The trick occurs with your supplier ~ he will have to sell off his existing stock for less than he paid for it. He will suffer losses. He will be unable to pay his creditors. He will go bankrupt.
There's usually so much bankruptcy up and down the supply chain (from raw materials producers to final sandwich makers) that nothing gets done.
Sometimes deflation will be kept localized to a single country ~ then they can use those extra chunks of money leftover and IMPORT what they need (See: Spain 1500s). Othertimes deflation will be more widespread. In that case if impediments to import/export are put in place ~ e.g. with protective tariffs to encourage domestic producers to not go bankrupt, you'll get a general collapse of trade ~ (See: Great Depression 1930s)
Most individuals will perceive that their existing debt loads are too high to sustain with their reduced incomes ~ even though interest rates may go to ZERO.
Sometimes your first indication that you have serious deflation is the drop in your interest rates. The United States and Switzerland (as usual) are already accepting deposits for which no interest is being or will ever be paid.
The 2 year T-bill rate may go to 0.3% today ~ and tomorrow it may bo to 0.0%. We can envision selling T-bills with as much as a 2% carrying charge where the buyers pay the government for the privilege.
Much more of this and banks will go "bankrupt" ~ check out the status of BOA today.
Thanks for the information, and your insight.
It’s getting scarry out there.