We are in a Winnie the Pooh economy. Christopher Robin used to drag his pet teddy bear down the stairs a step at a time, bumpety-bump, bumpety-bump. That’s how it feels now with each successive piece of bad news. Just when it seems the bumps have come to an end, down we go again.

The role of Christopher Robin has been claimed by Mervyn King, governor of the Bank of England. In his latest quarterly inflation report, he gave official blessing to the growing notion that interest rates could fall to zero, adding that we are in for a severe recession next year.

To be fair to King, he is only the messenger. He is not actually dragging us down — indeed, he is doing what he can to cushion the falls. We must now face a real prospect of deflation — prices falling — and the huge unknown is how the mass of people will deal with that.

Bank projections suggest a sharp trough next year, followed by a sharp recovery. I wouldn’t bet too heavily on that recovery being rapid. When we start to recover will depend on us and our collective behaviour.

In the recent Japanese deflation, that economy froze. Zero interest rates merely told the Japanese how serious things were, and deflation encouraged them to postpone spending as prices would be cheaper next month.

One of King’s answers to that danger is for the government to slash taxes and hand money to the poor, to get spending moving again.

If the chancellor, Alistair Darling, does anything like that in his pre-budget report on Monday week, he will put a rocket under shares in supermarkets and Associated British Foods, baker and owner of Primark, the ultra-cheap clothes chain.

However, King did warn of “marked uncertainties”, so all forecasts must now be treated with caution for the next year or so. We are heading for 3m unemployed, which could have social and political implications. Street riots loom as a possible consequence.

Darling’s dilemma is that what makes sense for him doesn’t make sense for us as individuals. He wants us to get out and party. It is more logical for us, though, to switch off the lights and pull the duvet over our heads.

I hope you will by now have simplified your finances as far as possible, while leaving a little money in shares or equity funds. And the occasional party.

The keys are to hold on to your job and keep paying into your mortgage and pension. Just beware King’s marked uncertainties.

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