After decades of focusing their concerns on inflation, perhaps bankers and investors now should be paying some attention to the prospects for inflation's mirror image-deflation.

"Those who say deflation went out with high-button shoes ought to look at Japan and Switzerland today. Both have had deflation during this entire decade," noted A. Gary Shilling, an economist and investment manager.

"Deflation is the risk, not reflation," concurred Edward Yardeni, chief economist at Deutsche Morgan Grenfell Inc., New York.

Deflation-falling prices-can mar corporate earnings and short-circuit an economic expansion as much as inflation. Indeed, deflation characterized the Great Depression of the 1930s.

To be sure, neither Mr. Shilling nor Mr. Yardeni is predicting deflation-falling prices-for the nation's economy. But they both offer scenarios in which the phenomenon might appear.

"If two things happen, chances of deflation could exceed 50%," said Mr. Shilling, president of A. Gary Shilling & Co., Springfield, N.J.. Those factors, he said, are the continued strength of the U.S. dollar and "a switch by consumers, at long last, from being big spenders to big savers."

Mr. Shilling has long expected such a shift by consumers, for demographic and other reasons, but the excellent business climate and low unemployment of the past several years have kept spending at high levels.

Spending has recently been soft, but a revival, anticipated by many economists, could provoke the Federal Reserve to ratchet up interest rates in a bid to slow the economy.

Eventually, this pattern results in recession, said Mr. Shilling, noting that economic expansions customarily end "with a bang, not a whimper" from the central bank's credit-tightening actions. That may also bring on the "long overdue massive correction in stock prices."

With consumer debt at high levels and many people relying heavily on the stock market for retirement savings, a recession and market correction could be traumatic and debilitating, he said.

"Then you might really get some religion in consumers, with the savings rate going up and not coming down," he said. "And that, in turn, could lead to a weak recovery and cause deflation to set in."

Mr. Shilling emphasized he was offering "a scenario and not a highly probable forecast, but it is a way things could unfold." At the same time, he noted that consumer spending and saving patterns "have so far defied my unimpeachable logic."

In any case, he said, it is difficult to imagine a recession until next year at the earliest or deflation as a serious problem until the end of the decade.

Moreover, deflation in limited instances is not bad and can be a sign of business health if demand is strong and innovation and efficiency are at work. "We've had deflation in computer prices for years," he pointed out.

But generalized deflation is handmaiden to falling demand as consumers wait for prices to decline further before buying and the value of savings goes up. That can mean excess inventories, layoffs, price cutting, and weakening corporate profits in a self-reinforcing cycle.

Moreover, debtors are the clear losers in a deflationary environment as much as they are winners under inflation, Mr. Shilling pointed out. While interest rates fall, the value of loan principal increases and the burden of debt service rises.

Mr. Yardeni said he is "not very concerned" about deflation, believing most companies will find enough growth around the world to either avert or offset the deflationary pressures of global competition.

Still, he noted that weak gold prices-recently at 12-year lows-suggest the producer price index annualized inflation rate may soon turn negative. Producer prices have fallen for an unprecedented six straight months.

The economist's greater concern is that deflationary forces might combine with a pair of other factors-a booming stock market and the "year 2000 problem" facing computer users.

An optimist about the economy, Mr. Yardeni has long predicted that the Dow Jones industrial average can hit "10,000 by 2000." With the Dow up 2000 points in only nine months to the 8000 range, however, he worries that his forecast may be conservative.

If the Dow hits 10,000 in the next six to 12 months instead of over two and a half years, "the Fed may have to act," he said.

Mr. Yardeni now sees a 30% chance of a worldwide recession in the year 2000. He still expects a 10,000 Dow, "but that level could be followed by a significant drop in stock prices in the U.S. and in other stock markets."

He advised investors to lighten up on stocks over the next few years and buy more bonds. He expects the U.S. government's 30-year bond yield to fall to 5% in 1998 and perhaps to 4% by 2000.

As for the "millennial bug" affecting computers, which may not distinguish the new century, the dimensions of the problems are worrisome and "the computer services industry doesn't have the capacity to solve everyone's problem."

As the year 2000 approaches, companies and governments could be forced to spend large sums to retrofit data systems. After the deadline, lawsuits could proliferate and legal costs explode.

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