Uh-oh. Deflation is Rearing It's Spectacularly Scary Head

The Consumer Price Index dropped 1% today, the largest single drop in more than 60 years. That means that the costs of goods and services are getting cheaper fast. Good news? Not at all.

Here's the Times article on today's news. Not the use of the word "deflation" in the headline, and this paragraph:

In a speech Wednesday at a Washington conference, the vice chairman of the Fed, Donald L. Kohn, said the risk of deflation remained slight but was increasing. “Whatever I thought that risk was, four or five months ago, I think it is bigger now even if it is still small,” Mr. Kohn said. The Fed, he added, needs to be aggressive, if necessary, to prevent a drop in prices.

Now this whole thing seems a little counter-intuitive, no? Prices dropping is a good thing for an economy in trouble, right? Well, no. Not if they drop a lot, over a sustained period of time. What happens then is manufactuers keep droping prices, until prices become lower than the costs of goods to make...factories close...more job losses...less money available...prices drop further. The intrinsic value of things begins to erode because there is not enough money to keep an economy going. Everything becomes worth a lot less...gasoline, milk, your house, your job, your education.

Last time this happend in the US in a big way? You got it. The Great Depression.