As our financial system continued to be pressured, traders' fears shifted this week away from impending shortages and inflation toward a cascading downward spiral known as deflation.

On Tuesday, the Labor Department released their Producer Price Index of wholesale prices, indicating the biggest drop since records began in 1947.

On Wednesday, the Consumer Price Index registered the largest monthly decline since before World War II. The simultaneous nosedive in home prices, autos, stocks and wholesale and retail prices was exacerbated by the worst housing starts number ever recorded since 1959, also released this week.

Grains, industrial metals, coffee and cotton all fell hard, as crude oil slid below $49 per barrel on Friday morning.

The danger of deflation is that consumers may postpone buying -- particularly investments, houses and durable goods -- as they wait for prices to fall further. Our government's two tools (injecting hundreds of billions of dollars into failing institutions or lowering interest rates, now close to zero) have thus far proved ineffective.

Credit and credibility need to be restored in order to cause the U-turn which would increase the chance of runaway inflation, typified by gold prices rising.

As President Bush purported last month when confronted with this dilemma, "If money isn't loosened up, this sucker could go down."

Opinions expressed solely are those of the writer. Walt Breitinger is vice president of commodities at Wachovia Securities. He can be reached at (219) 738-6460.