Deflation is when an entire economy of people stop buying as much as they once did, forcing the price of goods to drop. When people see prices falling, they tend to hold out longer hoping to buy at the bottom. Think about it this way: if a 2009 car was selling for $30,000, the 2010 model for $15,000, and 2011 model for $7,500, what consumer in their right mind would buy a vehicle today instead of waiting to buy in the future? So while all this watching and waiting is going on, all economic activity slows and slows—which is bad.

This is when an economy would start to enter a deflationary spiral. When the inflation rate (normally 3%) drops below 0, the real value of money increases (prices drop, you get more bang for your buck). Though that sounds attractive, it’s not in the long term. Profit margins shrink, businesses fail, and unemployment rises right alongside the real value of debt. So once caught in the spiral, it’s extremely difficult for an economy to pull itself up by its bootstraps.