Another Wall Street slide could set off worldwide deflation. To do so we need not just different policies but a different economic philosophy. The Japanese banker who told me this a week ago in Kyoto was not speaking only of Japan. Unlike most western observers, he understood that the world is returning to a condition it has not known since the late 19th century, when globalisation first got under way.
Deflation is built into the global economy that has emerged in the wake of the cold war.
The question is whether we can prevent it from spiralling out of control. While the stock market continued to defy gravity few people took seriously the idea that we may be returning to a world of steadily falling prices. Deflation might be entrenched in Japan, but there was no reason to think that it could spread. The vast destruction of wealth we have seen in stock markets over the past few weeks has shattered that complacent consensus. As in Japan, the risk is that a further collapse in the stock market will rebound on the real economy and reinforce the deflationary forces that go with globalisation.