The way I see it, an economy can't sustain continious inflation before the workers wages are not sufficient to buy goods and services.
The later part of the 90's and all of this century have suffered from inflation. A 100K house is now worth 2-250K, a basic car went from 5K to 12K, and we won't even talk about the inflation in the fuel and food markets.
But what about the workers wages? Did they inflate 2-3X what they were 10 years ago? In the private sector, I'd say no.
I see world leaders and even our Reps in Washington racing to save this situation. But what if it shouldn't be saved. What good is it to be employed if you can't afford to buy anything?
Is deflation really that bad?
Too much of anything is bad, too much inflation or too much deflation are both very bad, but too much deflation is worse than inflation. We can survive more inflation than deflation % wise before everything turns to shit. Inflation can be caused by many things. Whether workers can buy the products when inflation is running amok, depends on the source of the inflation. Oil and fuel prices tripling overnight, when the source of those is overseas, is especially bad for us, in that case you are right, inflation is bad, but when it trips the circuit breakers and heads the other way, it is a disaster, if it is not stopped immediately. Inflation caused only by rising wages here can keep pace with rising product costs for products made entirely here. The damage, caused by inflation, if any, depends on the cause of the inflation, and the amount. A 1% steady inflation rate, to keep the deflation beast at bay is what has successfully driven our economies for decades.
Areas like real estate, housing, and commodities can not be allowed to fall in price for too long, or too far (true Deflation). If they do, then the producers (commodities, housing, building, transportation.....) can no longer make profits, or service their loans, loans go bad, banks go bad, credit dries up, borrowing dries up, spending dries up, business expansion stops and contracts, people get laid off, and thus stop spending, and it can eventually wipe out all value in the country......... Growth stagnates, profits end and become losses, then people get laid off, new jobs don't get created because no one wants to expand or start a business when business is dying, leading to less buying, less selling, less profits, it turns into a vicious cycle. On the other hand, a small amount inflation helps keep this from happing (But other things can trigger deflation even if you inflate the money supply, like what is happening right now). In our case the FED policy last year, high FED funds rate, combined with government ignoring the housing problem for too long, and the AIG derivatives problem which was sold all over the world, has combined for a perfect storm that even rapid world wide printing of money by itself won't fix. It will help, but they need to address the deflation of real estate / housing or will just delay Great Depression #2.
Part of the problem with continuous deflation is that everyone stops buying and decides to wait for prices to stop dropping (but they never during the crash that led to the Great Depression). Why buy a house for $200,000 if it is dropping in price every month. Let that go on for a few years and everyone gets screwed like they did in the 1930s.
During the 1930's we had one problem we don't have now. Back then there was an inelastic money supply, it was tied to gold reserves limiting the FED's ability to print new money.
The reason house prices went up so high the last 10 years is that mortgage payment dropped when interest rates dropped. Mortgage interest rates were 13-20% back in 1980 when I bought my house. As the economy recovered, and inflation abated in the early to mid 1990's interests dropped from 20% to about 5% (maybe lower) for home loans, so a person who could afford a 50,000 house at 20% interest, could now afford a 200,000 house at 5% interest. Then all of a sudden house prices went up 400%, new home building bubble started to keep up with new demand, and then when the Fed raised the FED funds rate from 1.5% to 4.74% between 2005 and 2007, the house of cards came crashing down.
Now, even though they have dropped the FED Funds interest rates to 1% banks are too afraid to loan, people are too afraid to buy and borrow, so prices keep dropping, people keep getting laid off.
200 years ago deflation was not as serious a threat as it is now. 200 years ago everyone lived on a farm and produced most of their own food. Now if industry shuts down you have 300 million people in the US alone who don't have the skills to survive off the land, even if they had any land. Mass starvation usually leads to revolution, a bloody mess.
Mass starvation (caused by monetary policy mistakes like the ones we have just seen) in the Germany in the 1930's helped put the Nazis in power. Google "Germany, Great Depression, deflation, inflation, financial crisis" for more on where we are heading if Congress does not gets it act together quickly.
That is part of the story anyway.