It’s important to distinguish between

expected and unexpected changes in price level. If everyone knows that $100 today is worth the same in terms of actual goods as $110 next year,

then the interest rates on loans will reflect that by being about ten percentage points above the real rate people are willing to pay to borrow.

So neither lenders nor borrowers would care about perfectly-anticipated inflation, at least as lenders and borrowers. Everyone benefits

(albeit unequally) when the economy works well. Conventional wisdom says that’s when inflation is moderately low and more or less constant.

–dsws

deflationary crises in the 19th century in chapter 18 of his book “The Lost Science of Money”.

Echoing your observations, he explains that

delationary episodes across Europe, the US and Japan were “opportunities for bankers to reduce the money supply and increase the value of the

nation’s currency units which were owed to them”.

I can’t help noticing that any mention of increasing the money supply is met by cries of

anquish, immediately inviting comparison with the hyper-inflationary events in Zimbabwe/ post-war Germany, etc. As if bank-created credit is less

inflationay than government-created money!

What savings? From the point of view of a well informed

non expert it seems that its not a matter of confidence that is keeping most people from spending. They simply cannot take on more debt and they

don’t have any real savings.

I don’t understand why I don’t hear anything about the demand side of the credit crunch. Perhaps I’m just

missing discussions of it. No matter how healthy our banks are the borrowing rate is not going to go back to where it was anytime soon. People

were living unsustainably relative to their income and now realize they shouldn’t/can’t do that. Not only was what they were doing before

unsustainable but they can’t go back to a reasonably healthy borrowing rate until they are able to get rid of the debt they already have. As far

as I can tell the really serious liquidity crisis is in the finances of individual households and businesses. People consider themselves lucky if

they can afford necessities and loan payments on a monthly basis. Consumers and businesses cannot and will not be a serious part of the solution

to the debt deflationary spiral unless their debts evaporate or their incomes soar. At least thats how it looks from my vantage point.