"The D-word is back," says this morning's Financial Times. "Could deflation be the next big shock to the financial system?"

Where has the FT been? The world has never seen so much deflation. Stock markets around the world have deflated by about $10 trillion. U.S. housing has deflated by about $5 trillion. Oil has deflated to only half its high; it closed at $64 on Friday. Gold, down $13 on Friday, has deflated about 25%. Bear Stearns deflated to nearly zero.

Even the bond market is beginning to deflate. Yields are rising, to 3.97% for the 10-year T-Note.

The Dow rose 141 points on Friday. But year-to-date, the U.S. stock market - as measured by the S&P 500 - is down 35%. That means that U.S. stockholders alone have suffered a loss of nearly $5 trillion. And one in every five houses in America has sunk so low that it is now underwater; the mortgage level is higher than the value of the house.

The FT must be talking about consumer prices. Prices you pay for milk and gasoline. They're not going down yet. But they're not going up so fast either.

The headline U.S. inflation rate seems to have peaked out at about 5.5% and is now headed down. In Europe, the headline rate hit 4%. Now, that too is coming down. And everywhere you look, price cuts are beginning to appear. "Sale" signs are appearing in shop windows. Cheap flights are being advertised in the subways of Paris. Auction prices, according to an insider, are much softer than they were six months ago.

One thing that is sinking to the very bottom of the sea is the cost of sea-borne transport. The Baltic Dry Index measures shipping costs…and gauges the health of the globalized marketplace. Shipping prices rise when orders are being placed…and delivered. When orders decline, so does the index. Well, based on the index, there is no need for Misters Smoot and Hawley. World trade is collapsing without them. The index has gone down 14 days in a row, so that shipping barely costs 10% of what it cost a few weeks ago.

Deflation? What does that remind you of, dear reader?

Japan! Of course. This is the trend your editor saw coming 10 years too soon - a Japan-like slump.

"A deep and prolonged recession could raise the spectre of deflation of the sort that long plagued the Japanese economy," says a fellow at the American Enterprise Institute.

"Welcome to Hiroshima, mon amour," was how we put it, with Addison Wiggin, in our 2003 book, Financial Reckoning Day.

"If the United States were to repeat the Japanese experience, stocks could be expected to return to their 1995 trend line, with the Dow below 4,000, in the year 2012, at almost the very moment when America's baby boomers will most need the money," we warned.

(Financial Reckoning Day seems to be here, at last. John Wiley & Sons, the publisher, asked for an updated version…stay tuned.)

Meanwhile, "governments around the world are pulling out all stops to save the system and keep it running at all costs," says a strategist at Saxobank.

"All stops" are the things that keep the dollar worth something: the reluctance to spend too much…the reticence to 'crank up the printing press'…the residual instinct to protect the integrity of the world's dollar-based financing system.

Where does pulling out all the stops lead?

Peter Anderson, at RCM, took the words out of our mouth:

"We anticipate more taxes, more regulation, a bigger government and a massive deficit. This sets the stage for a potential inflation bubble of massive dimensions, but that is unlikely to occur until 2011-2012 at the earliest. It is in that environment that the dollar is likely to resume its decline against both the euro and the yen."

Deflation now. Inflation later. That is our guess how the reckoning goes. Falling asset prices…followed by falling consumer prices…followed by "money from helicopters"…followed by rising prices…followed by the end of the U.S.-dollar based worldwide monetary system.

Our Trade of the Decade was meant to capture the early stages of this - but only a bit of it: the relationship between gold and stock prices. In 1982, briefly, you could have bought every one of the stocks in the Dow index for a single ounce of gold. But by the time the stock market finished its epic rise, in January 2000, (while gold was doing an epic fall!) you would have needed 44 ounces of gold to buy the Dow. Now, that ratio has come down considerably. You only need about 13 ounces of gold to buy the Dow. And as stocks come down, the ratio is likely to fall below 5…and eventually back to 1 to 1 (at which time, remember, it will be time to sell gold and buy shares).

Looking ahead, our guess is that the gold side of the trade will be good for another 10 years. When the dollar begins to wobble, gold will fly. But if Mr. Anderson is right, the deflation stage will end sometime near the beginning of the next decade. For the moment, cash is king. Dollars - and US Treasury obligations - protect you from losses in the asset markets. But don't get too attached to your dollars. The king will mount the scaffold - sooner or later.

Yes, dear reader, everything is going according to plan. But whose plan? It's not the plan of consumers - who counted on having more and more money to spend. It's not the plan of investors; they're getting hammered by the markets. It's not the plan of Bernanke or Paulson either; they're desperately trying to stop it.

No, it's Nature's Own Plan…in which bubbles always pop…what goes up eventually comes down…and people always get, neither what they expect nor what they hope for, but what they deserve.

"Nature in her wisdom, and God in His grace," we wrote in Financial Reckoning Day, "make sure people get what they've got coming…"

Remember, a correction is equal and opposite to the deception that precedes it. A few years ago, we predicted that based on the level of mass hallucination in the markets in '05-'06, the coming correction "ought to be a doozy."

Now we find out what a doozy looks like.

Bill Bonner is the President of Agora Publishing. For more on Bill Bonner, visit The Daily Reckoning.