I wanted to explain you what deflation and inflation are, in which of that situations we are now, and in which of them we will be in the near future. But the question is not easy, in fact many great economists are thinking and discusing about it and they are not unanimous. But both situations are bad if they are deep, as it is the case anyway. 

 

First, the popular meaning of inflation is that the prices of things are growing, and deflation is that prices are lowering. That is the definition that try to use the governments, by measuring what is called Consumer Price Index (CPI), that is an average of the most common goods that people buy. The problem is that this definition is not suitable for everything, because it could be that food prices are increasing but home prices are decreasing. 

 

So, a more general and rigurous definition is that inflation is when the total quantity of money in the market is increasing, and deflation is when quantity of money is decreasing. If money is increasing, the value of each unit (dollar, rublo or euro) will be less, so the prices of things will be higher by average. When inflation happens in a moderate way, it is usual that salaries will also grow, and production of goods will be more profitable, so there will be more bussines, more employment, more building, etc. That is what was happening in the recent years or decades. That is also why the prices of homes was increasing, so that people bought more houses and you had a quite good job on it. 

 

But if inflation were too much, the prices will increase much more quickly than salaries and earnings, so people could not buy so much things and bussines could not pay materials and could not sell all the production, so the economy will slow down and employment will decrease. 

 

On the opposite side, deflation is when the quantity of money decrease. You can ask me why total money can decrease. That is the central question. The answer (my answer, after reading a lot and learning) is that the total quantity of money is not only the money created by the countries (by means of their central banks), but more important is the multiplier effect of the credit by usual banks. I mean, if I put 1000 € on a bank, and that bank lend you 800 of that euros, you will have 800 € that you can use to buy things, and I will have 1000 € deposited on the bank. So, we have apparently 1800 € in total, but initially it was only 1000. That is the main effect of credit in the economy, and that is why the prices of homes was growing so much in nearly every country (I think it was similar in Russia also, I am not sure). And not only the home prices increased, it was most of the investments also, including bussines, shares of stocks, commodities, .... So, everybody though and feel that they was more rich, because bussines, employment and salaries was growing. 

 

But credit money must be repaid. If things were stable there will not be any problem, because you pay your credit but another one takes another credit, or I take my money off the bank but another one deposits more money on that bank. The real problem is when there are collective effects by wich most of the people and bussines need money and most of the banks can not lend more money. That is the actual situation now. So, banks lend very few money, so bussines don't get enough money, so they must decrease production and workers, so there is less people earning money to buy things and more people and bussines trying to sell things (think about homes), so prices must decrease in order that things were sold, so production and building is not profitable, so less business and less workers indeed, ... and there are a vicious cycle lowering all the economy: employment, production, credit, taxes, etc. 

 

That is the horrible situation with deflation, that most of the people are poorer suddenly. The near reason is the decrease in credit, but the ultimate reason is the excess in credit the previous years. So, now it is not avoidable. We are now in such kind of global deflation, in mostly every country, or at least in the more developed countries. 

 

That excess of credit was originated in the United States. But, as the economy is now so global, the banks of every country bought and sold financial products to the others, so that the excess of credit in U.S. (inflation in the dollar) was transmited to everywhere. It is happening at different deep on each country, and at different times. For example, the price decrease in homes begun in 2005-2006 in U.S., in 2006-2007 in Spain or UK  (I wrote to you about it), and I think it is in 2007-2008 in Russia and east european countries. But it hurts everywhere to many people, including you and me. 

 

I tried to anticipate that, but I was terribly mistaken, because I though that the main effect will be a very high inflation due to the fact that U.S. was creating huge quantity of new money to fight deflation. And yes, quantity of dollars grew very very much in recent years, but the effect of decrease of credit is much more important now, it is incredible!, it is becoming much more deep than the 1929 Great Depression, and it will take quite more years to recover. Likely, after some time (I don't know if it will be years or months) I will be right in my first prediction, it will be a very huge inflation. But first it will be, and it is now, a very big deflation.