Stag-deflation?

Nouriel Roubini now predicts a "stag-deflation", or a recession associated with deflationary forces, in the US and global economies in the coming six months. He blames four factors as being responsible for this - a slack in goods markets, a re-coupling of the rest of the world with the US recession, a slack in labor markets, and a sharp fall in commodity prices following such US and global contraction. All of these would reduce inflationary forces and lead to deflationary forces in the global economy.

The most fundamental indicator of deflation is the falling aggregate demand (AD) that has ensured that supply vastly exceeds demand, be it for housing, consumer durables or motor vehicles. As Prof Roubini writes, AD is now collapsing in the US and advanced economies, and sharply decelerating in emerging markets. There is a huge excess capacity for the production of manufactured goods in the global economy, as the massive, and excessive, capital expenditure in China and Asia has created an excess supply of goods that will remain unsold as global AD falls. Deflation is inevitable!

The financial markets too appear to be pointing in the same direction, with yileds of long term Treasury Bonds declining, and the difference between the conventional Treasuries and Treasury Inflation Protected Securities (TIPS) (which is a proxy for expected inflation) becoming negative, thereby indicating deflationary expectations.

He also argues that the fiscal costs of bailing out borrowers and lenders will not be inflationary, as central banks will not be willing to incur the costs of very high inflation as a way to reduce the real value of the debt burdens of governments and distressed borrowers.

Update 1
Here comes more evidence that consumer spending has may fall precipitously in the coming days.