The prize for the most unusual Christmas card for 1997 goes to A. Gary Shilling, economist, beekeeper, and resident of New Jersey. For Christmas, he added lyricist to his credentials and wrote a song. ( Hum the 12 days of Christmas in the background.)

"The Twelve Steps To Deflation, or What Will a Partridge Cost Next Year?" reflects the current financial season. Here are the words:

"Twelve steps to deflation

Are currently in place:

Defense spending dropping;

Deficits ashrinking;

G-7 folks retiring;

Technology expanding;

Restructuring abounding;

More global sourcing;

Global glut increasing;

Internet everywhere.

Mass distribution;

Deregulation;

More market systems;

And the dollars king of currencies."

While weve all read a great deal in recent weeks about the crisis in Asia and its implications for our economy, Mr. Shilling picked up the signal early. He wrote his consulting clients last July that deflation was coming, "but not immediately."

Not much later, the developing Asian crisis brought a new conclusion: deflation sooner, not later. Recently, I called Mr. Shilling and asked him what we might experience and why. This is what he told me:

"Asia plays a very interesting role in this, much like the oil embargo in 1973. The embargo was just an act at the end of a long series of shortage events— the squeeze from the Vietnam war, rising interest rates, shortages of paper, glass, and other materials, the Club of Rome report predicting a long term future of shortages, etc. But the embargo was the event we identified with shortages.

"Asia is the same thing, in reverse. It is what well recognize as the event that showed us long term surpluses."

What were the other factors?

"First, the end of the cold war. Its important because you and I dont drive tanks. If you tax away production that cant be consumed, you create scarcity. Basically, wars are inflationary and peacetime is deflationary. Thats what you see if you trace inflation back two hundred years.

"Second, the end of deficit spending by governments. It started with the end of the Cold War and the reduction of government spending. But governments saw it as an opportunity and developed an actual enthusiasm for balanced budgets. Now, even though Japan is in a long deflationary recession, they are still sweating government deficits.

"Third, central governments are still fighting the last war. Theyre fighting inflation. In spite of the growing evidence of deflation, what they watch for is evidence of inflation. Thats what they respond to. It doesnt matter where you go in the world, central governments are reluctant to give monetary ease.

"Then there is restructuring. It hasnt stopped. And its not just in the United States. The Canadians are restructuring. Australia and New Zeeland have restructured. The Germans are starting. Only the French are going in the other direction.

"And technology. It cuts costs. And it cuts inflation. As technology becomes a larger and larger part of the economy, its impact on inflation increases.

"There is also the Wal-marting of the world, mass distribution to consumers that cuts costs and prices. It is beginning to look, for instance, like youll soon be buying cars like you buy refrigerators— a lot of different brands in a room. Detroit is losing control of its distribution. That usually means losing control of pricing.

"Finally, there is the strong dollar, getting still stronger as Asia goes through rounds of competitive devaluation. When import prices go down, it brings down domestic prices. We now import about 30 percent of all goods, virtually double the figure from twenty years ago."

What are the most important things to watch?

"Asia is a real key. Competitive devaluations mean the dollar buys more. Even the Japanese may devalue. All of them want more exports and the Japanese want to keep up with the rest of Asia. It will be a race to the bottom.

"At the same time, the economies of Asia have virtually collapsed, reducing their demand. It means well have a flood of imports and a shortage of exports.

"One thing to watch: China. They may devalue to regain their competitive advantage."

Anything else?

"I think there is one more shoe to drop, the U.S. consumer. If the consumer switches from three decades of spending spree and reverses gears, it will create excess capacity on a global basis. Were the consumer of last resort were $197 billion a year in trade deficit."

How would that happen?

"Some jolt. It takes a shock. One might be that the Asian shock is occurring in a drum tight (domestic) labor market. Corporate profits will have to give. We could see it in this quarter. We see some evidence of a bear market. Thats something that could really bother consumers."

I asked him to explain.

"People havent been saving because theyve made so much on stocks. But research shows that every 10 percent increase in stock values raises consumption by percent. If stocks get clobbered, real wealth is destroyed. It could convert consumers from big borrowers to big savers. That would ensure deflation."

Is deflation always terrible?

"No. There is good deflation and bad deflation. We had bad deflation in the thirties: mass destruction of purchasing power, wage cuts, failures. The basic problem was supply exceeded demand.

"But we had good deflation from the end of the Civil War to the end of the nineteenth century. The railroads opened new markets and we also had the industrial revolution. Things went from cottage industries to mass production. It resulted in massive growth. Wholesale prices declined by 46 percent. Most wages fell a bit during the period but prices were falling faster than wages. The standard of living improved."

So where is Mr. Shilling putting his bet?

"I think were heading toward good deflation."

Questions about personal finance and investments may be sent to: Scott Burns, The Dallas Morning News, P.O. Box 655237, Dallas 75265; or faxed to (214) 977-8776; e-mail to scott@scottburns.com. Check the website: www.scottburns.com. Questions of general interest will be answered in future columns.