The latest front-page headlines in the Financial Times reads "Economy shows slow growth." It starts out, "Fears that the US economy has hit a soft patch intensified yesterday on data showing slower-than-expected growth of 3.1 percent in the first quarter, the weakest performance in two years."

The article stated that business investment, which was expected to pick up the slack from slowing consumer spending, did not materialize in the latest reporting period. FT reported that overall business investment (buildings, equipment and software) slowed to 4.7 percent from 14.5 percent in late 2004.

So why the growing "soft patch" in the economy? After almost three years of furious credit pumping and various economic stimuli to recover the economy from the 2000-2002 recession, the Fed has now seen fit to step back and let the economy find its own level without further intervention. It has been said that stocks and the economy - must like water - always seeks it own level. We're about to find out what a natural, non-stimulated level for the U.S. economy will be.

I'm currently reviewing a recently published book titled "FAB: The Coming Revolution on Your Desktop - from Personal Computers to Personal Fabrication." Fascinating reading, especially if your somewhat technology-minded. The reason I'm bringing it up here is because of the longer-term deflationary implications of this emerging trend of "micro-fabrication." This is one proof from a fundamental standpoint why we are still in the midst of K-wave deflation and why hyper-inflation that some people are talking about isn't very likely to happen. With the ability to produce products in a basement that in former years could only be produced in volumes in large factories, the deflationary consequences in some areas could be enormous!

Along this same line, a recent headline I clipped from the newspapers stated "Plunging prices nullify book in electronic sales." The article went on to say that prices of DVD recorders have dropped 40 percent while flat-screen TVs have fallen 20-30 percent. This is yet another consequence of the so-called "Technological Revolution" and its longer-term deflationary consequences.

I call this the "DiGiorno Effect" after the extremely popular line of frozen pizzas that is giving the take-out and delivery pizza trade in the U.S. a real run for its money. Like most Americans, I consume my fair share of pizza and until a few years ago I always hated store-bought frozen pizza since they never came close to giving you that pizzaria-style taste that you get from a restaurant. But with improvements in microtechnology and with reduced costs thanks to global deflation - not to mention super competitive pressures arising from global economic competition - it is now possible to produce a wide array of products on the consumer level and sell them at low prices...including frozen pizza that actually tastes as good if not better than any number of those mainstream pizza take-out joints (and at a fraction of the cost!)

Yes, the DiGiorno Effect extends across many sectors of the economy and with the advent of nanotechnology will add that much more competitive pressure and with it the tendency for prices to drop in many sectors. Bottom line: deflation is still alive and well.

Another recent headline in the FT proclaims "Japanese central bank resigned to longer period of deflation." It stated that the Bank of Japan (BOJ) has "officially abandoned hope that the economy will return to inflation this year..." It further stated that the bank "blamed the stubbornness of deflation, now in its eighth year, on low rice prices and a fall in deregulated electricity and telephone charges."

Before you are quick to dismiss the above from a contrarian standpoint, the FT article also pointed out that while the BOJ still envisions deflation in the foreseeable future, it also expects prices to rise beginning later this year and through March 2007, and that the Japanese economy would "gradually gather momentum" from mid-2005. So it turns out the BOJ hasn't really "abandoned hope" after all!

Those expecting a 1970s-style inflation are missing the bigger picture, in my opinion. True, governments and central banks will use every hat trick to reflate their respective economies in the next 3-5 years before the final "hard down" phase of the 120-year cycle and K-wave begin in 2009-2010. The Fed started pumping vigorously after 9/11 while the Bush administration tried cutting taxes and other economic stimulus measures in the past two years. These things work for a while but ultimately nothing can stop the onward rush of the deflationary forces that have been with us since the 1990s. As my good friend and colleague Samuel "Bud" Kress likes to say, "No one can stop the cycles - not even the Fed!" You can build sea walls and dams to divert water currents, but you can't stop a tidal wave. We haven't seen the last of K-wave deflation!