I write this for my Children:
Businesses will reduce wages - that's not an easy process- it takes time, so for now price deflation will increase borrowing power.For companies with fixed-rate debt, price deflation makes debt more onerous - a fall in the price they can charge for their products lowers their revenues and makes it harder for them to make their loan payments.
We can spiral down the above, what falls first, what falls last, who survives, who fails, what are real interest rates (as inflation is taken out and deflation sets in - probably, and actually, higher) siphon it all down, let all the talking heads do a "work out" on the what ifs - the answer is simple.
The net result is positive (at this time... in our economy...for the survivors.) Wages falling slower than prices result in increased buying power for the consumer - temporarily - 6 to 18 months, maybe. You see... Government Monetary Policy - is not working...not working! Lowering interest rates, flooding the markets with money, boosting up financial businesses, increasing unemployment time limits...not working!
Unintended consequences...a bit of deflation that boosts real wages may be the best way to get American households out of the hole. Remember, reduced wages will take time and resistence, price reductions will be quick and immediate.
Who will survive? Individuals and Businesses who get their houses in order - actually, a cleansing process - a painful result for those who live in disorder, with excesses of one kind or another. - A chapter of Survival of the Fittest. Unpaid Credit Card Balances will fill the morgues with people who loved "poisoned candy" - to an excess.
How to practice. Clean your houses, live with what you have, do without what you want, Look at your money coming in and going out - one is suppose to be greater than the other! Those three will become the foundation of survival.
Did I mention patience? This first decade of the 21st century is now being defined in its 8th year. The "turn" might slowly be recognized in early 2011 and our economy might start to "show" in 2012 -2015. By that time, The Country and The World will look entirely different - let's hope, not like the story (in the book) "The Road" by Cormac McCarthy.
Other Must reads:-
"How We Know What isn't So" - Thomas Gilovich
"The Black Swan: The Impact of the Highly Improbable" - Nassim Nicholas Taleb