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The fed is structured to fight inflation - so, despite their claims to the contrary, their ability to fight deflation is like attempting to push a rope. The main problem exists primarily with the staggering amount of debt in this country (a condition that also existed prior to the Depression). So far, people have been able to re-finance debt as interest rates have dropped, thereby keeping debt payments close to the value of money - and that is in turn reflected by a fed funds rate of 1.25. However, if this country goes deflationary, what can the fed do? It can't pay people to borrow money, and re-financing offers would not go to that point as well. So even if people can re-finance their debt to, say, 1 percent, they are still having to pay that debt with deflated (i.e., more valuable) dollars. And that is where the vicious circle can kick in.

IMO tax cuts are the only action at this point that can arrest this cycle, because they create a real net increase in the puchasing power of households.

Yet people will overborrow, prefering purchases that are levereged -- why? Because it is the established habit, and that habit has not yet been broken. Thus tax cuts will increase public debt, and the result? A number of possible scenarios. Probably most still bad news.

A few of things might work, though. And include tax cuts -- not because tax cuts as tax cuts, but as a change of the ratio of incremented government debt to private debt, under the assumption that the public leverages less of a spent dollar than the government. Might make owned preferred stock, regular dividend stock in PRIVATE companies a better hedge against deflation than government bonds, and thus redirect captital flow to the *hopefully* more efficient private engine. I says hopefully because accountability and general expectations accountability (theose two are different things) must be there at every level to make the private stock a better hedge than a T-Bill.

Other things that would help are import tariffs on labor and goods. Labor? -- H1B, etc. Incentives for starting new corporate businesses (not adding to the dinosaurs) in manufacturing and transport stateside. All to help capital flowing more in the States.

My guess is that if a deflationary crisis began, and if the home mortgage foreclosure rate got too high, the government would simply buy up the bad mortgages at bargain-basement prices, acting as a buyer of last resort and pumping mounds of Fed cash into the mortgage market. The foreclosed properties could then be refurbished (by a federal jobs program similar to the Depression-era CCC) and sold at deep discounts. Politicians know that masses of middle-class families being thrown into the streets is the one scenario that can never be allowed to be realized; such a situation could easily turn very, very ugly.)

Remember: wealth = real property, tangible and intangible assets, and human creativity; money = symbols of that wealth. The real wealth of the country remains even in a deflationary slump; the problem is that there aren't enough symbols spread around to enable people to exchange that wealth. If a similar situation occurs today, the federal government could inject money into the economy simply by declaring an "income tax holiday" for a year or two. Allternatively, a land war in Asia could stimulate military spending, priming the pump and leading to increases in manufacturing and other military-related industries. (This is a long shot, however; modern military forces use high technology to do more with less, substituting one super-high-tech fighter/bomber with smart weapons for waves of conventionally-armed low-tech planes. This trend will only grow more pronounced as the use of unmanned aircraft, highly-automated ships, and other robotic fighting platforms grows.)