>So if it's "generalized" inflation - the price of everything keeps falling - then what is the cause of that????? To me learning that is step 1 in solving the problem.

I happened to be hanging out with a couple of economists last night, so I asked them: "There are lots of recessions, but deflation isn't that common. It's easy to see how deflation perpetuates itself, but how does it get started?" They weren't sure. They thought that one cause would be a recession that lasts a long time. They said that deflation has not been studied nearly as much as inflation.

I think that Japan's high costs are a part of the cause of its deflation. Most countries with that problem might try to correct it by devaluing their currencies, but Japan hasn't done that, partly I think because their balance of trade is still strong enough to keep the Yen high (and now the U.S. dollar is sinking, so it's even higher with respect to their big trading partner).

However, Germany is now considered to be at risk of deflation. I don't know exactly what makes economists say that, except that their economy has been weak for a long time, and they had the extra burden of absorbing Eastern Germany. They have the world's highest labor costs, but are not that expensive otherwise. In particular, they have low property costs, according to a property market summary in this week's issue of The Economist which you can read at economist.com

We discussed Japan and Germany in this way, but didn't really get anywhere.