Just call them dueling worldviews, or outlooks. In one corner is economist Joseph Stiglitz, who sees deflation as the primary threat to the U.S. economy, in the quarters ahead.

"Deflation is definitely a threat right now," Stiglitz, an economics professor at Columbia University, told Bloomberg News. "The combination of the deflation threat and the sluggish recovery should keep the Fed on hold for quite a while."

The U.S. Federal Reserve's quantitative easing and Congress' record $786 billion fiscal stimulus package run the risk of re-igniting inflation, in the interpretation of the inflation hawks. But not PIMCO's Bill Gross: he's concerned about deflation.

Gross, who heads the world's largest bond fund, said he's buying longer-maturity U.S. Treasuries as protection against deflation, Bloomberg News reported Tuesday.

Markets throughout the world have been rallying on the expectation that the world recession is ending. Lurking underneath the surface are some disturbing events.

Japan is in a sharp deflationary spiral. The Corporate Goods Index, which measures wholesale prices, plunged 8.5%, this after a 6.7% drop in June. This is the fastest drop on record.

Let's look at other deflationary numbers. Import prices fell 33.3% in yen terms and 26.5% on a contract-currency basis. Export prices fell 15.3% in yen terms and 6.5% in contract currencies.

This morning, the Labor Department announced that its consumer price index rose less than expected during May. This data is considered the latest evidence that the recession is continuing, keeping inflation in check. According to the Labor Department, the index increased a seasonally adjusted 0.1% in May, falling short of expectations for a 0.3% rise. Taking food and energy costs out of the equation, core prices increased 0.1%, matching expectations.

The recession is forcing prices lower, with the unemployment rate advancing to a 25-year high, and factories are operating at record-low levels. Some analysts suggest that we could see a period of deflation -- which is a destabilizing period of extended declines. Although lower prices may seem good, deflation could lead to consumers delaying purchases, which could then lead to drops in production and in wage cuts.

Markets were mixed and downish Tuesday, but there was some good news to be found.

Housing starts and building permits soared, causing a big pop in shares to battered homebuilders. Whether this is a false start or a real jump, its hard to get anything but good news out of a housing market so beaten down.

On the industrial side, the Produce Price Index remained relatively stable, walking the narrow path between two evils -- deflation and inflation.

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Since the hyper inflation of the 1970's the Federal Reserve has been plagued with fighting inflation, the number one bad guy of the economy. Now we are in a deflationary cycle and the Fed is using all the tricks in its bag to end this decline and turn the economy around.

One theory being thrown about is that if you create inflation, deflation will go away. Now, this is the wildest proposal to come out of the mouths of economists. Gregory Mankiv and Kenneth Rogoff are advocating 6% inflation for at least a couple of years.

This morning, the Bank of England's Monetary Police Committee (BOE) decided to keep its interest rate at the current all-time low of 0.5%, as was expected. The BOE announced that it would continue its 75-billion pound program, which is supposed to increase the money supply in hopes of keeping deflation at bay.

The BOE stated that, "since its previous meeting a total of just over 26 billion pounds of asset purchases had been made and that it would take a further two months to complete that program." Some experts believe the BOE will hold interest rates at 0.5% "well into 2010." Before the bank made its decision, the 10-year yield was hovering around 3.34%.

We live in the craziest, upside down world you can imagine. In years past at rise in consumer prices threw the markets into a panic, signaling that inflation was rising a getting out of control. But that was then and this is now.

Today the Labor Department said that the consumer price index rose .3% after dropping .8% in December. Voila! The inflation news is now good news. Why is inflation good news? It is good news because it means that we are not deflating. Even Bernake said that we simply cannot have deflation. He stated an inflation goal of 1.5% to 2% for the coming years. You see in this upside world, deflation is when prices fall, and since we don't want that, we now love it when prices rise -- that's inflation.

With its benchmark and new, short-term interest rate already in its 0-0.25% target range, investors are expected to concentrate on the U.S. Federal Reserve's statement and any information (or clues) it may provide about both the U.S. economy and the central bank's quantitative easing policy.

Further, Fed officials are also considering a revision of the central bank's forecasts so that they include periods beyond three years, Boomberg News reported Tuesday. The Fed will release its statement Wednesday at 2:15 p.m. ET.

Economist Peter Dawson told BloggingStocks he, and probably many other economists, will be looking for any Fed commentary / analysis of its quantitative easing strategy.

In looking back over 2008, there is one piece of good news -- but it's a silver lining on a black cloud. What am I talking about? In 2008, the U.S. had the lowest inflation rate since 1954 -- 0.1%. Back in 1954, prices actually fell 0.7%. The 2008 inflation report is good news in one sense, and ominous in another.

The good news is that the price of gasoline fell so much. In December gasoline lost 17.2%, the largest monthly decline in records that go back 71 years. Overall energy prices also dropped by a record 8.3% as home heating oil and natural gas showed declines.

If only it weren't for the reason that prices were falling, this news would put a smile on my face. And the reason for the fall is that the economy can only grow if consumer spending grows. And that's not growing because consumers are making less money and they can no longer borrow to make up the difference. This means that demand is dropping for just about everything -- including gasoline.

The new year has arrived, and the inflation hawks -- in this case they're more like inflation police -- apparently have not made balanced analysis one of their New Year's resolutions.

The inflation hawks continue to harp about the danger of "rising inflation" in the U.S., due to the U.S. Federal Reserve's $2.3 trillion balance sheet and Congress's likely large, $700-850 billion fiscal stimulus package as the new Obama Administration takes office.

Where's the inflation?

Still, economist David H. Wang wants to know if the inflation hawks have been evaluating the same economic statistics he has been reviewing.

"Where is this inflation they are talking about?" Wang said. "Based on the 6-month and 12-month trend data, deflation, not inflation, remains the far greater danger. We are more likely to see deflationary conditions than an increase in inflation in 2009, with only a modest increase in inflation in 2010."

With the CPI dropping and the cost of fuel moving down 17% last month, analysts are concerned that deflation will start to undermine the ability of businesses to get profitable sales and for the housing market to recover its ability to stage a price recovery.

OPEC may change all of that, but is it for the better or worse?

The concerns about deflation are growing rapidly. According to Reuters, "If we did nothing on the fiscal stimulus side, it would be a much bigger risk of getting into a full-fledged deflationary spiral," said Nigel Ga ult, director of U.S. economic research at Global Insight.

Since the cost of oil and gas is so critical to consumer and business prices in the U.S., the new OPEC cut of 4.2 million barrels a day from August levels could drive gas back toward $3 a gallon, especially if the cut moves crude back toward $80. Some OPEC members like Iran need prices at that level to balance national budgets. Analysts say that today's cut may not be enough because the recession is curtailing demand. That fails to acknowledge the fact that the cartel could cut again early next year.

If gas goes up, it may make the consumer spending aspect of the recession worse, but it would certainly help move the economy away from deflation.

Mixed blessings.

[Editors note: the post has been updated to reflect recent news.]

Douglas A. McIntyre is an editor at 247wall st.com.

I have a deep concern that we have now entered uncharted economic territory. Economists are scouring their history books and charts for precedence but they may not find anything there because our current situation probably last occurred before there was good data and perhaps never at the global scale we are witnessing today.

There is no widget application available that will help you solve this on your Apple Inc (NASDAQ: AAPL) iPhone, nor can International Business Machines (NYSE: IBM) help you with its most advanced computers.

In our world of ever increasing expectations for immediate gratification, you will be frustrated trying to figure out a safe path for the journey ahead without great patience and fortitude.

This is the first of what I hope will be an educational and informative dialogue exploring what I think may be a real possibility that we are destined to suffer through a period of both deflation and inflation at the same time. Issues that are troubling and confusing on Wall Street, Main Street and in Washington, DC.

How often is a drop in inflation a bad thing? Never? Not exactly.

The consumer price index in China increase by only 2.4% in November. Earlier in the year, that number was closer to 9%. According to the FT, "In further signs that price pressures are fading fast, annual non-food inflation – considered a less volatile gauge of underlying conditions – fell to 0.6 percent in the year to November from 1.6 percent in the 12 months to October."

The news may be good for farmers in rural China, but for the rest of the world, it is very unsettling. Sharply rising inflation in the world's most populated country was a strong indication that its economy was overheating due to rapidly growing GDP, based mostly on exports. It also meant an increase in imports of goods being bought by the new Chinese middle class. A slowdown in inflation is yet another sign the nation's economic growth is grinding to a halt. It is, in essence, a sign that the global GDP may actually be shrinking and that the conditions that made China an important player in international trade and politics could begin to fade.

The Chinese are used to an endless improvement in personal opportunity. Rapid GDP growth will do that. What happens when tens of millions of people see their bubbles burst? It probably means that the central government will not be viewed as well as it has been in the past.

The citizens in China are about to get a rude shock. The political forces that rule the nation cannot overcome powerful outside economic forces. Social instability may be about to take hold. And no one knows what that means for the future of the political system in a place with over 1.3 billion people.

Douglas A. McIntyre is an editor at 247wallst.com.