In Children, Toys, Greed, Profits, Gambling, and Lessons from History , I noted that some experts have warned us that if the world's economic problems are not solved quickly, the world will enter a "dangerously deep recession." I then wondered if we tightened up that phrase, would we get Depression?

Well, the experts assure us that there is little chance of a depression. But, instead, they are beginning to express concern about another d-word. According to The Dark Side of Lower Prices, the concern is deflation. What is deflation? It's the opposite of inflation. Instead of increasing every month and every year, prices drop. Look around. Stock prices are dropping. The price of oil has returned to levels not seen for a while. The price of gasoline is now under $3 per gallon. Housing prices have been trending downward for at least a year.

Because inflation causes so many worries, particularly among individuals on fixed incomes and organizations on fixed endowments, it is tempting to think that deflation would be good news. But it isn't. Economists explain that when prices drop because demand falls, producers must cope with production costs that exceed revenues. Their reaction usually is a reduction of production, together with the dismissal of part of their work force. In turn, demand for goods continues to drop, and prices continue to fall.

Economists suggest that it is very difficult to reverse deflation. To many of them, it is "scarier than a recession." Though most of them don't think deflation will occur, the odds that at least one economist puts on it happening are now six times what they were a month ago. Deflation, it seems, can cause, hasten, or worsen a depression, though it doesn't necessarily have that effect.

Conditions for deflation are present, we are told. So it could happen, even if the chances aren't high. It's not comforting to be told that declining prices are not a reason to hope that the economy recovers quickly, but rather a reason to begin worrying about deflation.

Curious, I looked again at the tax code to see if my initial thought was correct. It was. A variety of numbers in the tax law are adjusted for inflation. Technically, they are increased to reflect upward changes in the consumer price or other index. What's missing, I thought, was a downward adjustment for deflation. My thought was correct. If deflation sets in, the tax law will not respond as it does when prices rise, unless Congress steps in and amends the law. We've been living with inflation for so long that no one considered writing the inflation adjustment language in a manner that responds to both deflation and inflation.

It took Congress decades to insert inflation adjustments into the tax law. If deflation comes upon us, will it take Congress several more decades to make adjustments in the tax law for deflation? From the economists' perspective, we had best hope that the question remains theoretical. For if it becomes real, we're in even deeper trouble than the deep mess in which we currently are. And that, folks, is a depressing thought.
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