Specific examples of the negative effects of deflation include:
- The Great Depression, which began in 1929, was a period of severe deflation. The prices of goods and services fell by more than 25% between 1929 and 1933. This led to a decrease in aggregate demand, which caused businesses to cut production and lay off workers. The unemployment rate rose to over 25%, and the economy did not recover until the early 1940s.
- In the early 1990s, Japan experienced a period of deflation. The prices of goods and services fell by an average of 1% per year between 1992 and 1999. This led to a decrease in aggregate demand, which caused businesses to cut production and lay off workers. The unemployment rate rose to over 5%, and the economy stagnated for several years.
The reason these economic theories are widely believe is because of the close alignment with empirical observations.
That is basically correlation implying causation. Deflation has been happening with China mass producing cheaper goods than western world able to. My dollar able to purchase way more Nokia knock-off phones and yet my pay decrease during the same time. Yeah USA is experiencing decrease in aggregates demand. Economics are just number statistics fitting whatever school of economists decide to be. So many contradictions of theories in economics so bad that some have to actively attack the other schools (Misses? Chicago? Keynes?).
The point is that empirical observations don't agree with these widely believed economic theories on deflation beeing super scarry.