In an effort to demonstrate how serious they are about this whole “recession thing,” they stated that their new interbank loan rate target was zero. Zip. Nada.

When asked if this meant they had run out of bullets, Bernanke implied they could always simply inject money directly into the system by buying billions of dollars worth of Treasury bonds.

This is actually a peculiar thought, because Treasury bonds are the one asset that is actually in demand these days (whereas dollar demand is actually rather tepid).

In fact, Chairman Bernanke’s rather alarming statement caused the U.S. dollar to fall against the euro by the biggest amount in the latter currency’s history. The dollar also notched up a 13-year low against the yen.

Why Are They So Scared of American Banks?

But let’s go back to T-Bills for a moment. Right now, there is so much desire out there for the darn things, the Treasury Department can actually offer interest rates of zero, and even less than zero, and they just keep on selling.

To explain this, I’ve heard a dozen or so terms bandying about: words like inflation, deflation and stagflation. What I want to know is this: why would somebody want to buy T-Bills at zero percent, when they could park them at most any American bank for 2% or 3%? And that’s just for short-term notes – commit to a longer time spread and you can crank that up to nearly 5%.

The only reason I can think of is that despite all the efforts to secure the banks – all the billions and indeed trillions of dollars we have poured into their coffers, and all the various deposit insurance promises Washington has made – whoever is buying all those T-Bills has reason to think America’s banks are still not good risks right now.

And that’s a scary thought indeed.

No More Failures (Please?)

In a press conference on Wednesday, U.S. Secretary of the Treasury Henry Paulson assured us to the contrary. Paulson is so sure that the banks are completely secure, he might not even ask for the second half of his “TARP” money. “I don’t expect any more major financial institutions to fail during the current credit crisis,” he said.

Shortly after Paulson made this categorical statement, Morgan Stanley (MS: NYSE) announced that it had lost another $2.2 billion in the three months ending on Nov. 30.

They were kind enough to point out that while this loss was some 558% higher than they had led folks to expect, it was actually a 39% improvement over the same time period last year.

Another scary thought.

The Wrong Kind of Record Gain

Meanwhile, things are still tough down in the trenches (where success or failure is measured by whether you still get a paycheck). Last week saw new applications for unemployment surge to a 26-year high.

The only good news to come out of all that was analyst expectations that unemployment had peaked. Unfortunately, we are now being told to look out for another record-breaker.

Indeed, Nobel prize-winning “Neo-Keynesian” Professor Paul Krugman has warned that if Washington does not continue to dump billions (if not trillions) into the economy, unemployment could climb as high as 10%.

Krugman shouldn’t worry but so much: The incoming Obama administration has pledged an immediate flow of additional billions aimed directly at unemployment – not to mention a highway and bridge program as big as anything we’ve seen since Eisenhower in the 1950s.

The Perfect Accessories For Troubled Times

So, given all that, here are a few things you might care to invest in during these troubled times.

Back in the days of FDR, they used to call idle hands the tools of the devil. Certainly unemployed folks are occasionally driven by desperation to seek out cash by removing it from other folks’ wallets. Usually by threat of force.

I don’t think that but so many middle-class working stiffs are going to start carrying serious heat. In fact, Smith and Wesson (SWHC: NASDAQ) are in a bit of a pickle this quarter, as only their lower-margin Saturday night specials seem to be selling well right now.

But I do think sales for those nifty little shock guns TASER (TASR: NasdaqGS) sells could be just the thing in 2009.

And if Obama is bound and determined to spend trillions building roads, I suppose a few shares of Caterpillar (CAT: NYSE) would do well as a stocking stuffer.

Finally, I suspect that all these trillions and trillions of loose dollars that Washington seems intent on forcing on us will quickly reverse the minor deflation we have seen over the past few weeks. So I would strongly suggest adding shares of PowerShares Bearish Dollar ETF (UDN) as a hedge against the return of inflation.

Source: What to Buy as the Dollar Stumbles