- (1) a slack in goods markets,
- (2) a re-coupling of the rest of the world with the U.S. recession,
- (3) a slack in labor markets, and
- (4) a sharp fall in commodity prices following such U.S. and global contraction, which would reduce inflationary forces and lead to deflationary forces in the global economy
I think that the only key one is the third one – the goods market is too flexible, the second is merely a means for the other reasons, and the change in commodity prices is a relative price movement again.
Ultimately, if the price in the labour market it too inflexible (wages) we will see a knock down in employment sure – but deflation? Deflation stems from a reduction in the quantity of money – central banks are going to keep printing all they can to keep price levels up, a factor that will reduce real wages and then in turn reduce the scope for increases in unemployment.
I don’t see deflation occurring when fiscal and monetary policy is determined to stop it.