Normally, money is injected into the economy through asset purchases by the Federal Reserve. To stimulate aggregate spending when short-term interest rates have reached zero, (Me: At 1.5% now and may very well go to 0% as he suggested) the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. (Me: Buying $700 billion of toxic mortgage backed securities and now taking equity stakes in banks directly)

Alternatively, the Fed could find other ways of injecting money into the system--for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities. ( NYSE: AIG) Each method of adding money to the economy has advantages and drawbacks, both technical and economic. One important concern in practice is that calibrating the economic effects of nonstandard means of injecting money may be difficult, given our relative lack of experience with such policies. Thus, as I have stressed already, prevention of deflation remains preferable to having to cure it.

If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation.

(Emphasis with underline and bold all mine.)

"Our Fed and Central banks around the world are doing all they can to both alleviate the credit crunch and perhaps, without saying it, inflate away some of the debts outstanding via their actions.

"So what's it going to be: Inflation or deflation?

"Let's look at where we are now. Inflation in September showed year over year CPI increase in the US at 4.94%. This is down from 5.6% in July. If you have been holding anything yielding less than 4.94%, you have lost purchasing power. The hidden tax of inflation has eaten into your wealth.

US Treasuries maturing 3 years or less are all currently yielding less than 3%. It's no wonder Warren Buffett is selling his treasuries and buying stocks in great American businesses as per his recent Op-Ed in the NY Times.

The world's greatest investor is not interested in negative rates of return, especially given the actions of the Treasury and Fed to print money and flood the system with ever more dollars that will likely lead to higher inflation.

In Warren's Op Ed to the NY Times, he states, and I think this is important, "Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts."

So what is an investor to do to protect his or her wealth in an inflationary recession/depression when real rates of return are negative? Here is a starting point.

1. Invest in business that have strong franchises and can earn high returns on capital or don't need to invest in a lot of capital each year just to stay in business. These businesses should be able to pass off the higher costs of production to their consumers and still make high returns on capital. Many of these businesses pay dividends whose rates are now far higher than money market and treasury yields.

2. Consider having silver or silver mining shares in your portfolio.