Additional quantitative easing, as proposed by Federal Reserve chairman Ben Bernanke, is a necessary, though not sufficient, measure to preempt deflation and a possible economic relapse.

"Engineering a successful transition out of deflation is one of the most challenging aspects of monetary policy, but the Bank of Japan just might be able to do it this time."

While markets have been obsessed with Europe's debt crisis, they have failed to notice potentially more ominous developments. The United States and Europe are heading toward deflation, a classic prolonger of crises.

The current economic outlook is unnerving as inflation is low and falling in the U.S. and Europe and cutting rates is no longer an option. Policymakers must recognize that, while the acute phase of the financial crisis may be over, the chronic trend toward deflation that has followed it is not.

Declining inflation, veering into outright price declines (or deflation) in some countries, continues to be a major risk to the global economy.

AEI economist John H. Makin will recap his recent Economic Outlook, where he warns of the possible danger of deflation.

Expectations of falling prices would deepen the economic downturn.

The Obama administration seems to be doing too little too late in resolving the country's banking crisis.