You can make the Nasdaq into a scapegoat if it makes you feel better. But what we've really got on our hands here is a good old-fashioned stock-market crash.

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I know, it was set in motion Thursday after the bell when Intel (INTC:Nasdaq - news - boards) warned. And Cisco (CSCO:Nasdaq - news - boards) helped it along with its own warning Friday. But the decline is too widespread to make tech the whipping boy this time. When the Wilshire Total Market Index -- a cap-weighted index of every stock in America -- collapses to new lows like it did Monday, you need to look for something bigger than the little smoking gun in Intel's hands. You need to look for a smoking cannon. And I know what it is. It's the thing that I've been writing about for the past couple of weeks: deflation.

As I've explained in previous commentaries, deflation is the opposite of inflation. In a deflation, commodity prices, consumer prices and asset prices get caught up in a downward spiral that triggers cascading bankruptcies and unemployment. The only safe haven is cash or government bonds. Equities are radioactive. Deflation is the result of monetary error by the central bank -- in our case, the Federal Reserve -- of printing too little money to meet the liquidity demands of the economy.

Primal Fear

Investors may not attach the word deflation to the fear that's making them dump stocks -- although the most sophisticated ones certainly do. But a general sense of dread is beginning to take hold, a primal instinct that something is terribly wrong at a systemic level, and that we're not doing the right things to diagnose or fix it.

The fear crystallized Monday with the realization -- conscious or unconscious -- that Alan Greenspan is going to lower rates. And it won't help.

The focal point of the fear was an op-ed piece Monday in The Wall Street Journal by Wayne Angell, chief economist at Bear Stearns, a former Federal Reserve governor and a well-known Friend of Alan. Two weeks ago, you'll recall, Angell ignited a broad market rally by boldly forecasting that Greenspan would lower interest rates ahead of the next scheduled Federal Open Market Committee meeting March 20. Greenspan dashed those hopes in congressional testimony the following week.

Angell's op-ed reads to the uninitiated just like a run-of-the-mill plea for Greenspan to lower rates, citing all the usual arguments about the slowing economy, lack of inflationary pressures, stock-market collapse and so on. I've written two dozen of those myself. But for those who can read between the lines -- and those are the people who can set a market crash in motion -- Angell's op-ed is different.

Angell's Arguments

First, Angell asserts that Greenspan may have to lower rates dramatically further than anyone else has dared to suggest. He writes, "... surely if the economy continues to sag toward recession, a drastic reduction of the real federal funds rate -- to a range between zero and 2% -- may be needed." He's talking about the real fed funds rate, which means the amount by which the Fed's target rate is above the rate of inflation. But elsewhere he suggests that the rate of inflation is no more than about 1.6%. So when he's talking about a real funds rate of zero, he's talking about a target rate of 1.6% or less. A number like that is so far off everybody's radar that when an eminence grise like Angell puts it out there, it really gets your attention. Scary stuff.

Second, Angell attacks the fundamental basis of decision-making that leads to the Fed's rate policies. Angell throws aside the myriad ever-changing rationales we've heard from Greenspan and the FOMC for the past several years, all what Angell calls "activism," aimed at stabilizing consumer sentiment, aggregate demand and the level of the stock market. Instead, Angell argues that "... short-run monetary activism was producing growth rate swings of increasing amplitude. Why not then discard short-run stabilization activism in favor of the Fed adopting a strategy aimed at price level stability?"

Nothing revolutionary in that suggestion -- or so it seems. Isn't price level stability what the Fed is supposed to focus on anyway? Yes, but here's where it gets really interesting.

Third, Angell argues that if price level stability really were the Fed's focus, then job one is to stop the deflation. As Angell puts it, "The Fed should recognize and act on the deflation indicators all around us -- falling core commodity prices confirmed by a continued fall in the price of gold. The dollar seems to be appreciating against everything. That means the Fed should increase the money supply by choosing successively lower federal funds targets until core commodity prices rebound."