Here is what you don't do: They are chasing the bogy of inflation, but it is deflation we must fear, says James Buchan

IN Arlington Road in Camden Town, men, some in ties, queue the length of the block for a dish of rice provided - a modern touch - by the Hare Krishna Temple. Round the corner on Inverness Street, women - Chinese, Cypriot, Irish, English - pick expertly through the market trash for burst oranges.

I wish I could show my home streets to John Major. Also to those men from the Treasury who pro-nounce each syllab-le sep-ar-ate-ly as if we were all half-wit-ted and who look like country GPs cheating on their wives. One of the frustrating things about the present crisis is that these men appear to exist in a separate political economy: a bizarre world without value or consequence, autocratic, violent, ignorant, frivolous.

Five years ago tomorrow, the day Wall Street crashed, I was living in New York. In a blinding epiphany that still sparks and flashes in my imagination, I realised that the value of an object (in this particular case, IBM shares) is only what some guy will pay for it in money, which, at that moment - 11.30am, EST, 19 October 1987 - was roughly nothing. That was the moment when the deflationary fat went into the fire which has, in stages, spread all over the world and is now burning out of control.

Everybody, even Norman Lamont, has a notion of what inflation is. It is when money buys fewer things: holidays, airline tickets, houses, furniture, pictures, embarrassing ready-made meals from Marks & Spencer. Deflation is when you have to sell or make more and more things just to get the same amount of money. Few people remember the last big deflation but when Keynes called it 'a worse visitation' even than hyper-inflation, he knew what he was talking about. He usually did.

In its initial phase, the deflation was most evident in recherche asset markets (Post-Impressionist paintings, racehorses, and so on) but it soon caught in real property and agricultural produce, service trades, processed food, manufactured goods. Last month, inflation in British manufacturing, as measured by the Producer Price Index, ended. We are now moving into the second phase, where incomes fall and individual destitution becomes widespread.

To fight this horrific process, you do what Alan Greenspan, chairman of the United States Federal Reserve and the only person around who is remotely up to the present economic challenge, is doing: you cut interest rates to nothing. This reduces the price of money and takes the heat off asset values, lifts the burden on borrowers and reduces the attraction of saving, all at one go. It also devalues your currency - in the US case, by 20 per cent - which makes foreign goods unaffordable and keeps your own factories open. Single-handed, Mr Greenspan has so far prevented a collapse of the US economy.

What you don't do is what Mr Major, Mr Lamont and Michael Heseltine are doing, which is to throw 30,000 men out of work on the basis of questionable economic arguments. The jobless miners will stop spending, which will help to depress demand, lower prices and wages, and drive us deeper into depression. The taxes they stop paying must be raised elsewhere, which will depress demand, lower prices, and so on. It is impossible to exaggerate the perversity of these politicians - freeing themselves from the German deflation, only to launch their own.

The business is complicated in that ministers either do not know what they are talking about or are lying. The coal pits are uneconomic only in the lunatic structure of the electricity industry devised by Cecil Parkinson in 1989. He created two large generating companies in England and Wales, National Power and PowerGen. They had to be large to absorb various old and costly nuclear power stations. As it turned out, these nuclear power stations are uneconomic under any but Ukrainian operating conditions and are being subsidised. Did you know that you were paying pounds 40 a year to support some 1950s nuclear rust-bucket?

That still left the generating duopoly, which so terrorised the distribution companies that they have started generating on their own, using natural gas - a premium fuel quite unsuited to heating boilers to turn turbines to generate electricity to heat lighting filaments. Such are the capricious economics of late Thatcherism. The arguments for closing the pits are very complex and contentious and need to be carefully analysed. Instead, the Government is using the most brutal economic violence to stifle discussion.

Keynes, whose thick lips and hairy moustache now jump at us even from monetarist newspapers, thought in 1931 that a combination of devaluation and lower rates of interest would halt the deflation. He rapidly changed his mind. In February 1932, he wrote: 'It may still be the case that the lender, with his confidence shattered by his experiences, will continue to ask for new enterprise rates of interest which the borrower cannot be expected to earn. If this proves to be so, there will be no means of escape from prolonged and perhaps interminable depression except by direct state intervention to promote and subsidise new investment.'

It should be obvious that running a tight budget and abandoning capital projects as the Major government wants to do is precisely the wrong policy for deflation. What makes Mr Major, Mr Lamont and the country doctors from the Treasury seem so bizarre to us is that they are fighting the last war, the one against inflation. They are attached not to the ideology of Thatcherism - that went when Margaret Thatcher went - but to certain symbols of that ideology (The Market] Zero Inflation]) which they worship, blindly, like savages, lest the sky fall on their heads.

They are no rocket scientists.