(FORTUNE Magazine) – Most American investors are in denial about what is coming: The global deflationary wave let loose by the Asian financial crisis last year has started rolling around the world to weaken Japan even further, demolish Russia, shake Latin America, and threaten Europe and the United States itself. This may develop into the most widespread and deepest deflation since the Great Depression. It has destroyed wealth and liquidity all over the world, will send European and American markets sharply down, and could easily end in a global recession. (For more on the markets and the U.S. and world economies, see Cover Stories.)

Here, however, is where I depart from my fellow bears: This story should have a happy ending. And it's not because of some fairy-land "New Economy," freed from the laws of economic gravity and the business cycle. What does seem true is that America has contributed something new to the world over the past 20 years: a standard of technological and corporate efficiency that is forcing almost everybody else (except maybe the Europeans; more on them later) to conform or die.

The imposition of ruthless American standards is deflationary, at least in the early stages. This is partly because great leaps in technology and productivity tend to lower prices even as quality rises (consider, for instance, computers); and partly because the de facto global central bank--the Fed--has refused to cut rates. (The Fed has been understandably preoccupied with its domestic responsibilities.) But the end result, after the coming crash, should be a great world boom as the standards pioneered by the U.S. become those by which all companies and economies are judged.

That cheerful long-run outlook, however, will be little consolation to the world economy over the next few years. The stock and bond market devastation outside the U.S. and Western Europe is now almost universal. Commodity prices are crashing too. In late August the Bridge/Commodity Research Bureau index hit a 21-year low. Gold was at a 19-year low and oil, at about $13 a barrel, was cheaper in real terms than it was before the first oil shock in 1973.

Meanwhile, the markets and economies of Western Europe and the U.S. have floated upward unhindered--or they did until late August, anyway. A line of argument has developed in the States that, however tough events have been for the half or so of the world economy whose markets have been trashed, this has all been quite grand for Europe and America. A year ago, the U.S. economy was in danger of overheating, raising fears of an increase in interest rates and an end to the party. Then along came cheaper imports, especially of commodities, and falling bond yields. There is no reason, the thinking goes, why the balance of domestic boom and overseas bust can't continue.

But that belief is about to be blown up, for two reasons. The first is that, although nobody has given a very good explanation for financial contagion--why the collapse of one country's markets should send the markets of other, mostly unrelated, economies down as well--there is no doubt the process exists. The world has already seen an awful lot of this contagion, and there is no reason why it should suddenly stop at the threshold of the rich West. For one thing, although for months most forecasters (the IMF included) shrugged off the global economic impact of the Asian implosion, it has always defied belief that the collapse of a such a dynamic region would prove but a minor annoyance elsewhere. Before 1997, Asia accounted for half of the world's economic growth and two-thirds of the growth in world trade. Those days are over, and the consequences for the profits of American manufacturers have already become clear.

Second, the virus will find a nice, ripe host in the U.S. economy and its overvalued stock markets. One consequence of our seemingly unending boom in the economy and the stock market is that companies have made massive capital investments based on little more than the expectation of...an unending boom in the economy and the stock market. Meanwhile, American households, never known for their thrift, are now saving virtually nothing: They're counting on their mutual funds, which these days contain more of America's financial assets than the whole banking system. The effect of a Wall Street slump on household wealth and consumption would be enormous.

Much more important than a deflation-induced bear market, however, is deflation itself--a fall in the general price level. Not every market crash leads to a recession, let alone a depression, nor does every deflation. But deflation can do immense damage in an economy with high levels of debt since real debt burdens rise even while profits fall, leading to bankruptcies, further economic decline, and even higher real debt burdens.

So how much havoc will deflation wreak this time? That depends in part on government policy, especially the Fed's. It's widely accepted that if, in the early 1930s, Washington had loosened rather than tightened policy, the worst ravages of the Depression could have been avoided. As Milton Friedman has put it: "Deflation is the easiest thing in the world to avoid; you just print more money." With deflationary pressures mounting all over the world economy, it would be surprising--indeed, disturbing--if the Fed's next move in rates were not downward. But even that is unlikely to prevent a significant slump.

There is one big reason for optimism, however, and it's called dollarization. The term describes the imposition on the entire world of the standards of performance and efficiency that were forced on American companies by the corporate restructuring of the 1980s. By the early 1980s the return on equity of American companies was only about 8%, half the historical average. Thanks to the enormous pressure put on corporate America by Ronald Reagan in politics, Paul Volcker in money, and Michael Milken in corporate finance, that rate has since been driven up threefold.

It is now the rest of the world's turn. Asia, where the crisis broke, has long had returns on equity in the high single digits at best. In a world where capital flows freely, that simply will not do. Now that Japan has abandoned capital controls, why should Japanese savers be earning 1% at home when they could be getting five or ten times that in the U.S.?

Dollarization can be deflationary, and that's not necessarily a bad thing. Whether it's Silicon Valley creating better, cheaper machines, or China improving one of the world's worst distribution systems, price declines can be an encouraging sign: They mean that buyers are getting more for their money.

But dollarization will have several unsettling short-term consequences. First, the process is immensely disruptive. America's own restructuring in the 1980s was controversial enough, and that took place in a single country with a single culture. Apply this process to most of the world, with all its divergences and tensions, and the increased turbulence can only be guessed at.

Second, not many parts of the world will be spared. The one area likely to escape is the European Union, whose euro project, backed by great reserves of wealth, may allow it to preserve a regime of social protection and relative economic inefficiency that nobody else will be able to afford. The result will probably be a bipolar currency world, though the American pole will have a lot more magnetic attraction than the European.

Third, the U.S. will by no means escape the world's pain. Much of the reason we Americans are going to be so surprised by the global crash about to descend on us is that during our years of plenty we forgot we needed anybody else. One thing dollarization surely means is that the U.S.--and especially the Fed--is going to start paying attention to events outside its borders.

Last, it is worth recalling a lesson from America's restructuring of the 1980s. The chattering class assumed the U.S. was past its prime, that it was doomed to perpetual decline and social unrest. We now know that the American economy was cleaning house for its resurgence. Look for the transmission of American standards of efficiency to the rest of the world today to be portrayed in similar colors of catastrophe. But these dire warnings will be just as wrong as those dour jeremiads of the 1980s. The world's economic efficiency and wealth-producing capacity are about to be radically upgraded. This will happen first in Asia, but it will spread, and the world is going to be a lot better off for it.