The big news today is that the Dow fell another 260 points on Friday.

U.S. stocks have lost more than $1 trillion in value in the last three weeks - an amount equal to about 8% of annual GDP. Goldman Sachs (NYSE:GS) - the alpha business of Wall Street - has lost 20% of its value.

Of course, no Daily Reckoning reader should have lost serious money. We have urged readers to avoid U.S. stocks generally (there are exceptions…many of them) ever since the market peaked out early in 2000. Not that we knew what direction stocks would take (we were surprised to see the Dow later going up)…we just saw nothing to be gained by speculating on stocks when they are coming off a record high.

In March of 2000 the S&P stood at 1539. Last week, it was barely 1450. Plus, consumer price inflation has steadily eaten away at dollar values. While you might have cashed in $200,000 worth of S&P shares to buy a decent house in 2000; today, you'd need $400,000 worth. And while you might have gotten a gallon of gasoline for $1 in 2000…now, you'll pay $3. Just taking the government's CPI at its word, the dollar has lost about 20% of its value since 2000…which means, your S&P portfolio is down about 25% in real terms.

You would have been much better off in gold; it's up 150% over the same period.

"There is nothing safer than gold because it does not have counterparty risk," says our friend James Turk, over at GoldMoney.com.

"In other words, gold is not reliant upon some government promise to maintain the value of the currency they manage. Nor is gold reliant upon a bank promise claiming that your dollars or other national currency are not at risk."

But owning gold is boring. Owning gold is like going to a World Series game and hoping for rain. You are on the sidelines…out of it…a nullifier…a hopelessly old-fashioned fuddy-duddy.

Of course, there are times to go with fashions…and times to go against them. Our guess is that this is one of those eras when being a contrarian pays off.

The popular press is busy reassuring Americans that the wobble on Wall Street won't cause them any trouble. Two major reasons are given:

First, Wall Street's woes are traceable to subprime lending - and that, as we all know, is a containable problem. After all, said a report on MSN MONEY, the entire housing industry is only a $1.5 trillion industry.

Only? That's more than 10% of the entire economy. The GDP growth rate is only (officially) about 3%. A one-third cutback in the housing industry would mean negative growth in the economy - a recession. And it could be a long, deep recession.

"Housing to weaken even further," says the Wall Street Journal.

The Washington Post adds that it is becoming hard to find a lender will give you a no-money-down mortgage.

Where does that leave the housing industry? D.R. Horton (NYSE:DHI), one of the biggest builders, announced its first quarterly loss in 15 years of doing business. Weyerhaeuser (NYSE:WY), a major supplier to the homebuilding industry, says its earnings are off 89%. And American Home Mortgage (NYSE:AHM), a major lender, has been cut down to a penny share; you could buy the shares last week at 69 cents. Better move fast; if the rumors are correct, it will soon cease trading.

The second reason given for why we shouldn't worry is that overseas economies are strong and growing fast. They are buying more and more imports from the United States, say the analysts. But the last time we looked, manufacturing was still shrinking in the United States. How can a declining sector prevent a general decline in the economy?

The credit bubble has been a fantastic boon to foreign manufacturers. Capital was never easier to get. And Americans would buy any and all the junk they produced. Now, these same producers are America's competitors. And when the slump in the Unites States forces consumers to curtail their buying, foreign manufacturers will have to quickly refocus on their own domestic markets…competing with products provided by U.S. exporters.

The U.S. has neglected capital investment…and the manufacturing sector generally…for a quarter century. How will it now export its way out of a recession? Beats us…

*** The Fed is still talking about the risk of inflation…while the risk of deflation rises daily. Deflation happens when liquidity dries up. Suddenly, money disappears. Lenders don't lend. Spenders don't spend. The velocity of money declines as everyone holds on to what he's got…fearful of losing it.

When this happens even the feds can't do much about it. They have their printing presses…but they have no good way of getting the money into the hands of people who will move it around. The usual way is through the credit markets. The Federal Reserve pushes down short-term interest rates, for example, enabling lenders to offer money at lower rates.

But when a deflationary mentality takes hold of people, the last thing they want to do is to borrow money. They're afraid that they might not be able to pay it back. Besides, in deflation, consumer prices fall. So the money they pay back will be more valuable than the money they borrowed. Their effective, or real, interest rate will be much higher than the nominal rate they are paying.

As prices fall, consumers become even more reluctant to spend. They begin to see that they'll get a better deal if they wait. They turn Japanese.

That is the nightmare that haunted Ben Bernanke when he took over at the Fed. It is what prompted him to announce that "the Fed has a technology…called a printing press…" with which it can print up dollars at almost zero cost…and if need be, the Fed can drop dollars from helicopters in order to get the money into circulation.

Of course, this was a fanciful description of monetary policy. Let the Fed scatter dollar bills from helicopters and the U.S. dollar would fall faster than the currency in Zimbabwe, where inflation is said to be running at 100,000% per year. Some things just have to run their course - like hyperinflation, for example. Once it begins it continues until the currency is completely destroyed. Deflation, too. Once begun, it is hard to stop…for the cure if often worse than the disease.

The Japanese economy was strong when prices began to fall in 1989. First stocks fell. Then property. Then consumer prices. All prices came down. And each falling price strengthened deflation's grip on the Nippon economy. People hoarded money. You practically had to hold a gun to the consumer's head to get him to spend. And business investment? Takeovers? Leveraged buyouts? All came to a stop.

But Japan could afford deflation. People had savings - lots of savings. And the economy always enjoyed a trade surplus. Nor was there any large subprime lending problem.

Can America afford a liquidity crunch…a credit contraction…a deflation? We don't know…but if we were Ben Bernanke, we might want to make sure the printing presses and helicopters were in good running order.

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