"Let us assume that the unthinkable happens," our old friend Marc Faber begins. "China's economy slows down sharply, or even contracts - and there are reasons why it could. Commodity prices slump and bring about economic hardship in the resource-producing countries. Imports of capital and consumer goods from Europe and Japan decline. We would then have the perfect setting for a global economic contraction with dire consequences for corporate earnings and asset prices."

We are on our way down to the Eternal City. The schools in Paris are out for Spring Vacation, so we are taking advantage of this break in educational tedium to learn something.

Elizabeth is an especially keen learner. She is sitting next to us on the airplane, reading a history of the early church. Soon, she will be asking questions about papal succession…schisms…councils…and architecture, vainly trying to improve us with bits of unwelcome knowledge.

But we are using this time in the jet stream to profit from a vacuum in the news stream. That is, cut off from our usual sources of misinformation, we have nourished our thinking with thought. And what we are thinking about is: what if we are wrong? (Since we are often wrong, time spent considering the alternatives is rarely wasted. Often, it ends as prophecy.)

Our theory is that the war between inflation and deflation leaves millions of casualties, but no clear winner - at least not for a while. Instead, prices for U.S. stocks, houses and labor are marked down…while commodities, oil, gold (and even some emerging markets) go up.

But we could be wrong in either direction. Either inflation or deflation could soon emerge victorious. Most analysts think inflation will be the clear winner - with big boosts, not only for commodities, but for the economy and stocks… and maybe even houses. They think the financial industry has bottomed out and will soon get back on its feet and begin inflating the whole economy.

The view Marc is putting forward is the opposite one - that deflation will be the clear winner, dragging the whole world economy into a slump, with lower prices for commodities as well as stocks and property.

Marc notes that much of the world's earnings come from the energy exporters - Russia and the Arab countries - and finished product producers in Asia, notably China.

Both depend on the same foreign buyers.

In the weekend news, for example, we discovered that the emerging markets are now using more oil than the United States. They use more oil because their economies are growing - because they are still moving products to the United States. In a real downturn, the United States (and other developed nations) would stop importing so much oil…and so much merchandise from China, which would have the consequence of reducing energy consumption by China too. Result: lower energy prices and a worldwide recession…maybe even the worst worldwide depression in history.

What might be the consequences of such a depression? In the United States and Europe, probably nothing catastrophic. People in the developed nations live with a thick cushion under their derrieres. The bench might grow harder and less comfortable; assets would fall in price; earnings would decline (both for businesses and individuals); otherwise, life would go on as before.

In the emerging markets, on the other hand, billions of people now sitting precariously on the edge of modern life might get pushed off. The artificial boom - brought about by excessively low lending rates in the West - caused millions of people in the emerging markets to abandon their farms and move to the cities.

For the first time in human history, the planet now has more people living in cities than in the countryside. These people can no longer 'get by' as subsistence farmers. They no longer have any land to subsist on. Instead, they rely upon a sophisticated, globalized economy for their daily bread. And if that economy should break down, they could go hungry…or starve.

Already, there have been food riots in various parts of the globe - and this while the world economy is still growing! Think what they will do when the economy shrinks…when their earnings (which have been going up by 10% per year and more) begin to fall…when there are no jobs for them in the cities…and nothing to eat. Ah, dear reader, then it gets interesting.

We're not predicting this. We're sticking with our middle-of-the-road forecast…for neither worldwide prosperity nor worldwide ruin. But there are risks from both directions. And while most people expect a mild recession and quick recovery…almost no one expects the kind of global meltdown Marc imagines. We could see oil below $50…the Dow below 5,000…Wall Street wiped out…and 20 million US families busted.

But that is the good news. In the emerging markets it could be much worse - worse than the Great Depression of the '30s. And there is also the political risk.

What do governments do when faced with economic collapse and social unrest? Hemingway described it:

"The first panacea of a mismanaged government is inflation of the currency. The second is war. Both bring a temporary prosperity; both bring more permanent ruin."

That is, they do just what Ben Bernanke and John McCain have already promised. They dump money from helicopters and "bomb, bomb, bomb…bomb, bomb Iran." Imagine if China's, and Russia's leaders are as simpleminded as America's. Surely, they are…

Bill Bonner is the President of Agora Publishing. For more on Bill Bonner, visit The Daily Reckoning.