IT SEEMS LIKE ONLY YESTERDAY that the stories were all about soaring oil prices and the threat of a fresh bout of inflation.

But today, with crude oil hovering around $50 a barrel — roughly one-third of what it was at its peak earlier in the year — and stock values falling almost as far, the big question seems to be whether the current world-wide recession will become a Depression accompanied by Deflation, the two most dreaded 'D' words in an economist's lexicon.

That's certainly what occurred in the Dirty Thirties, and there's some evidence to suggest that conditions are ripe for a recurrence.

Just about everyone knows what a recession is, most of us having lived through at least the one in the 1990s, and they're no doubt aware of the fact that a depression is just a deep recession that usually lasts several years. Deflation is a term that has been around a long time but seldom used in recent decades. Wikipedia defines it as "a persistent decrease in the general price level of goods and services" or alternatively as a decrease in the money supply and credit.

"The two meanings are closely related, since a decrease in the money supply is likely to cause a decrease in the price level. Deflation is considered a problem in a modern economy because of the potential of a deflationary spiral and its association with the Great Depression, although not all episodes of deflation correspond to periods of poor economic growth historically."

Certainly, we have been experiencing a sharp decrease in credit, and the United States housing market is a classic instance of a huge decline in prices that's far more significant than the recent drop in gasoline prices.

Earlier this month, the New York Times carried an article which warned that a "new threat may be gathering force within the American economy — the prospect that goods will pile up waiting for buyers and prices will fall, suffocating fresh investment and worsening joblessness for months or even years.

"The word for this is deflation, or declining prices, a term that gives economists chills."

Noting that persistently falling prices were at the heart of Japan's so-called lost decade after the catastrophic collapse of its real estate bubble at the end of the 1980s, the article said some U.S. experts are finding parallels to the current economic turmoil.

With economies around the globe weakening, demand for oil, copper, grains and other commodities has diminished, bringing down prices of these raw materials. Although apart from houses, U.S. prices have yet to decline noticeably for most goods and services, the article noted that reduced demand is beginning to soften prices for products like furniture and bedding, and for some appliances, tools and hardware.

Last week, it was announced that the U.S. consumer price index actually fell in October, and although the main factor was a 10 per cent drop in retail gasoline prices, there was a slight drop in other commodities.

There was a time, not that many years ago, when virtually all economists felt the risks of another Great Depression occurring were slim to nil because of the lessons learned since then.

However, the main lesson, surely, was based on the thesis of John Maynard Keynes that governments could reduce the "boom and bust" business cycles by running surpluses in good times and having stimulative deficits during recessions.

Unfortunately, Keynesian economics gave way in the U.S. to a neoconservative ideology which held that the ultimate cures for economic woes lay in tax cuts and deregulation.

The belief was that dramatically reducing the marginal income tax rates would benefit everyone, since the added wealth of the major beneficiaries (the top 5 per cent of income earners) would somehow "trickle down."

Well, today there's very little evidence of any such trickling but copious evidence that the eight years of tax cuts and deregulation at a time when the U.S. was waging two wars have not only produced unprecedented economic turmoil but saddled future generations with unprecedented levels of debt. Historians will likely establish that the recently approved financial-sector bailouts, if properly accounted for, would push the 2008 federal deficit to more than $1 trillion ($1,000 billion).

The current worry is that in the worst case, the end of inflation may be the beginning of something malevolent: a long, slow retrenchment in which consumers and businesses worldwide lose the wherewithal to buy, sending prices down for many goods. That would prompt businesses to slow production and accelerate layoffs, taking more pay cheques out of the economy and further weakening demand.

The big danger lies in the difficulty of finding a cure. Policy makers can generally choke off inflation by raising interest rates, dampening economic activity and reducing demand for goods. But as Japan discovered, an economy may remain ensnared by deflation for many years, even when interest rates are dropped to zero. Falling prices make companies reluctant to invest even when credit is free.

Through much of the 1990s, prices for property and many goods kept falling in Japan. As layoffs increased and purchasing power declined, prices fell lower still, in a downward spiral of diminishing fortunes.

Could the same thing happen here? We certainly hope not, but persistent deflation south of the border would obviously pose a significant risk of spreading northward.