Prices of commodities and subsequently of goods that could be manufactured overseas were sharply lower throughout the 1990's, yes. But that's not deflation. There was plenty of money, just not in commodities and Wal-Mart dry goods.
Deflation is a general reduction in money supply, not the sloshing of it from one place to another. Or as I like to say it, overstating a bit, deflation is "no money, no how, no where." You have to go back to the 1930's, before we went off the gold standard, to find that.
I define deflation in relation to supply and demand. if supply is ‘500’ and demand is ‘600’ then supply didn’t meet demand and you have deflation. If supply is now reduced to ‘400’ but demand is also reduced to ‘300’, you have inflation as supply is greater than demand.
What happened during the 90’s is that demand for liquidity went up (because capital gains taxes were cut) and while money supply also went up, it didn’t match the demand.
Just for grins, my recollection is that the USA experience 1 year of deflation since the 1930s and that was in 1986. The oil market collapsed and Texas went into a depression. It was a mild deflation and you know the boom that followed.
Like I said, just for grins. I think 1986 was the only year since the 1930s that the US economy actually experienced deflation and it turned out to be a good thing, well if you weren’t a Texan. This current deflation, well..
There was a deflation in the money supply then. Remember Clinton bragging that the government was ‘running a surplus’?
I was working for a commodity company then, the price of everything was droppping....
http://www.aei.org/publications/pubID.9831/pub_detail.asp
What are the symptoms of this dangerously accelerating deflation? To answer this question, it pays to look simultaneously at the behavior of interest rates, exchange rates, and stock prices. Normally a strengthening currency and rising interest rates together constitute a sign of economic vigor since upward real returns can generate that observable combination of price movements. Simultaneously one would expect to see stock prices climbing as a reflection of higher expected real returns. Investors in such circumstances would be switching from bonds into stocks as expected earnings rose faster than interest rates. International capital then flows into the country with rising real returns to buy into the higher expected real growth; this process leads to the popular notion that a strong economy means a strong currency. The demand for cash is stable with higher incomes pushing it up while ascending real interest rates quash cash demand and induce substitution into bonds and equities. This situation prevailed in the United States from mid-1995 to mid-1998.
Japan’s Lack of Wisdom
The picture changes in a world of accelerating deflation, especially when the government, as Japan has unwisely done, proposes to fight the deflation with more spending and tax cuts. Keynes identified absolute liquidity preference (he never mentioned a liquidity trap) as a situation in which investors have an absolute preference for cash over bonds because interest rates are so low that they expect them to rise. The conviction that bond prices can only fall (or interest rates can only rise) produces a strong or absolute preference for cash. Stock prices too are expected to fall because accelerating deflation pushes down expected earnings as the attendant rising expected of real yields on bonds and cash draws funds away from stocks. In this environment a rising currency and rising interest rates are matched by a falling stock market. This combination has appeared intermittently in Japan over the past several months and signals an urgent need for reflation.
Japan’s manifestation of the most serious deflationary symptoms demands a closer look. Japan has made a disastrous policy error by promising to fight deflation with higher spending and lower taxes. Under this plan the weaker the economy gets (and it is getting weaker, as seen in recent reports such as the Bank of Japan’s December Tankan survey), the larger the expected supply of bonds becomes. The rise in the expected bond supply supports the Keynesian notion of absolute liquidity preference by reinforcing the idea that bond prices will fall (interest rates will increase) and so funds rush into cash and out of bonds, stocks, and foreign assets. Foreigners can participate in the switch out of bonds and into cash by buying yen, selling Japanese government bonds (JGBs), and selling stocks.