Is deflation heading America's way?
One-quarter of the world's population is experiencing deflation prices of goods and services are falling, on average.
In Japan, the world's second-largest economy, prices are declining, as they are for China's 1.2 billion people and for residents of Hong Kong.
Is the United States next to be hit by deflation? Prices paid to US factories, farmers, and other producers already have fallen 1 percent in the past year. Consumer prices often follow producer prices.
Even so, most economists would probably agree with Mickey Levy, chief economist at the Banc of America Securities, in New York. "There is a very low probability of [deflation] unfolding," he says.
Mr. Levy argues that growth in the demand for goods and services by Americans still outstrips growth in the economy's ability to produce them.
That brings about "disinflation" when the rate of inflation slows but "based on sound economic fundamentals, [deflation] has no merit," maintains Levy.
Yet the Federal Reserve sees sufficient risk of deflation that in June it published a paper by four economists entitled, "Preventing Deflation: Lessons from Japan's Experience in the 1990s."
The lesson they draw is that when inflation and interest rates fall close to zero, and the risk of deflation is high, the government should take fiscal and monetary stimulus measures beyond conventional levels.
In theory, a government could stimulate inflation by mailing $1,000 checks to every household and have the central bank cover that expenditure by creating new money.
Fed Chairman Alan Greenspan cited the paper in testimony to Congress last month.
"To the last dying breath in his body, Greenspan will do everything he can to prevent deflation," says Paul Kasriel, an economist with Northern Trust Co. in Chicago.
Already, the Fed is pumping up the nation's money supply so that there's plenty of cash around to keep up purchasing and maintain prices. One measure of the money supply, known as M-2, has grown at a 7.8 percent annual rate in the past six months. "That's not low," says Mr. Kasriel.
What's so bad about falling prices? Doesn't everyone like bargains?
Economists don't, if deflation shrinks economic growth, boosting unemployment and hurting business. When prices drop, consumers may delay purchases to await still lower prices. Businesses have a harder time making profits.
While inflation shrinks the real cost of repaying debt, such as mortgage payments, deflation does the opposite. It makes it harder for debt-ridden consumers and businesses to service their loans.
Japan is a nation of creditors. So falling prices aren't so bad for people with fat savings accounts and even lots of cash. The purchasing power of that money increases over time. The Japanese, still prosperous, seem to tolerate the situation.
But deflation has not helped Japan's policymakers move the economy out of a decade-long stagnation. Interest rates, already at zero, can't be pushed lower by the Bank of Japan.
By comparison, the United States is a nation of debtors. Americans would not likely be so patient with deflation.
If the US does fall into deflation, it could be "rough," says A. Gary Shilling, a consulting economist in Springfield, N.J. Many Americans aren't prepared for such a development.
Mr. Shilling has predicted deflation for years. He even wrote a book on it. So far, though, consumer prices are still rising, though they are only 1.5 percent above a year ago.
But Shilling warns that house prices have possibly blown up into a bubble. If that bursts like stock prices, it will make it "abundantly clear" that the nation is slipping into deflation, he says.
Post-bubble economies, such as Japan where real estate and stock prices have tumbled hugely, are seen as more likely to suffer deflation.
Shilling sees numerous other factors pushing prices into negative territory. Among them:
Central banks in Europe, Japan, and the US are "dragging their heels" in easing monetary policy, still fighting the old battle against inflation.
American consumers, he says, are on "a savings spree for the first time in 20 years."
Technology in computers, telecommunications, and other industries is reducing costs, boosting productivity, and thereby making lower prices possible.
Mass merchandisers such as Wal-Mart and Home Depot, he says, are driving "less efficient" small stores out of business.
Manufacturers are outsourcing more parts and production to low-cost countries.
Shilling figures deflation in the US, after a period of adjustment, will be relatively "good" because it arises from an excess supply of goods and services, not so much from inadequate demand for them.
In economic theory, businesses could pass on some of the benefits of rising productivity in the form of lower prices to those buying their goods and services and still make reasonable profits.
Many economists note that the US is not Japan. America's economy is more flexible.
Though Fed policymakers have been recently hinting that interest rates will not be lowered again when they meet next week, there's little doubt that they would step on the monetary gas again should the economy show new signs of stalling.
If shrinking demand is the cause of a slowdown, the Fed can just keep on printing more money until people use more of it.
"It's not a difficult issue to solve," says Kasriel.