We face recession without shock absorbers as Berlin loses patience with the eurozone
The Great Reprieve is exhausted. The world has used up the three years' grace gained by extreme stimulus after the debt bubble burst in 2008.
This time we face the risk of double-dip recession without shock absorbers. Interest rates are already at or near zero in much of the OECD club. Fiscal deficits are stretched to the limits of safety.
Far from loosening, the US is on track to tighten by 2pc of GDP next year, and Europe by 1pc to 2pc, into the slowdown.
China has already pushed credit to 200pc of GDP. It cannot repeat the trick.
The Anglo-Saxons can print more money, but the gains in asset prices for the rich are offset by losses from fuel and food inflation for the poor. This is a destructive trade-off.
The decision to throw everything we had at the crisis after Lehman-AIG was a legitimate gamble at the time, given the near certainty of depression if shock therapy had been tried – as in 1931.
It is too early to say the policy has failed, and failure is a false term when leaders confront cruel choices. Yet last week's drama has brought home the truth that suffocating debt has not gone away; it has merely hopped on to the shoulders of sovereign states, threatening just as much damage.
Standard & Poor's downgrade of the United States to AA+ is a detail in this greater drama, albeit of poignant symbolism.
S&P should have acted six years ago when the rot was setting in. To do so now is fatuous.
The US Treasury is right to disregard the verdict and keep risk weightings unchanged to avoid a cascade of forced debt sales. Note how quickly Japan, Korea, France, and even Russia, have closed ranks behind Washington.
As for China's bluster, it is chutzpah and self-delusion. We all agree that the US needs to "cure its addiction to debts", but so will China soon.
China buys US debt in order to recycle $200bn a quarter in foreign reserves, hold down the yuan, and continue its mercantilist export strategy. If China had not distorted world trade in this fashion, the US would not be in such a mess.
Unlike America, Europe still has stimulus cards it could play. Yet EMU politics prevents the use of these cards. Germany still fails to understand the logic of monetary union: that (Teutonic) surplus states have a duty to boost demand in order to offset austerity in (Latin) deficit states until equilibrium is restored. Instead, Berlin is imposing a 1930s Gold Standard formula of deflation decrees through the EU machinery, with the burden of adjustment falling on debtor states.
We may learn over coming days whether the European Central Bank is at least willing to stop the bond crisis in Italy and Spain from spiralling out of control.
"The ECB should stop hiding behind its monetary orthodoxy and remember that if there is no more Union, there will no longer be an ECB either," said ING's Peter Vanden Houte.
Umberto Bossi, the leader of Italy's Northern League, claims that a grand bargain has been agreed. The ECB will buy bonds in exchange for Italy's pledge to pull forward austerity cuts. He added that it had been a "historic mistake" to join the euro.
Investors know that the ECB did not succeed in stemming the crises in Greece, Ireland, and Portugal, despite buying almost a fifth of their debt. So any intervention would have to be massive to convince the markets, pushing the bank ever further beyond its legal mandate and treaty authority.
Yet we know that the ECB's two German members and the Dutch governor have refused to endorse such a quantum leap. It would be impossible to "sterilise" large bond purchases. The action would amount to Fed-style QE, anathema to Berlin.
Can the ECB ram through such a high-stakes policy in defiance of Europe's chief power, in breach of Maastricht's sacred contract, and still hope to preserve German acquiescence in EMU?
Berlin is losing patience. Der Spiegel cites unnamed officials warning that Italy is too big to save, and that escalating demands may "overwhelm" Germany itself.
The search for a scapegoat has begun. German MEPs and officials have begun to blame Brussels for triggering this crisis, though all it did was admit that the €440bn bail-out fund is too small to restore confidence, and that EMU is in systemic danger as contagion spreads to the core.
Even Germany's most ardent pro-Europeans seem to have given up trying to find a solution. They are building an alibi for EMU break-up instead.
This is a dangerous moment for the world. It is still possible that the growth scare of recent months will prove a false alarm.
Yet the Bank for International Settlements is surely right that we are pushing ever closer to the limits of a model that relies on artificial stimulus to keep stealing extra prosperity from the future. There is ever less to steal.