There's a theory making the rounds at the bearish camp that the only reason the U.S. has not followed Japan's route of deflation is because the Fed moved quickly to lower interest rates after the tech bubble peaked in 1999.

As you may be aware, stocks and real estate prices fell in Japan for years... 14 years, to be exact. And when the tech bubble burst in America, many (including yours truly) feared we may have followed Japan's economic route. But aside from some fundamental differences in our financial markets (banks in Japan were big owners of public company stock), the Federal Reserve staged an all-out war against deflation by dropping interest rates to a 46-year low.

The Fed's actions resulted in Americans spending until their hearts were content. The Fed fought off deflation. But by their actions, the Fed created other bubbles, namely property and debt bubbles. With oil prices easing dramatically as of late, the focus is now off of inflation and back onto deflation. (Deflation is an economic term for a period of time when prices for goods fall.)

Unfortunately, there's a big difference between the economic state of Japanese consumers and American consumers. You see, while there was a long period of deflation in Japan, Japanese consumers did not experience major hardships because they are net savers. That means they save more than they spend... a lot more.

But in America, citizens are net spenders. Americans spend a lot more than they make. In times of deflation, you want to have money in the bank as opposed to debt because, over time, falling asset prices (stocks, real estate) lead to outstanding debt being higher than underlying asset values.

That's the big difference between the Japanese consumer and the American consumer. Greenspan has seen to it that we spend, spend, spend. But if deflation sets in over here in America, we will be in much worse shape than the Japanese during their time of deflation, because we will not have the money to take advantage of lower prices as we're all tapped out.

Many Americans buy assets on the premise they can carry the debt to purchase the asset (again, stocks or real estate) because someone else will eventually pay more for that stock or property. But what happens when there are no takers for the asset in question? What about when nobody is left in line? Dear friend, this is not the best time in history to carry large debt.