Deflation poses a couple of significant threats.<p>Firstly, it acts as a disincentive to real investment: the rate of deflation is effectively an interest rate earned on funds stuffed into mattresses. If deflation is at 5%, no one will want to invest in any project with less than a 5% return over the same period. Risk and liquidity premiums would also increase even for investments that do provide a higher return than the deflation rate.<p>Secondly, existing long-term debts would become extremely onerous for borrowers. The implications for outstanding mortgages could make the recent default epidemic pale in comparison.<p>However, it's worth pointing out that the 19th century was largely a period of sustained, gradual deflation, and was also a period of tremendous economic growth with little of the amplified boom-bust cycle we experienced in the 20th century.<p>I'd conjecture that a climate in which a small amount of deflation is accepted as a given would foster economic decision making that tends to focus more on real wealth-creation, and less on the kind of financial abstractions which have led to the recent turmoil. As long as we could manage the transition from a slightly inflationary to a slightly deflationary economy (i.e. find a way to deal with the problem of outstanding debt), I'm not so sure it would be quite the disaster that the article portrays.