If you look at that closely, in the first sentence, the definition states "a reduction in the supply of money or credit." The irony at the moment is that the money supply is rocketing skyward as the Treasury and Fed pump money into banks, insurance and other industries, but credit is so tight that only clients who deposit enough money to borrow can get any. So the decreased supply of money for the "pure" definition of deflation is missing. All the other attributes apply. We're not in a pure deflationary economy.

So what do we have? Is it stagflation? Here's the definition of that: A condition of slow economic growth and relatively high unemployment -- a time of stagnation -- accompanied by a rise in prices, or inflation. We certainly have slow economic growth and high unemployment (forget the relative part). But we don't have a rise in prices. In fact, most everything is going down except medical bills. It's hard to find a pocket of the economy where prices are going up. So we're not in stagflation.

Another option is inflation. Inflation is defined as the rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. We're definitely not there either. The general level of prices and goods and services is going down, not up and purchasing power is rising, not falling.

Another guess: disinflation, defined as: A drop in the inflation rate, i.e. a reduction in the rate at which prices rise. That doesn't quite fit either. Prices aren't still rising, with exception of one or two pockets (most likely your attorney hasn't cut prices yet). On the whole, prices are dropping.

So where are we? In a mess.

Money is plentiful, but it's not flowing into the economy. New money isn't being loaned, at least not yet. The reason: the capital injections from the Treasury to banks are needed to make up for losses from mortgages, consumer loans, and construction loans.

In other words, those loan losses are eroding capital so fast that the new investment capital is used to make up for them, to shore up the bank's capital base, not for new loans to spur the economy. Because banks need to keep a certain level of capital in order to hold on to their banking licenses, banks need to shore up the holes in their capital dikes before they can look to lend. That means until most of the losses are fairly contained or at least quantified, banks will be reluctant to lend. That will take several more months at least.

The real problem for the banks is that they never know which credit is going to fail, even the ones that have been paying for years. What if that creditor loses his/her job? Maybe there are no savings to pay the mortgage or the credit card. Then those credits go into default without any prior warning. Banks have no way of guessing which ones are absolutely good and ones that will fail. Hence, they will err on the side of the most conservative estimates, and keep capital dear to them so their ratios stay positive, and they can keep their licenses. Like their customers, they're going to be tight with money.

So what should investors do in this hard to define but difficult economic reality? Pretty much what they should do at any other time: keep a six- month supply of cash, buy stocks that have ever increasing earnings and pay a dividend, and stay diversified.

Of course, we've all suffered heavy losses from the past year. The above paragraph applies to any new money that investors expect to put into the market. Most of us don't have new money and are working on the part where we're trying to save for the next six-months worth of bills.

But if you can afford to invest, and do it wisely, this economic mess will straighten out at some point and reward the brave investors who took advantage of the moment.

One thing to keep in mind: no matter where we are now, inflation looms on the horizon. Without real diligence and some luck, there is no way we can escape inflation in the future. That's because all the money now being dispensed to cure today's problems will eventually find its way into the economy. When it is fully deployed, there will be the classic problem of too much money chasing too few goods causing prices to rise.

And we won't have any trouble recognizing that when it comes.