Deflation

Deflation is a general decline in prices, often caused by a reduction in the supply of money or credit. Deflation is believed to have bad effects on the economy, as 1)falling prices create consumer expectations of lower prices, causing consumer demand to fall 2)deflation would cause debt loads to increase and lower asset prices would make debt repayment more difficult and cause further asset liqudation leading to more depressed asset prices. Deflation can occur in prices of goods&services or prices of assets.

The posterboy for deflation and its pernicious effects is Japan. Though academics believe that deflationary spirals are dangerous, this site believes that deflationary spirals often come after asset bubbles and may just be the natural result of asset prices coming back to a more reasonable level.