“Deflation now, inflation later” is how Bill Bonner sees this crisis evolving. For now, US dollars protect you from falling asset values. But don’t get too attached: when the inflation bubble begins, the greenback will be tossed aside, and gold will fly.

More from Bill in The Daily Reckoning:

Deflation? What does that remind you of, dear reader?

Japan! Of course. This is the trend your editor saw coming 10 years too soon — a Japan-like slump.

“A deep and prolonged recession could raise the spectre of deflation of the sort that long plagued the Japanese economy,” says a fellow at the American Enterprise Institute.

“Welcome to Hiroshima, mon amour,” was how we put it, with Addison Wiggin, in our 2003 book, “Financial Reckoning Day.”

“If the United States were to repeat the Japanese experience, stocks could be expected to return to their 1995 trend line, with the Dow below 4,000, in the year 2012, at almost the very moment when America’s baby boomers will most need the money,” we warned.

(Financial Reckoning Day seems to be here, at last. John Wiley & Sons, the publisher, asked for an updated version…stay tuned.)

Meanwhile, “governments around the world are pulling out all stops to save the system and keep it running at all costs,” says a strategist at Saxobank.

“All stops” are the things that keep the dollar worth something: the reluctance to spend too much… the reticence to ‘crank up the printing press’… the residual instinct to protect the integrity of the world’s dollar-based financing system.

Where does pulling out all the stops lead?

Peter Anderson, at RCM, took the words out of our mouth:

“We anticipate more taxes, more regulation, a bigger government and a massive deficit. This sets the stage for a potential inflation bubble of massive dimensions, but that is unlikely to occur until 2011-2012 at the earliest. It is in that environment that the dollar is likely to resume its decline against both the euro and the yen.” Deflation now. Inflation later. That is our guess how the reckoning goes. Falling asset prices…followed by falling consumer prices…followed by “money from helicopters”…followed by rising prices…followed by the end of the US-dollar based worldwide monetary system.

Our Trade of the Decade was meant to capture the early stages of this — but only a bit of it: the relationship between gold and stock prices. In 1982, briefly, you could have bought every one of the stocks in the Dow index for a single ounce of gold. But by the time the stock market finished its epic rise, in January 2000, (while gold was doing an epic fall!) you would have needed 44 ounces of gold to buy the Dow. Now, that ratio has come down considerably. You only need about 13 ounces of gold to buy the Dow. And as stocks come down, the ratio is likely to fall below 5…and eventually back to 1 to 1 (at which time, remember, it will be time to sell gold and buy shares).

Looking ahead, our guess is that the gold side of the trade will be good for another 10 years. When the dollar begins to wobble, gold will fly. But if Mr. Anderson is right, the deflation stage will end sometime near the beginning of the next decade. For the moment, cash is king. Dollars — and US Treasury obligations — protect you from losses in the asset markets. But don’t get too attached to your dollars. The king will mount the scaffold — sooner or later.

Yes, dear reader, everything is going according to plan. But whose plan? It’s not the plan of consumers — who counted on having more and more money to spend. It’s not the plan of investors; they’re getting hammered by the markets. It’s not the plan of Bernanke or Paulson either; they’re desperately trying to stop it.

No, it’s Nature’s Own Plan…in which bubbles always pop…what goes up eventually comes down…and people always get neither what they expect nor what they hope for, but what they deserve.

“Nature in her wisdom, and God in His grace,” we wrote in “Financial Reckoning Day,” “make sure people get what they’ve got coming…”

Remember, a correction is equal and opposite to the deception that precedes it. A few years ago, we predicted that based on the level of mass hallucination in the markets in ’05-’06, the coming correction “ought to be a doozy.”

Now we find out what a doozy looks like.

Source: Reckoning Day Is Here