Yesterday, we posed a 'what if?' It was not a prediction; just an exploration: what if the world economy goes into a long, slow, soft Japan-like slump?

What if stocks continue to go nowhere? Yesterday, the Dow lost 139 points, after several big gains in the last few sessions. Up. Down. Up. Down. Stocks are down 15%-20% all over the world (except for Shanghai's big 50% loss) for the year. Over the last ten years, markets in the East and emerging economies are still up - many of them by huge margins. But the United States and other developing markets are mostly flat. Adjusted for inflation, investors have lost 20% to 40% of their money.

And what if the financial crisis that began with subprime infects the rest of the industry? Today comes word that JP Morgan lost $1.5 billion since July - nearly a year after the problems with subprime debt were out in the open. Fannie Mae lost more than $2 billion in the last quarter. Freddie Mac lost $800 million. Those losses were not from subprime loans. Worrisome losses have already been reported in credit card debt, student loans, private equity and auto finance. And now even "borrowers with good credit defaulting on homes," says CNNMoney.

And what if housing continues to fall? Prices are down nearly 20% nationwide - and still declining. Nearly one third of all buyers over the last 5 years now have negative equity, according to a report out yesterday. Of those who bought in 2006, 45% are upside down.

Erratum: last week, we reported a startling fact: that, taken as a whole, America's homeowners have negative equity. It was startling…and untrue. We doubted it was true when we reported it, but we must have gotten distracted before we checked it. What is true is that the percentage of their houses owned by Americans - their equity - is less than the percentage owned by the mortgage lenders. They are not "upside down," as we reported, because their houses are worth more than their mortgages. They are merely "inside out," people who only appear to be homeowners on the outside. Inside, they are renting from the finance company.

And what if the finance industry and housing don't 'bounce back'? It will mean a long period with neither the juice of credit nor the elixir of housing price gains to get the party going again.

And what if consumers react in the way they normally react? That is, what if consumers actually stop consuming so much? There is mounting evidence that what must happen is happening now. The U.S. trade deficit unexpectedly fell last month; Americans are exporting more and buying less. Retail sales are slipping. Unemployment is rising. Drivers are driving fewer miles. Restaurants report fewer customers. Las Vegas reports fewer gamblers; and for the first time in many, many years spiders are said to weave their webs in brothel doorways without being disturbed.

And what if consumers, householders, investors, and businessmen all begin to downsize? Today's news from Texas is that old people are downsizing their retirements; they're making them shorter and later. The Dallas Morning News tells of a survey by the AARP showing more people nearing retirement age are continuing to work…or even going back to work. Many had counted on the value of their houses to finance retirement. But house prices are down as much as 40% in some areas, putting a big hole in retirement budgets.

And what if China, India and other emerging markets don't emerge as fast as we had hoped? What if they, too, suffer from a buyers strike in the developed nations? What if they can't sell so many toaster ovens…and so much bric a brac? They wouldn't need as much iron as people estimated. Nor as much coal. Nor copper. Or oil.

And what if the whole world began to slack off - with less lending, less buying, fewer container ships crossing the oceans, fewer commercial airlines, and more saving? What if Americans rediscovered frugality? What if the whole world began to act like the Japanese?

What if the whole, globablized world economy sank into a long, soft, slow Japan-like slump, in other words?

"It should come as no surprise that the U.S. economic malaise is now becoming a global phenomenon," writes Dana Samuelson. "After dodging the U.S. slowdown last year, the 15-nation eurozone economy appears to have shrunk in Q2, for the first time since the common currency's introduction in 1999. Firm figures are still coming in, but Italy's GDP contracted by 0.3% in Q2 after growing by a scant 0.5% in Q1. And Germany, the largest eurozone economy and the engine of G7 growth in recent years, contracted sharply in the second quarter, shrinking by as much as 1.5%, according The Wall Street Journal Europe. Eurozone growth certainly slowed to a crawl in the first quarter. According to RGE Monitor , Q1 growth in the UK fell to 0.4%, Ireland to 0.8%, Italy to 0.5%, and Spain to 0.4%. Estonia and Latvia contracted sharply, while Q1 GDP growth in Canada fell to 0.3% and New Zealand shrank by 0.3%. As in the U.S., housing booms in Spain, Portugal and Ireland are collapsing, while the euro's recent appreciation hurt companies that export. Japan, too, is at risk of a recession as exports fell in June for the first time since 2003 and unemployment reached 4.1 percent, almost a two-year high."

And what if the gold market is confirming this worldwide slowdown? Yesterday, the price of gold fell another $13, to $814. What to make of it? Is this some vast conspiracy among central banks to drive the price down? Or have investors - including central bankers themselves - decided that they don't need gold? Have they figured out that the dollar is as 'good as gold' - or better? Gold is falling. The dollar is rising. Paper money - of no intrinsic value - is beating out the old-fashioned, natural, limited, useful (Lenin said he would use it on the walls of public latrines) yellow metal.

Would it make sense…maybe…if our 'what if' turned out to be correct? A worldwide slump would take the inflationary pressure off commodities and gold.

But wait. There's always more to the story….

*** There are only two major problems with our "what if" above. First, America cannot afford a Japan-like slump…and second, the feds won't allow it.

As to the first, a long, soft on-again, off-again recession may have been survivable - barely - when we first saw it coming in 2000. It would have been similar to the recession of the '70s. People wouldn't have liked it, but they might have used it to get themselves in better shape - with less debt and more savings. Instead the feds fought the downturn with the most reckless money policy in U.S. history. And they won - meaning, they succeeded in getting people to throw caution to the wind.

Nouriel Roubini was interviewed in Barron's last week. He sees a recession coming that will be "more painful than any since the Depression…We are in the second inning of a severe, protracted recession, which started in the first quarter of this year and is going to last at least 18 months, through the middle of next year… A systemic banking crisis will go on for awhile, with hundreds of banks going belly up."

Roubini notes that 72% of GDP is attributable to consumer spending and that the consumer has no money. The feds handed out billions in 'tax rebates;' even so, retail sales in June increased only 0.1%. Most of the money was used to pay down debt…or just to keep up with higher-priced food and fuel. Consumer debt was 100% of disposable income in 2000; now it's 140%. Bankruptcies are up 30%.

And the economy is still, officially, growing! You can imagine what would happen in a real downturn. Today, a severe, drawn-out recession would be devastating for millions of people. They would lose their jobs and their homes. Naturally, they would expect the government to "do something."

That brings is to the second problem with our 'what if' ramble - it presumes a world in which markets are allowed to function. In the real world we have a very funny monetary system that permits the financial authorities of the United States of America to create money, almost at will. These authorities have said many times that if the U.S. has stable consumer prices it will be over their dead bodies. Which would be fine with us. But the dollar-based system is inherently, inevitably inflationary. And even though this week's markets are signaling a victory for the natural market forces of deflation, the United States still has a lot of ammunition. It has already nationalized its two big mortgage backers - Fannie and Freddie. It has handed out more than a hundred billion in rebates. It has planned to spend as much as $300 billion to rescue homeowners. And it still has its printing presses.

Thanks to U.S. printing presses, inflation has gone up all over the globe. As reported in Newsweek recently, a Morgan Stanley report released in late June summed it up: "Much to our own surprise, we find that 50 of the 190 or so countries in the world now have inflation running at double-digit rates, including most emerging markets. In other words, about half the world's population is already experiencing double-digit price increases."

What will happen? We don't know. But we doubt the whole world will fall into cotton and sleep like the Japanese…not without a fight!

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