[vkou]

Inflation/deflation is a proxy for population growth + productivity growth + looseness of monetary policy.

Loose monetary policy can't be maintained forever (You get stagflation, which is even worse - just ask Japan), year-over-year productivity growth can't be maintained forever, and the subject this thread is discussing is 'what happens to the economy when population growth goes negative?'

So yes, a deflation of 0.5% wouldn't be devastating. A deflation of 3% would be a stop-the-presses-the-world-is-going-to-hell-we-need-a-new-economic-system event.

The problem is that you can't loose-monetary-policy your way out of deflation, because one of the factors contributing to a loose monetary policy is how willing banks are to lend money to people. In a world where the money base is shrinking year-over-year, in aggregate, lending money to people is a terrible idea, because there won't be enough money in circulation next year to make interest payments. This leads to a reduction in lending, a reduced appetite for risk in lenders, and a reduction in the amount of money created by fractional reserve banking, which further pushes you into deflationary territory.

It's a vicious cycle that you can't escape.