Deflation is heading our way and we ought to be preparing for it, says economist A. Gary Shilling, author of a new book on the phenomenon of falling prices.

The big winners in such a world would be savers and lenders, he writes. Losers would include big spenders with large credit card debt, meaning that many Americans are going to have to change their ways.

And they will, Mr. Shilling says, when a new bear market in stocks, probably sparked by the Asian financial crisis, shakes consumer confidence, boosts savings, and helps lower prices.

"Whenever Americans hear the world 'deflation,' most think of the Great Depression of the 1930s," Mr. Shilling says.

Yet falling prices can also generate a good economic scenario, he writes in Deflation (Lakeview Publishing, $16), a 372-page survey of the phenomenon with strategies for businesses and people.

For the United States, the deflation he expects will be benign, resulting from excess supply, rather than the malignant 1930s brand that was triggered by collapsing incomes and falling demand.

Mr. Shilling, a former chief economist at Merrill Lynch & Co. who heads his own money management and consulting firm in Springfield, N.J., is part of a small but growing camp of business watchers who anticipate deflation.

He was an early forecaster, in 1975, of falling inflation, "even though prices were still accelerating," he says. Now he thinks deflation "is not just possible but highly likely."

He acknowledges that many disagree, including heavyweights like Federal Reserve Chairman Alan Greenspan and economist Milton Friedman. But early warning signs are abundant, he asserts.

Most significantly, inflation is historically a wartime event, and the 50-year Cold War is over, with inflationary defense spending on the wane. Meanwhile, technology advances are boosting productivity, and global competition is increasing.

He cites many signs of deflation. College tuitions, he points out, are no longer such an inflation hot spot, with leading institutions like Princeton, Yale, and Stanford posting smaller increases. And subway fares in New York City are being discounted.

As Mr. Shilling sees it, inflationary expectations are at an ebb after 15 years of slowly falling inflation, but have not yet been replaced in buyers' minds by anticipation of lower prices.

"My judgment is that declines in the prices of most goods and a fair number of services, averaging 1% to 2% and lasting for several years, would do the job," he said.

Price declines are also indicated by historical trends of the United States and other capitalist economies, he said, which tend to move "in 50- to 60-year cycles of extended growth and decline, commodity price peaks and troughs, and rising and falling interest rates."

The patterns were spotted in the 1920s by Russian economist Nikolai Kondratieff. The most recent upswing began after World War II, leveled out in the 1970s and 1980s, and seems poised for a down phase, with lower rates and prices.

Mr. Shilling's book is available through the publisher at 888-346-7444.

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