I urge you all to read Ben Bernanke's "Deflation: Making Sure "It" Doesn't Happen Here" speech from 2002. He told us. And now he's doing it.

[UPDATE - THE FED HAS JUST INJECTED $200,000,000,000 MORE INTO THE SYSTEM, ALLOWING BIG-BOY INVESTMENT FIRMS ESSENTIALLY UNLIMITED SHORT-TERM LOANS SECURED BY ANY TOXIC MORTGAGE CRAP THEY HAVE HANGING AROUND

NICE JOB HELICOPTER! WE KNEW WE COULD RELY ON YOU!]

Here's the crib notes gameplan for HP'ers. Invest wisely.

* Devalue the dollar (well underway and nowhere close to the bottom)

* Take interest rates to zero (getting close)

* Flood the market with cash (the auctions are underway)

* Finance the government's buying up assets (get ready for RTC2, and for the government to buy up the assets of Fannie, Freddie and failing banks)

* Offer f*cked banks and companies zero-interest loans and take any crap as collateral (the FHLB is doing this already)

Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys

Therefore a second policy option, complementary to operating in the markets for Treasury and agency debt, would be for the Fed to offer fixed-term loans to banks at low or zero interest, with a wide range of private assets (including, among others, corporate bonds, commercial paper, bank loans, and mortgages) deemed eligible as collateral

There have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly

In lieu of tax cuts or increases in transfers the government could increase spending on current goods and services or even acquire existing real or financial assets. If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets.