WC8 referred to a book "This Time Is Different" by Kenneth Rogoff & Carmen Reinhart. It is a very good book whose main conclusion - after analysing 800+ years of economic cycles - is that...
IT IS NEVER DIFFERENT.
That is exactly the case now. We are going through an event that has all happened before - a credit driven, unsustainable asset bubble has collapsed causing a severe recession that now needs massive deleveraging and balance sheet repair to overcome.
Their conclusion is that in the natural course of events these credit/ financial recessions lead initially to deflation, normally results in sovereign debt default (which often cluster and trigger other sovereign defaults) and often ultimately leads to inflation (as one form of debt default).
Unlike normal recessions these types (though rare) are especially severe - i.e. 1930's great depression.
The ECB, Fed, BoC, BoJ are doing everything they possibly can to avoid deflation - trying to plug the dyke with their finger....
... interesting and scary times. I'd recommend reading the book, or at least tuning in to John Mauldin's weekly commentary to get an accurate take on what's likely to happen (mind you, sleep will become problematic if you do :)
