That leaves the world in a very dicey position. A disturbingly large number of central banks are in a spot in which they cannot easily offset deflationary shocks. And the central banks in best position to provide an inflationary impulse are manifestly refusing to do so. They are not adhering to the "rules of the game", presumably because they believe that in a world of (mostly) flexible exchange rates there is no need to do so. Yet the constraint of the zero lower bound suggests that there is, because deflationary pressure in one economy propagates thanks to insufficient monetary response. Someone needs to lead the way in pulling the world economy off of the zero lower bound. But the economies that look most capable of achieving this—and this first and foremost means America—are adding to the disinflationary gale rather than leaning against it.

The world economy is still less brittle than it was in the 1930s and could conceivably get its act together, but there may not be much time because of the dangerously weak link that is the euro zone. Deflationary pressure there stresses a political and economic union that is not well equipped to manage the challenge. And a euro zone break-up, should it occur, would probably generate an economic calamity to rival the Depression.

Central bankers have been patting themselves on the back over the last few years for having steered the world clear of a second Depression. Well, chaps: mission not yet accomplished.

David Fuller's view

In thanking the subscriber, I said this was an interesting article, although as with all Economist articles, frustrating for me because I do not know who wrote it or what their track record has been.

Unfortunately, the Eurozone certainly is a problem, far from addressed by its governments.  The European Central Bank’s extremely capable and diplomatic president, Mario Draghi, has held the Eurozone together, to the surprise of many, since he succeeded Jean-Claude Trichet on 1^st November 2011.  However, there is only so much that he can do. 

It looks to me as if the Eurozone’s politicians and powerful bureaucrats, living in isolated splendour, are driving their Socialist liner full speed towards a deflationary iceberg. 

Nevertheless, this need not be an economic destiny.  A powerful economic stimulus led by Germany would help, as might a division of Euro member states into two different currency groups.  These policies would inevitably be controversial, but probably better than what we have long seen, not to mention what The Economist is warning about in the article above.