Commodity prices collapsed, and deflation then began to work its way through the economy.
The 1980s were rough, but deflation then hit hardest those who had overextended during the inflationary 1970s.
The point here is to understand where we are in the cycle between inflation and deflation and then to invest accordingly.
If the price of keeping the euro together is years of deflation, then sooner or later one country or another will be unwilling to pay it.
Adherence to an unsustainable currency union - the Gold Standard - then forced governments to continue deflation-worsening policies, provoking social unrest and inter-country tension over unpaid debts (in this case war reparations, but still debts).
When the Great Recession hit, we then saw the CPI move into deflation for a couple calendar quarters.
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It seems that not everyone is ready to join the deflation-first, then-inflation camp I am currently resident in.
There may be some complacency that because deflation did not spiral downwards then, it will not do so this time.
So why not then break free of the euro and have that deflation as a currency devaluation rather than an internal devaluation of wages?
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But if asset price inflation turns to asset price deflation first, bringing about recession, then goods and services inflation is pre-empted in the immediate cycle.
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Since then, Japan's economy has suffered stop-start growth and chronic mild deflation, with many companies struggling to rebound from the impact of the Lehman crisis and the March 2011 earthquake and tsunami.
Responding aggressively to financial panic, recession and the threat of deflation, they lowered short-term interest rates close to zero and many then plunged into the realm of the unconventional, buying government debt and extending vast new loans to banks.
Research by the International Monetary Fund suggests that, if average inflation targets are set below 2%, then there is a marked increase in the risk that interest rates will hit zero and that deflation may occur.
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Shortly after Naoto Kan, then the deputy prime minister and now also the finance minister, gave a noisy warning of deflation's threat late last year, the bank adopted a new lending facility to boost the money supply and bring down money-market rates.
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In a period of deflation, incomes would be likely to fall, and a fall in house prices would then surely follow.
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Only the U.S. Treasury, and then maybe the Fed depending on how much you think it controls the value of the dollar, can engineer a deflation.
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