Via Mark Thoma, from Mary C Daly of San Francisco Fed, comes a graphic that compares core-inflation trend in the US with Japan of the nineties, and the similarity is striking. A long-term deflation trap is a real possibility.
The deflation trend accompanies a steady slide in GDP growth rates, after a brief recovery. Real GDP growth trajectory has already been revised downwards thrice this year.
The worries about deflation coupled with stagnation comes even as the potential output crossed more than a trillion dollars and is estimated to persist well into the next few years.
Update 1 (30/10/2010)
Excellent Times article that compares Japan and US. The interesting thing is that US may be worse off than Japan in so far as it cannot draw on a large domestic savings pool to finance stimulus spending like Japan. See also this article about the problem faced by the Japanese policy makers and central bank on the financial market mess.
Update 2 (5/11/2010)
Bernanke now feels that the US economy faces the prospect of undergoing the Japan experience.