It really happened here. Tuesday, the Federal Reserve’s closely watched, overnight federal funds rate dropped from its already historic 1% to a level not seen since Japan’s “Los Decade” of the ‘90’s – a rate between zero and 0.25%! The reality is that we’ve already been there even with the 1% nominal rate, as foreshadowed by the recent sales of 4-week T-Bills at 0%, just so investors worldwide can feel that their money is in a safe place.

With the scandals of late, including the record-busting Madoff (still-unfolding) $50 Billion plus mess which has cleaned the clocks of many rich individuals, entities and even charities, a flight to safety is looking increasingly like a reasonable alternative, even if it pays nothing – the under-the-mattress rate, if you will, because that is what you get if you hide your cash there – now the same as the Fed!

So the real fear now is Deflation and there is no more speculation about it. Milton Friedman (1912- 2006) a Nobel Prize winning economist, is credited with creation (or, at least the modern revival) of the economic theory of Monetarism, which, greatly oversimplified, is the belief that excessive expansion of the money supply is inherently inflationary, and that monetary authorities must devote themselves to maintain price stability, almost at all cost.

This is pretty dense academic stuff, but, in the economics classic: “Monetary History of the United States 1867-1960,” coauthored by Friedman with Anna Schwartz, their theory said that inflation was due to excess money supply generated by a central bank, and deflationary spirals, like we are now obviously caught in, are instead caused by just the reverse, the failure of a central bank to support the money supply during a liquidity crunch.

Tuesday also featured more record-setting bad news: consumer prices dropped severely for the second consecutive month and at the fastest rate since the government began keeping track in 1947. And, if not bad enough on its own, the NYT reported that: “The housing starts in November represented a 18.9 percent drop from the previous month and were 47 percent lower than November 2007.” This prompted statements like: “This is mind-bogglingly awful,” from Ian Shepherdson, United States economist at High Frequency Economics, quoted also in the NYT Tuesday. We are simply running out of superlatives.

President-Elect Obama held a long meeting with his economic advisors and gurus of these things are now counting on an even bolder, still bigger, and more expensive economic recovery plan being announced shortly with even more aggressive moves to pump enormous amounts of money into the severely hemorrhaging US economy, which is getting more and more like giving blood transfusions to a profusely bleeding patient with the doctors all hovering around the table, standing knee-deep in the patient’s blood.

Except, this blood is green, the color of money, and we are looking at the death of an entire economy, not just one bleeding patient. Yes, our economy is ‘bleeding out,’ right before our eyes and it needs one hell of a team of creative, bold economic doctors, and the across-the-aisle support of everybody, if we have any chance to avoid a first quarter of 2009 which will exceed all superlatives for bad and nasty and even “mind-bogglingly awful,” and the other three quarters of 2009, which could be even worse.

We now match here in the US all four systemic indicators of a true and horrifying deflationary spiral, exactly like Japan had in the 90’s: 1) after a price bubble in equities and real estate, asset values are dropping like a rock; 2) companies are hitting the insolvency wall as a result of the asset bubble, rippling out all over the economy; 3) people are terrified that their banks and other financial institutions just will not be good enough for whatever they dare risk with them, and; 4) prices of imported goods are decreasing – visit a Costco or Wal-Mart lately? Check out those big-screen flat TV prices.

Time now to circle the wagons and not to nurse old grudges, new grievances, and long-time frustrations with either political party. We need to get this economy off life support and breathing on its own again right away with massive infusions of dollars and enormous infrastructure and other job-creating projects or we are going nowhere. And that trip could take a decade, like Japan’s adventure in Deflation did during much of the 90’s.