Deflation that emanates from the financial sector is lethal.

Fiscal contraction is contractionary, period.

At the same time, it spares an already weak economy damaging fiscal contraction in the short run.

But Keynesianism involved continued fiscal expansion, with no offsetting monetary contraction.

The prospect of a disorderly fiscal contraction needs to give way to a more rationally designed approach that avoids undermining the fragile recovery.

Indeed, just a year or two ago, expansionary fiscal contraction was all the rage, and a massive research effort went into proving its existence.

Japan s deflation and economic stagnation over the last two decades stemmed largely from a dysfunctional financial system and a lack of private demand.

Although the new tax law is generally described as a fiscal stimulus, it is more accurate to say that it avoids a large immediate fiscal contraction.

The Deflation Bogeyman

Deflation and Democracy

Deflation Doldrums?

Indeed, this was the trap faced by Argentina in 1998 2001, when needed fiscal contraction exacerbated recession and eventually led to default.

Inflation or Deflation?

The Second Great Contraction

The experience of deflation is well entrenched.

Can China Avoid Deflation?

The Great Contraction of 2008 2009

Can China Beat Deflation?

The love has been very tough indeed, generating rapid economic contraction, massive unemployment (upwards of 50 among young people), and continued fiscal deterioration, owing to rising debt service costs.

Why Deflation is Good News for Europe

Deflation in many advanced economies.

Deflation, on the other hand, increases debt, and feels like being smothered by a lead blanket.

If prices fall at a rate of 1 , could they fall at a rate of 10 ?

It is not clear if deflation can be beaten with monetary policy excessive fiscal stimulus and deferred austerity may make the debt unsustainable and the structural reform components of Abenomics are vague.

Deflation discourages optimism about the future.

Has Global Stag Deflation Arrived?

This contraction has become even more severe since then.

The downturn caused the deficits, not the other way around.

The dilemma is that, whereas fiscal consolidation is necessary to prevent an unsustainable increase in the spread on sovereign bonds, the short run effects of raising taxes and cutting government spending tend to be contractionary.

But deflation is associated with persistent recession (see Argentina again), and no country s society and political system can accept years of recession and fiscal austerity to achieve real depreciation.

Finally, employment continues to contract rapidly.

Some countries, like Angola, are contracting.

There was no persistent tendency to deflation.

Japan provides good lessons about where the true risks are, as it has been suffering from deflation or near deflation for 14 years.

Sudden fiscal contraction would reduce domestic aggregate demand faster than the economy s deleveraging and structural shifts could replace it, thereby killing off growth and hiring, with adverse feedback effects on budget deficits.

It also invested billions in a wall, whose cost is far higher than originally planned, after confiscating large portions of Palestinian territory.10

Despite this massive shrinkage, the reality on the ground is unchanged.

Abenomics goal is to escape two decades of deflation.

Dealing with deflation is impossible within the bounds of normal market operations.

Employment growth continues to disappoint, and fears of deflation will not go away.

But deflation is painful and cannot realistically be pursued for political reasons.

But, in a Great Contraction, problem number one is too much debt.

We know that in periods of economic recession, youth are among the worst hit.

The IMF might reasonably take the position that ECB policies have been overly contractionary resulting in a strong euro and very low inflation and are no longer appropriate for member countries in the midst of a financial collapse.

The most direct adverse impact of deflation is to increase the real value of debt.