Deflation is a great thing. In Germany, they've got a "brothel special"... From 10 AM to 4 PM, all the the food, drink, and sex you can handle for 70 Euro!
Seriously, I think this is where deflationists get it at least partially wrong. Governments will be reluctant to reign in spending and will pass the bill to the consumer since the taxpayer is basically tapped out. In my view this will ultimately drive riskier assets higher due to the search for returns keeping track with the real rising costs of living.
Take a look at Japanese government spending 1990-2010 and the performance of their risky assets (equities, land, real estate) during the same period. Why don't the hyperinflation bloggers ever put those charts up? Because it doesn't support their central thesis. Skyrocketing government spending unfortunately doesn't automatically leads to price inflation or asset price inflation.
Didnt the Nikkei more than double from 2003 to 2007? http://www.google.com/finance?q=INDEXNIKKEI:.N225
And you attribute that to Japanese government spending? Or to a global bull market in equities during 2003-2007? Japanese stocks are still down 75% over the last 20 years. Real estate and land prices are back at 1980s levels. Trillions in government spending couldn't change that. Had you bet on risky assets in Japan in e.g. 1995 (well after the bubble popped) based on the "money printing" and "government spending" arguments you would have lost a lot of money.
You could attribute it to Japanese government spending and the following downmove to the collapsing global economy rather than the failed government policies themselves. I would say there is always a tension line between local policies and global circumstances. Let's agree the Japan example does not exclude big market movements either way providing excelent trading opportunity rather than it supporting the bearish playbook completely. I try to grasp the concept of timelines visualising the policies implemented in market movements but have come to the conclusion the correlation is supportive at best but certainly not determining.
I am with makloda on this... In particular, I expect the Eurozone to slip into Japanese-style deflation for at least a few years. The amount of excess capacity is staggering, fiscal tightening is almost inevitable and the central bank is likely to tighten the screws at least to some extent.
Why not look at another lost decade, that of the US, where stockmarkets offered a rare negative 10 year return, employment is down to multi decade lows and serious strains have manifested themselves upon society on a number of levels despite loose monetary policy by the FED. Let's see how the individual DJI components performed during this timeframe. CAT: +200% UTX: +150% MCD: +100% TRV: +100% XOM: +90% JNJ: +80% MMM: +70% CVX: +60% PG: +40% BA: +30% IBM: flat AXP: flat KFT: flat KO: flat WMT: flat DIS: -20% HPQ: -20% BAC: -35% DD: -40% MSTF: -40% PFE: -50% T: -50% VZ: -50% DD: -50% Alcoa: -70% CSCO: -70% GE: -70% INT: -70% Clearly there was substantial downside risk, but the markets offered some nice money making opportunities as well despite negative market sentiment (2 giant stockmarket crashes) and negative economic fundamentals. For those shunning high risk index investing in the DOW for instance would have offered substantial protection as well. Is it really so outrageous to predict a similar outcome for the western world in years to come? Having said that, I myself own no stocks despite some commodity plays which I expect to perform reasonably well regardless of economic conditions.