Global markets plunge - deflation transitions from threat to reality

NVDL: Deflation was dismissed for a long time by the experts. If you believe in Peak Oil, deflation becomes a distinct possibility.

What is it?
Deflation is the opposite of inflation.

Wiki defines it as follows:

In a credit-based economy, a fall in money supply leads to markedly less lending, with a further sharp fall in money supply, and a consequent sharp fall-off in demand for goods. Demand falls, and with the falling of demand, there is a fall in prices as a supply glut develops. This becomes a deflationary spiral when prices fall below the costs of financing production. Businesses, unable to make enough profit no matter how low they set prices, are then liquidated. Banks get assets which have fallen dramatically in value since the (mortgage) loan was made, and if they sell those assets, they further glut supply, which only exacerbates the situation.

To slow or halt the deflationary spiral, banks will often withhold collecting on non-performing loans (as in Japan, most recently). This is often no more than a stop-gap measure, because they must then restrict credit, since they do not have money to lend, which further reduces demand, and so on.

NVDL: Of course, this is EXACTLY what is happening.

clipped from news.yahoo.com HONG KONG – World stock markets tumbled Thursday, with benchmarks in Tokyo and Seoul losing almost 7 percent each, after recession fears sent Wall Street plunging and Japan suffered its biggest drop in exports in seven years. The uncertainty facing companies around the world was evident after U.S. consumer prices fell 1 percent last month, the largest amount in the past 61 years. While beneficial to consumers, lower prices hurt corporate profits and raise the threat of deflation. "We've gone past the poor sentiment stage," said Miles Remington, head of Asian sales trading at BNP Paribas Securities in Hong Kong. Slideshow: Stock Markets