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I know there's a case for deflation, but do you really think it very likely? My reasoning is as follows:

1. Deflation is bad for the government.
2. The government owns the printing press.

I agree with both points. However, the Japanese government managed to get locked into it, and printing money was not very effective at priming the pump once they were in it. If consumers suddenly become savers (and focus on bonds because corp profits make equities distinctly ugly) printing money will not necessarily solve the problem... it may in fact worsen it, if the money printed is mostly tucked away into bonds and consumers in the aggregate refuse to allow price hikes by moderating spending and searching harder for bargains when they *do* purchase, you have a formula for further falling rates. Rates can't drop to zero, but they can get frighteningly close.

While I don't think it's by any means certain, given American habits, the aging demographic does make it a bit more likely. After all, boomers are pumping money into equities mainly because they don't expect social security to exist, or be sufficient to provide for their needs when they leave the workforce. A deflationary spiral will make that worse (with the one bright spot perhaps that international markets are likely to become accessible, though that's a mixed blessing, considering that SEC-regulated issuers of common stock provide much closer to full disclosure than do most companies I know of that are not listed and regulated in US markets.

If we break over into deflation the "levers" government has to steer the economy become even less effective than they are under "normal" conditions. Just ask the Japanese central bankers.

Among the reasons I think this may happen is that everything Greenspan *says* suggests he has his eyes clearly focussed on winning the *last* war, namely saving us from another inflationary period ala the 70s. With such an emphasis, perhaps he and his helpers are not seeing quite so clearly the impact that the 'net and other demographic trends have had in keeping price inflation (energy partly excluded) in check.
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