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Deflation Threat Returns as Asset Markets Decline

Now that oil and other commodity prices have fallen back to earth, inflation fears have given way to deflation fears. The deflation scenario might go like this: Banks worldwide, stung by $588 billion in writedowns related to toxic assets -- especially mortgage-related securities -- will further reduce the flow of credit, strangling growth. That will push house prices lower, forcing additional losses and making banks even more reluctant to lend.
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