WaitingonObama2

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　　Will deflation take hold?
　　For most of the post-World War II era, consumers and investors have worried about inflation. Now, some analysts see the greatest threat as deflation -- a broad-based and sustained decline in prices, wages and the value of assets.
　　"Deflation is the economic battle that lies ahead," asserts David Rosenberg, chief North American economist at Merrill Lynch & Co.
2 g+ B7 R! x* j4 }　　U.S. consumers, he says, are simply tapped out after years of buy-now/pay-later living. With layoffs soaring, Rosenberg believes Americans will continue to pare spending, pay down debt and boost savings in 2009, overwhelming federal stimulus efforts.
　　The result, he says, will be an environment ripe for deflation: Manufacturers and retailers will keep cutting prices to try to induce demand, but consumers still will stay away, just as many did this holiday shopping season.
% W& R, P+ O4 L+ D/ f' _　　Once a deflationary mind-set becomes ingrained, even people who have money to spend may wait, figuring prices will only get cheaper.
　　Wages, too, become threatened as companies seek to slash costs deeply to cope with plunging sales. That can fuel a debilitating downward spiral in the economy -- exactly what Japan faced from 1995 to 2005.
* ^3 J$ y! d$ I/ E. L　　Despite her relative optimism about an economic turnaround next year, Sterne says she worries about the surge in layoffs. "I think companies have joined the panic, and they're getting rid of too many people," she said.
  W4 f1 v+ W1 G　　That is where Obama may find the bully pulpit of the presidency useful once he takes office. He could try to caution against excessive job cuts, while talking up his goal of creating or saving up to 3 million jobs in the next two years via stimulus spending.
　　Many analysts have a hard time envisioning a broad-based deflation scenario for one reason: They note that the Federal Reserve has literally pumped trillions of dollars into the financial system in recent months to pull interest rates down and bolster the finances of banks and major companies.
　　Eventually, that flood of dollars should begin to find its way into the real economy.
　　Paul Kasriel, head of economic research at Northern Trust Co. in Chicago, points out another incentive the government has to fight deflation with every policy tool available: In a deflation, debts become more onerous for borrowers, particularly if their incomes decline. Loans have to be repaid with cash that is becoming more valuable every day as prices slide.
　　With the U.S. the world's biggest debtor nation, "on political grounds, deflation is not an option," Kasriel said.
' x: u( s/ {9 d3 C. }/ e　　But as the Fed pumps unprecedented sums into the financial system, the risk is that it is setting the scene for the opposite harm: a jump in inflation down the road. The classic cause of inflation is too many dollars chasing too few goods.
　　Most economists acknowledge the inflation risk but say it's one the Fed has to take. Ultimately, the Fed will have to sop up its dollar flood by raising interest rates -- but that's a task for 2010 or beyond, and it's one policymakers would relish compared with fighting deflation, said Paul McCulley, a managing director at bond-fund giant Pimco in Newport Beach.
3 x& y5 {1 K7 K, R- p; {　　"If the [anti-deflation] policy works too well, and inflation rises, that's a pretty easy thing to deal with," he said.
3 Q+ [5 [* ?9 U" t$ O5 i$ V3 [　　The panic that gripped financial markets from mid-September to mid-November has subsided. U.S. stocks have bounced modestly since Nov. 20, and investors have been nibbling at other battered assets, such as corporate and municipal bonds