The global economy is at the point of maximum danger

It feels like the summer of 1931. The world’s two biggest financial institutions have had a heart attack. The global currency system is breaking down. The policy doctrines that got us into this mess are bankrupt. No world leader seems able to discern the problem, let alone forge a solution.

The International Monetary Fund has abdicated into schizophrenia. It has upgraded its 2008 world forecast from 3.7pc to 4.1pc growth, whilst warning of a “chance of a global recession”. Plainly, the IMF cannot or will not offer any useful insights.


Its “mean-reversion” model misses the entire point of this crisis, which is that central banks have pushed debt to fatal levels by holding interest too low for a generation, and now the chickens have come home to roost. True “mean-reversion” would imply debt deflation on such a scale that would, if abrupt, threaten democracy.

The risk is that these same central banks will commit a fresh error, this time overreacting to the oil spike. The European Central Bank has raised rates, warning of a 1970s wage-price spiral. Fixated on the rear-view mirror, it is not looking through the windscreen.

…IndyMac will deplete a tenth of the $53bn reserve of the Federal Deposit Insurance Corporation. The FDIC has some 90 “troubled” lenders on watch. IndyMac was not one of them.

The awful reality is that Washington has its back to the wall. Fed chief Ben Bernanke thought the US could always get out of trouble by monetary stimulus “a l’outrance”, and letting the dollar slide. He has learned that the world is a more complicated place.

Oil has queered the pitch. So has America’s fatal reliance on foreign debt. The Fannie/Freddie rescue, incidentally, has just lifted the US national debt from German ‘AAA’ levels to Italian ‘AA-’ levels.

China, Russia, petro-powers and other foreign states own $985bn of US agency debt, besides holdings of US Treasuries. Purchases of Fannie/Freddie debt covered a third of the US current account deficit of $700bn over the last year. Alex Patelis from Merrill Lynch says America faces the risk of a “financing crisis” within months. Foreigners have a veto over US policy.

Telegraph