Debt, deflation and other maladies are purely symptoms of Japan's disease.

A public debt crisis in Japan (as the combination of recession, deflation, and high deficits drove up the debt GDP ratio).

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

Deflation increases the real (inflation adjusted) debt burden, as well as the real interest rate.

America fears deflation Europe driven by its largest economy, Germany fears national debt and inflation.

With bad debt left to fester on banks balance sheets, growth vanished and deflation set in.

And that's basically deflation 50 percent deflation.

But that is logically flawed even with deflation, real purchasing power would fall, and the real value of debts would rise (debt deflation), as the real depreciation occurs.

Deflation Doldrums?

After its banking crisis of 1987 1989, Japan experienced two decades of stagnation and deflation with skyrocketing government debt.

The Deflation Bogeyman

America fears deflation

According to Bernanke s debt deflation theory, the collapse in consumer prices was one of the causes of the Great Depression, since deflation raised the real value of debts, making it difficult to repay loans.

And that's basically deflation 50 percent deflation. And it's not just computers.

The Calvo study thus concludes that Bernanke s debt deflation theory of the Great Depression does not generally apply to the more recent crises.

Escaping from the Deflation Trap

Has Global Stag Deflation Arrived?

Deflation in many advanced economies.

Deflation is almost always bad.

This will fuel more global deflation and private and public debt defaults in debtor countries, which will ultimately undermine creditor countries growth and wealth.

That's a 50 percent deflation rate.

That's a 50 percent deflation rate.

Seven years of debt deflation, reinforced by the expectation of everlasting austerity, have decimated private and public investment and forced anxious, fragile banks to stop lending.

While fiscal austerity may be necessary in countries with large deficits and debt, raising taxes and cutting government spending may make the recession and deflation worse.

Deflation increased real interest rates and curbed economic activity, thereby setting off another round of deflation, and so on.

Why Deflation is Good News for Europe

But here's the ingenious solution advanced in part by Milton Friedman to keep the money supply stable and avoid inflation and deflation while the debt is retired.

This is forcing deficit countries into real exchange rate adjustments via deflation and thus a rising burden of public and private debt that may lead to disorderly defaults.

With deflation, we are heading into unknown territory.

But that is logically flawed even with deflation, real purchasing power would fall, and the real value of debts would rise (debt deflation), as the real depreciation occurs. More importantly, the exit path would restore growth right away, via nominal and real depreciation, avoiding a decade long depression.

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

So because of our innovation, we actually experienced deflation.

Though there is little evidence of the importance of small changes in real interest rates, the effect of even mild deflation on real debt, year after year, can be significant.

Instead, they focused exclusively on US foreign debt, ignoring household debt (mortgage and consumer debt), public debt, business debt, and financial debt.

In addition to this increase in the real cost of debt service, deflation would mean higher loan to value ratios for homeowners, leading to increased mortgage defaults, especially in the US.

Nominal interest rates for periphery countries sovereign debt have remained extremely low, and, even when taking into account expectations of very low inflation (or even deflation), real interest rates are low.

On one side is concern about another downturn and deflation.

The BOJ's hidebound policies are usually blamed for Japan's deflation.

Price deflation is far more likely in the near term.

Deflation should not be hard to check, with sound policy.

Moreover, Rosstat has recorded deflation over the past two weeks.

In the short term, it is important that monetary policy in the US and Europe vigilantly fight Japanese style deflation, which would only exacerbate debt problems by lowering incomes relative to debts.

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.

This deflationary tendency will create serious economic problems, which do not necessarily result from deflation as such, but may stem from a natural resistance to deflation.

Debt sustainability and debt relief