Has it been four years ago already? Are we really that old?

It seemed so simple back then. We watched the bubble in Japan pop at the beginning of the '90s. Then, we watched as the U.S. stock market, led by techs, repeat the same pattern. Every excess, absurdity, and extravagance that had made fools of the Japanese made cretins in America - only 10 years later.

Come the year 2000 and we thought we knew what would happen next. In fact, we were so sure of it we wrote a book arguing that the United States would follow Japan's example...with a long, slow slump that would take stock prices down 80% and make consumer prices fall and push the economy into recession.

Everything that should happen eventually does. But fortunes are lost betting when and how. The market can fail to do what it is supposed to do longer than you can stay solvent.

In the event, tech stocks did fall 80%. The Dow was going down, too, and the U.S. economy went into a recession. But then, peculiar and irregular commandos struck the World Trade Center towers in New York with commercial jets and the American public with panic. George W. Bush and Alan Greenspan joined forces to unplug the biggest gush of liquidity the world has ever seen. Taxes were cut. Spending was increased. And the Fed cut the price of money to below the prevailing rate of consumer price inflation. The resulting tide of cash and credit swirled all boats up.

But did the feds actually side step the correction the country needed? Or, did they just postdate it and make it worse? Inflation is now the big worry, say the papers. We say, don't believe it.

Robert Reich, Labor Secretary under Clinton, seconds us.

"Deflation, not inflation, is what Ben Bernanke should be worried about," Reich says.

"Each generation, in its determination to avoid the nightmare it does remember, runs the danger of over-reacting, and thereby bringing on the opposite trauma. A generation ago, economic policy makers paid too little attention to inflationary forces then building in the American economy. Eventually, Paul Volcker had to break the back of inflation by raising interest rates sky high. That put the economy into a severe recession. Now Bernanke and company are paying too little attention to deflationary forces building in America and the global economy.

"Bernanke fears that today's economy resembles the one that began to overheat the 1970s. But he's wrong. Labor unions today don't have nearly the power they did then to get wage increases. Big companies don't have nearly the power they did then to raise prices. Global wage competition is keeping a lid on American wages, just as global price competition is pushing down on American prices. Meanwhile, fancy computer software is allowing rivals all over the map to erode almost anyone's market share. Who's going to raise prices in this environment?

"What's more, there's no reason to raise prices. Productivity has been soaring over the last five years while the median wage has been stuck in the mud. Wages, remember, constitute about 70 percent of the cost of doing business. So how can price pressures be building? Bernanke and company worry the U.S. labor market is heating up. They're wrong here, too. Despite what look like rosy employment numbers, a smaller proportion of the American labor force is employed today than it was in 2000. Millions of people don't show up on the unemployment rolls because they're too discouraged even to look for work.

"The price increases we're now witnessing are not due to excess demand over limited productive capacity, which causes inflation. They come mainly from soaring prices for energy and raw materials. These commodities are being bid upward because of China's rapid growth, but take a closer look and you see something else going on. Much of the increase in commodity prices is being driven by speculators who expect prices to continue to rise. In other words, part of what we're seeing are speculative bubbles. Such bubbles can burst any time. The fact is, the global market is glutted with productive capacity, and that's not chiefly because of the huge gains in American productivity. If you really want to see a glut, take a look at China.

"If anything, there's too much capacity relative to demand. This is a recipe for deflation. Prices can begin to drop because buyers hold off, expecting further price decreases. It happened in Japan in the 1990s. It's already starting to happen in certain housing markets in the United States that had been red-hot but are now cooling so fast home prices are dropping. Deflation is often accompanied by stagnant or falling wages, which make it harder for consumers to afford to buy. Look what's been happening to American wages.
 
"The Fed and other central bankers around the world are raising interest rates because they're fighting the last war. But they already won that war. Inflation is no longer our biggest threat. They ought to be worried about the war before the last one, and the specter of deflation. They're in danger of losing that war even before they know they're in it."

Maybe we were not wrong, just early. Pushing up interest rates to fight inflation and "load the gun," the Bernanke Fed could help trigger the Japan-style slump we saw coming five years ago.

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