PRESTOPUNDIT -- A Good Blog at a Great Price. Guaranteed.

Some of the myths of deflation are exposed by economist Jacek Rostowski. (via Mises Econ Blog) Money quote:

There are five ways in which deflation is supposed to plunge the world into a spiral of economic contraction. First, once deflation has started, falling prices will make people put off spending, causing prices to fall further. Second, with prices falling and the value of debt fixed in nominal terms, the real indebtedness of households and firms will grow, acting as a drag on the market, as in Japan since 1990. Third, nominal interest rates cannot fall below zero because companies and households always have the choice of holding cash, which gives a zero return. Banks cannot therefore offer interest rates below zero to depositors so cannot charge negative nominal interest rates on loans. The demand for loans will fall, shrinking the banking sector and the economy with it. Fourth, because nominal interest rates cannot turn negative, central banks will be powerless to offset the effects of deflation. Finally, with prices falling and nominal interest rates stuck at zero, real interest rates will keep increasing, turning the deflationary screw.

In fact, all of these supposed effects either do not matter much, or are the result of inflation being lower than expected, or happen because institutions have not yet adjusted to a potentially deflationary world. They are not the inevitable result of falling prices.