Are we entering a "low-grade depression"?

The threat of national deflation, an economically dangerous long-term slide in prices, rose anew Friday with a second monthly decline in wholesale costs.

The Labor Department reported that its Producer Price Index, which measures prices before they reach consumers, fell 0.3 percent in May from April. That decline followed a record 1.9 percent plunge in wholesale prices from March to April.

A big part of the decline in wholesale prices for both months came from retreating energy prices, which had been stoked in previous months on war tensions. Prices for some other goods, including clothing and trucks, also went down.

"There are many flavors of deflation," said Mark Zandi, chief economist at Economy.com. "A mild case can hurt businesses but usually isn't a problem for consumers. But in a severe case ... everyone is going to get nailed."

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The back-to-back declines in wholesale prices come in the aftermath of recent warnings by Fed Chairman Alan Greenspan and his colleagues about the possibility of the country facing deflation.

Although Fed policy-makers say the chance of that happening is remote, the Fed still must be alert for deflation because of its potential to wreck the economy, they said. While the country experienced limited bouts of falling prices at the end of the 1940s and in the mid-1950s, its last serious case of deflation was during the Great Depression.

In a bad case of deflation, prices fall for goods, services, stocks and real estate. Businesses, watching incomes and profits shrivel, lay off workers and cut salaries of those who have jobs. Individuals and businesses find it harder to pay off debt. Bankruptcies rise.

The threat I'm talking about is economic. Like the British Empire in the years after World War I, the American Empire is marching toward global domination on increasingly shaky financial legs:

--The American economy now depends on a rising tide of cheap imported goods to sustain acceptable levels of economic growth and domestic consumption.

--Because of this dependence, the trade deficit - the gap between what America exports and imports -- has reached truly gargantuan levels. This trend is unsustainable.

--To pay for its import habit, America has to attract approximately $1.5 billion a day from foreign lenders and investors. This means foreign capital - and capitalists - are becoming increasingly essential to the smooth functioning of the U.S. economy.

--But foreign investors are becoming increasingly reluctant to invest in U.S. assets. To cover the shortfall between what America needs to borrow and what private investors are willing to lend, foreign central banks (the counterparts to our Federal Reserve) have stepped in to fill the gap.

--As a result of these trends, foreign governments are accumulating a growing ownership stake in the U.S. national debt. In fact, they now own more Treasury debt than the Federal Reserve itself. But their willingness to continue subsidizing our import habit in this fashion is unclear.

The strain of increased defense budgets, combined with the looming demographic burdens of retirement and health-care spending, make the longer-term picture even gloomier. A debt crisis looms. The Republican fiscal train wreck - product of the stubborn supply side fantasy that federal taxes can be cut without reducing federal spending - has only brought the day of reckoning closer.

The result, as an economist with the Citigroup Private Bank recently put it, is an "unseen hammer" hanging over the U.S. economy and the U.S. financial markets.