The economies of Europe, China, Brazil, and India are all rapidly shrinking, though it will take a while for the data to show it. The markets keep hoping for the governments to save the day, though there is no indication that any of them will do anything sustantive or helpful. Europe's governments have already postponed so long that the real economy has entered a vicious cycle of doom. China's government provided massive stimulus in 2009, but it was for even more investment in a nation that already had too much unproductive investment and too little consumption.
Consumption and investment in at least half the world is falling, which will lead to a prolonged and dramatic plunge in most commodity prices. Labor prices may be sticky, but the price of most goods will fall. It may even infect the US, where the dollar will become much more valuable compared to other currencies. The downside to your dollar being worth more is that it means everything else is worth less. The lack of global investment opportunities and the fear of loss will drive ever more savings into cash, particularly when holding US currency becomes not only the safest, but also the highest return investment globally available.
The deflation won't be a dramatic bust, but a slow and steady withering. We are looking at a global Japan, but worse than Japan. What is frightening is that 23 years later, Japan still has no solution. Their deflation hasn't been that bad, but there has been de minimus economic growth. And their government continues to borrow more money every year on a stagnant tax base. Is this what awaits the rest of the world?
The private sector is too afraid to consume and/or invest outside of the US. Most governments either won't or can't borrow money to invest on infrastructure, education, and technology - much less to spend on social benefits. Central banks create money, but they only provide it to banks, who then sit on the cash because they see no safe lending opportunities and need to preserve their capital for expected higher future credit losses.
Central banks must do what the public and private sector will not or cannot - they must make people spend. The last gasp of Monetarists is the call for central banks to create inflation by talking it up and raising inflationary targets. But the fear of possible inflation is overwhelmed by the fear of certain default and deflation in a depression. All that raising inflationary targets through verbage will do is convince everyone that central banks are both impotent and absurd. Central banks like to calm markets, but now they need to scare them. This is a tough role for central bankers, who are known for being boring rather than scary. They will need radical action.
Central banks must find a way to flood households with money, where it will be immediately spent since a) households have pent-up demand in a depression, and b) if enough money really is distributed then households will want to spend it before inflation lessens the value. If consumption is elevated for long then it will draw out private investment to collect the household spending and start a virtuous cycle of consumption and investment (then you can worry about inflation).
The trick is that most central banks can't just send households checks, instead they must buy assets. Large banks can sell bonds and other liquid securities to central banks, but what asset can most households sell? Their mortgaged house, their children, and their souls? There's the rub that will require creative policy and rule interpretation. We need central banks to buy mortgage and credit card debt, and then agree to either not collect on the debt and/or force the debt to be restructured so that the household's interest rate is set to the risk free rate (approximately zero in a deflationary environment). Central banks must take credit risk, and perhaps willingly take credit losses. And why not? They can make their own money, they aren't really a bank. They can afford to do what no one else can.
Central banks can go too far in printing money. Zimbabwe and Weimar Germany show why central banks should be independent, so that they don't go crazy making money for government operating expenses. That is what central banks fear today. I suspect it will take prolonged depression and deflation for private creditors and central banks to realize that there are worse things than your returns being eaten away by inflation, such as debtors defaulting because their income falls even as their debt burdens remain, or central banks that are at best ignored and at worst abolished.
Hopefully we will appreciate the difference between currency (paper) and wealth (serving each other) before things get too bad. Otherwise we won't have much of either.