Deflation in 2014

I read an article recently warning about deflation and how it could be right around the corner. This article illustrated that through a different type of inflationary/deflationary index called the "market-based PCE" (which the author claims is much more accurate), our inflation rate is much, much lower than we think. He believes that if the trend continues we will experience deflation, where the dollar will be worth more and more.

On the face this seems like a great thing, but another article I read goes into why this is not so. When consumers experience a fall in prices, they are much more willing to put off making large purchases. Their rational is simple: "Why would I buy that now, when it'll be cheaper later?" This is a perfectly normal idea and in the short run makes a whole lot of sense. You will see consumption fall as well as borrowing, because only idiots would buy or borrow something today that is cheaper tomorrow. The overall effect, though, is disastrous. When consumption falls, real prices continue to fall with it and the effect is cyclical. It becomes a game for consumers to wait out as long as they can to buy something, as every day they wait the product becomes cheaper in real dollars. Borrowing becomes illogical as well because who would borrow today when the value of the dollars you borrow will be higher tomorrow? This too cuts consumption. It becomes a real investment to simply put your dollars in a savings account and let them sit and gain value!

On the production side this too is a nightmare. With consumption cut severely, producers will produce less. When production is down, jobs are lost and unemployment rises. To the recently unemployed worker, the value of the dollar goes up as well because they are now hard to come by. Wages are now much much lower both in the nominal and probably in the real sense, making everyone worse off. This too leads to a cut in consumption. It is a vicious cycle that seems to perpetuate itself, and one that must be avoided.

This got me thinking about terms of trade and immigration. When the value of the dollar becomes much higher, aren't imports much cheaper? Exporting, however, becomes much more expensive and thus would fall. This has a negative effect on the terms of trade for the country experiencing deflation. Also, when wages are lower and unemployment higher, immigration slows down as there are less and less benefits of immigrating to the deflation-experiencing country. This indeed is something to worry about it this country.

http://www.marketwatch.com/story/could-we-be-heading-for-deflation-2014-03-11
http://krugman.blogs.nytimes.com/2010/08/02/why-is-deflation-bad/?_r=0