A sustained decline in the general price level of goods and services — the opposite of inflation, typically associated with falling demand, credit contraction, and economic depression.
Deeper Explanation
Deflation is more dangerous to an economy than moderate inflation because it creates a self-reinforcing spiral: falling prices cause consumers to delay purchases (waiting for prices to fall further), reducing demand, causing more price cuts, which causes more delay. Debt becomes more burdensome in deflation because the real value of debt obligations rises as prices fall — a business with fixed debt obligations in a deflationary environment sees its real cost of debt increase year by year. The 1930s depression was the defining deflationary episode: Dalio's economic machine model explains it as the inevitable end of a long-term debt cycle where credit cannot be further expanded. Dalio's portfolio protection against deflation includes long-duration government bonds and gold.
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