An umbrella term for the geomorphological processes that lower the surface of a landscape by means other than water erosion. As you might expect, deflation has its greatest effect in desert landscapes.

The most common cause of deflation is wind, as it picks up fine particles from a dessicated surface. A dried-out lake bed is a common start, or a dried out river channel. First the clay blows away, then the silt, then, when the wind is stronger, the sand. Sometimes the wind is strong enough to pick up small pebbles, at least enough to make them bounce along the surface (saltation). Deflation, then, is an effect of particle sorting by the wind.

The fine particles blow away and form loess and sand dunes elsewhere, leaving behind the stones that are too big for the wind to pick up. These stones jostle against each other as the soil beneath them is carried away, only stopping when they fit together well enough to protect the soil from the wind. Eventually an equilibrium surface is reached. Such a self-assembled jigsaw puzzle of stone is called a desert pavement by geomorphologists; it is called Gobi in Mongolian, reg in Arabic, and gibber in Australia. Whatever you call it, it's the most common form of desert surface.

The process begins again when the the wind concentrates on a particular spot, or finds a weak spot or a hole in the pavement. Perhaps a watering hole is wallowed out by buffalo or elephants, or someone thoughtlessly drives a jeep across the pavement, or simply walks across it in hard boots. A little bit of soil exposed and is carried away by the wind. This renewed deflation is self-reinforcing: more and more rocks are jostled from their equilibrium state, more and more soil is exposed and carried away.

Such a "deflation hollow" can be carved down until it reaches the water table (forming a playa lake at the bottom); it spreads out until a new equilibrium surface forms. When the water table is particularly deep, enormous deflation hollows or "pan"s can form. One of the largest, Egypt's Qattara Depression, is 18,000 km2 in extent, and 122m below sea level.

Although deflation originates from natural processes, man can help it along: Dried-out or poorly managed farmland is just as likely a source. East Anglia's strong "fen blows" are well known for carrying top soil away. A more dramatic (tragic) example is the Dust Bowl of the 1930's in the United States.

Deflation is a sustained reduction in the general price level across an economy or in a particular class of goods or services. This might sound like great news for the average consumer but in reality spells disaster for an economy because when prices are declining and expected to continue declining, few people have any motivation to engage in economic activity such as investing, borrowing, or even buying goods.

The causes of deflation can either be internal to an economy or come from outside of it. There may be a sharp fall in the price of economic inputs like energy which cause deflation across the economy, which is something that western economies are bracing for as we speak. In another scenario, if money becomes scarce within an economy because credit is expensive or the central bank restricts the supply, then prices can be expected to fall so that sellers can attract what little money there is in the economy.

A sharp decrease in aggregate demand due to high unemployment or a fall in disposable income can have the same effect, as prices are lowered to stimulate demand. Deflation can cause consumers to hoard their money rather than spending it because they know that tomorrow they will be able to buy more than they could today for the same amount of money. This can cause demand to fall further and drag prices down still further, contributing to what is called a "deflationary spiral". Usually savers are spurred to try and lend their money (or put it in a bank that does it for them, and gives them a rate of interest in return) because the money in the proverbial jar under the bed gradually becomes worth less due to inflation. In a time of deflation, this risk does not apply and the deflationary spiral can hence be worsened by the drying up of credit.

As well as making it less risky to save money, the deflationary spiral also makes it less worthwhile to borrow it. If I borrow $10,000 from you today and pay you back $15,000 after interest over the course of a year at a time of declining prices, I am getting a comparatively worse deal that I would be during a period of inflation because at the end of the year, $15,000 is worth more than it was at the start.

Central banks hence find it harder to convince the other banks to borrow money from them - a measure that might contribute to breaking the deflationary spiral - during a period of deflation. Central banks can offer negative interest on money, which means actually paying someone to borrow it, but this strategy only makes sense when the central bank also exercises some sort of control over how the money is used. Developing countries such as South Korea have used this tactic to stimulate their economies in the early days, but it is much less likely to occur in western countries.

Investment in fixed assets such as property and capital formation dries up during a period of deflation because of the factors that militate against people spending, lending, or borrowing money. When prices are declining generally and demand is low, it is the brave lender who will invest in new capital or a new business when simply keeping his money will result in it becoming more valuable.

Economists split into two schools of thought on how to tackle deflation. Followers of John Maynard Keynes stress the need for the government to deliver a fiscal stimulus, effectively trying to kick-start the economy's engine by increasing demand. With more money sloshing around, prices should hopefully rise. This may require tax cuts or for the government to borrow money to spend on the economic jump leads; this money will need to be paid back later on.

Conversely, monetarists, following in the footsteps of Milton Friedman, argue that the prime tool for battling deflation is a lowering of interest rates and a steady, predictable increase in the money supply. These measures, which Friedman would like to see applied at all times, are designed to allow money to flow as efficiently and cheaply as possible around the economy, hence stimulating demand. Monetarists argue against the direct stimulation of demand by government spending, arguing that it creates inefficiencies that are ultimately harmful to the economy. However, democratic governments, faced with the need to deliver quick palliatives to their electorates, tend to favour the more activist, Keynesian approach.

The following are some thoughts on excerpts from the "deflation" article at Wikipedia

Because the price of goods is falling, consumers have an incentive to delay purchases and consumption until prices fall further, which in turn reduces overall economic activity - contributing to the deflationary spiral.

It only reduces economic activity if the economy has no other goals.  For example, if nobody feels like they need the latest computers because their previous one is still "fast enough" that doesn't mean they don't want the choice to be able to get an even faster computer a few years down the line.  It boils down to a matter of how your economy defines wealth.  If your economy defines it by measuring how much gold or foreign currencies it can hold in its treasury, that's a completely different scenario from one in which your economy defines it by measuring, for example, its ability to produce fast computers (or grain, or electricity, or housing, or whatever). 

If a nation focuses on its ability to produce certain things, is that just an example of the much-maligned word: "protectionism"?  Well, you can think of it like this: You have a house. The local power company produces your electricity and sends it to your house. One day, a winter storm knocks out the electricity in your town. You go out and buy a generator.  While the electric company is busy trying to repair power lines, you are nice and toasty in your house and the pump in your basement can still keep it from getting flooded.  Eventually, the power company restores service to your house, so you turn off your generator, since the generator is not as efficient at generating electricity as the power company.  Over the years, however, you maintain your generator - making sure it's in working condition and doesn't become a lump of rust.  Is that "protectionism"?  Is it an inefficient use of your time and labor, when you should be accepting "comparative advantage" instead?  The thing is, you've recognized that the generator has value, even if you are not currently using it to produce anything - even if you have no "demand" for its output at the moment.  It is a source of wealth that you have maintained, even if you've chosen not to tap that wealth at this time.

The same would be true of an economy that measures its internal wealth by its productive ability, even in times of low demand.  After all, sometimes when people aren't demanding anything, it might just mean they are content with their lives.  Why bother with the trouble of using up the earth's resources by advertising things to them if they are already happy? 
While an increase in the purchasing power of one's money sounds beneficial, it can actually cause hardship when the majority of one's net worth is held in illiquid assets such as homes, land, and other forms of private property.
Assuming it's a capitalist economy, which assumes no responsibility for the economic welfare of its people, then this would only be a problem if the relative value of the person's net worth is falling in relation to other goods and services he needs (food, water, electricity, football tickets).  However, if it's just deflation across the board, and the value of the person's home, land, and other assorted junk is not changing relative to the value of food, water, etc, then it makes little difference. 
Deflation raises real wages, which are both difficult and costly for management to lower. This frequently leads to layoffs and makes employers reluctant to hire new workers, increasing unemployment.
This would not be a problem if the employees themselves had democratic control over the company. If the company is getting less revenue in terms of dollar amounts, they could simply vote themselves a pay-cut - and if the cost of living is falling, it wouldn't even matter much with respect to how much they can buy with their salaries.

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