Deflation is a sustained decrease in the general level of prices in an economy. It is the opposite of INFLATION, an increase in the general level of prices. Falling prices are a result from either increasing productivity, which allows producers to increase output and INCOME; or declining DEMAND. Increasing productivity benefits both the economy and producers, but decreasing demand results in lower prices and lower incomes. As illustrated in the CIRCULAR FLOW MODEL, when demand declines, output declines, and household income declines even further, causing further decreases in demand. The result can be a downward spiral in the economy. Deflation has what economists call distributive effects. People with fixed incomes, including bondholders, benefit from deflation because it raises the value of the money income they are receiving, and thus their REAL INCOME or purchasing power increases. People with savings also see their purchasing power increase. Deflation hurts debtors because they are paying back money that has increased in purchasing power while their incomes have not increased commensurately. Deflation can hurt creditors if declining prices put borrowers in a situation where the amount they owe exceeds the now-reduced value of the ASSETS they borrowed against. In the United States during the 1980s, when oil prices fluctuated dramatically, in some communities housing prices declined so much that owners “walked away” from their MORTGAGEs. Banks and SAVINGS AND LOAN ASSOCIATIONS were forced to liquidate these mortgages and take losses, contributing to the savings and loan crisis and the creation of the RESOLUTION TRUST CORPORATION to bail out the industry. Similarly, declining prices in Japan have bankrupted many financial institutions, crippling the Japanese economy for over a decade. The most severe period of deflation in the U.S. economy occurred during the GREAT DEPRESSION, between 1929 and 1934, when prices decreased by 24 percent. Business bankruptcies skyrocketed, 9,000 banks failed, homeowners defaulted on mortgages, and UNEMPLOYMENT rose to 25 percent. During a period of high debt levels, deflation is of particular concern to economic policy makers. With high debt levels, the potential for business and household DEFAULTs increases. In 2002 total debt in the United States equaled 158 percent of GROSS DOMESTIC PRODUCT (GDP). According to the Wall Street Journal, “the last time debt rose to that level was in the late 1920s.” Policy makers fear deflation from decreased demand because it can make it hard for them to stimulate the economy. INTEREST RATES tend to change with inflation rates. When there is negative inflation (deflation), interest rates cannot go below zero. The Federal Reserve, the monetary authority in the United States, lowers interest rates to stimulate borrowing and spending, but the Fed cannot lower rates below zero. Without monetary policy options, the only ways to stimulate the economy are fiscal policy options, increasing government spending, and/or decreasing tax rates. These choices, though, increase budget deficits, increasing the national debt. Generally businesspeople prefer stable prices. Increasing or decreasing prices create uncertainty, increasing the risk of business ventures.