In today's news: Is the economy dead?

“Okay, this is a shocker,” said Douglas Porter, deputy chief economist at BMO Capital Markets. “We’re not talking about a shot across the bow of the optimists, this is more like a torpedo through the hull.

Imported wine at seven bucks a bottle. Incredibly cheap food, jeans and household staples. Real estate prices 40% below levels of more than a decade ago. Structural unemployment and families that save a fifth of their gross income.

Welcome to Japan, and the new face of deflation.

The country’s in the news this week after the latest stats showing Japanese prices racing downwards at an unprecedented clip. Now we hear that Germany has been in a price decline for four months and, of course, Canada’s inflation rate has been negative since mid-summer.

This utterly confounds those among us who have been gleefully predicting hyperinflation, as central banks print wheelbarrows full of money, as governments borrow without limit, and stimulus spending goes off the chart. Especially loud have been gold bugs dreaming of their basement rock collections soaring in value, and real estate investors praying runaway asset values will be their ticket out of debt.

But what if they’re totally wrong?

Here’s the other argument: Prices are in a gentle downward slope which will only pick up speed as demand withers and producers are forced to cut prices again…and again. Why would that happen?

The growing legion of the unemployed, the underemployed and the utterly discouraged. Official jobless levels are pushing 10% in North America, but lots of economists say when you count in the folks who have given up, the ones no longer collecting benefits and the Boomers who will never work again, it’s closer to 17%. Jobless people don’t buy much, after all.

Meanwhile consumer incomes are going down, not up. Real incomes are lower in the US, and most of Europe. If it were not for “cash for clunkers” and homebuying grants in the States, the home reno tax credit in Canada and 3% mortgages, what would the economic landscape look like? And what will transpire when the artificial government stimulus finally ends?

Reduced demand has led to overcapacity, withering corporate profits and a drying up of new business investment. This creates a vicious circle in which there is no new job creation, therefore no increase in consumer income, no consumer spending surge, no new demand, no new jobs. And how can we rationally expect anything different, when consumer spending accounts for 60% of all economic activity?

So, if price deflation becomes asset deflation, dropping the relative value of computers, bungalows, cars, commodities and iPhones, where does that leave most Canadian families?

Well, figure it out. Unlike Japan, families here have basically no savings. Unlike the Japanese, who have had 20 years to deal with deflation, we have the highest personal debt rate in history. Unlike in Japan, we have a housing bubble creating new billions in mortgage borrowings. Unlike Japan, a large portion of our national wealth depends on digging stuff out of the ground and selling it – commodities.

The downside potential is unlimited. And that’s what scares economists. Deflation’s a monster.

The good news: Those higher interest rates will take a lot longer getting here.

The bad news: You won’t notice.