A pretty good write up about the case of deflation and what was also discussed “money velocity”
Here is the conclusion:
“Putting It All Together
There is one gauge of economic activity that does not support deflation at this moment: consumer spending.
Despite the black hole of late 2008 and early 2009 in consumer spending, recent figures, while tepid are mainly improved from that time period. If consumers continue to spend as they have been spending over the last 12 months, it seems likely that level consumer pricing will remain in effect unless, of course, it is maintained by the discounting previously discussed.
However, if the financial markets continue to gyrate, the housing market weakens, and the employment situation stays the same or worsens, there is reason to believe consumers may react as they did in the fall of 2008 when spending fell off a cliff. In other words, if the economic recovery falters, the risk of deflation increases dramatically.
In addition, and perhaps ironically, the world’s 30-year borrowing binge may, itself, promote deflation. As consumers and companies continue to pay down their debts, consumer prices could fall on potentially curbed spending. In turn, falling prices would cause economic growth to spiral down too. Unfortunately, this is similar to what happened here in the United States in the 1930s.
The ultimate sign of deflation, however, will be when it hits incomes. When people literally have less money in their pockets to spend, consumer prices will falter. Declining incomes will also make it harder for consumers to pay down their debts and will put further pressure on the housing and credit markets.
And for those monetarists who measure deflation, or inflation, by the federal funds rate, not only did the Fed recently comment for the first time that “underlying inflation has trended lower” but with the key rate near zero in reality and well below zero in theory, there is no arguing that inflation – hyperinflation – is tomorrow’s problem while deflation is today’s worrisome reality. ”
