It's been obvious for so long

that the economies of many leading nations

were underwritten by simply artificially

inflating the value of assets and then using

those assets as collateral to borrow against

This led to a consumer boom based on debt

What is involved is not a conjunctural financial downturn, but rather a systemic crisis of the world capitalist system that finds its sharpest expression in the decline of the global position of American capitalism.

Underlying the present financial turmoil is the unraveling of economic processes bound up with financial speculation that has been developing over the course of some three decades.

From the early 1980s, responding to the protracted decline in the profitability of US manufacturing, the American ruling class embarked upon a relentless assault on the wages and basic rights of the working class, thereby effecting a wholesale redistribution of social wealth upward to the financial elite.

The drive by the US ruling class to systematically impoverish the vast majority of the population to the point where they cannot afford to pay their debts is producing an economic readjustment on a scale not seen in decades.

The present social order offers no avenue to ward off such a catastrophe, since the scale of debt forgiveness, job creation programs and income support necessary to avert recession cannot be implemented without a sweeping redistribution of wealth from the super-rich to the vast majority of the population.

Bigger Than Anything in Living Memory

Lunch in Davos with George Soros, the classic case of the poacher who turned gamekeeper. In the early 1990s, he was the speculator's speculator: the man who cleaned out Britain's gold and foreign currency reserves on Black Wednesday.

Today, he has become the scourge of market fundamentalism, warning that the deregulation of finance that has been underway since 1980 has pushed the global system to the point of its biggest crisis since the second world war.

Soros is honest enough to admit that he has been here before. He said it was the crisis of global capitalism during the Asian financial turmoil of 1997 but, this time, he says, it really is the big one.

The other tremors that have beset financial markets over the past 20 years were merely the overture to Gotterdammerung.

It's a brave call for there is no shortage of people willing to say that cuts in interest rates and lower taxes in the US will lead to any recession being short and shallow, while the developing world has the strength to keep growing strongly.

Nor is the Soros remedy - an audit of the books of financial institutions to make sure that the risks of what they are doing with their fancy products are fully recognised, followed by a far tougher regulatory regime - whole-heartedly supported.

As the Bank of England found with Northern Rock, the very idea that auditors were crawling all over the accounts of Merrill Lynch or Citigroup might lead to panic.

What's more, those who believe allowing the market to work is the least-worst option, argue that the inevitable human failings of regulators mean that they are bound to make any bad situation worse.

Soros is right, though, to say that this crisis has the potential to be far bigger than anything that has been seen in living memory. Firstly, it is a crisis that is affecting the center of the global financial system - the US - rather than the periphery.

Secondly, the global economic balance of power is changing, with a shift from west to east. Historically, that has always added to geo-political tension.

Thirdly, there have to be doubts about whether the normal policy instruments will work.

Soros says the Federal Reserve was right to cut interest rates after being asleep at the wheel as the subprime crisis undermined the health of the financial system and ultimately the economy itself.

But he doubts whether pumping liquidity into the system will have much effect.

In part because consumers are already sodden with debt, but also because cheap interest rates don't make that much difference if you are going bust.

The current crisis, Soros says, is not a crisis of liquidity - which can be cured by cutting interest rates - but a crisis of solvency.

In that case, the Fed's action will have more of an impact on inflation, by pushing down the value of the dollar, than it will on economic activity.

Higher inflation will constrain the Fed's freedom of action when the solvency problems come to the surface, leading to another, far more serious crisis a short way down the road.

At that point, the market fundamentalists may take Soros's suggestions a bit more seriously. By then, of course, it will be far too late.

Fears of Global Financial Collapse

The panic in the worldwide equities markets has unfolded in response to the growing threat of a massive readjustment in the world economy—including a sharp devaluation of the dollar and a permanent fall in US consumer spending.

Neither the Fed’s actions, nor the Bush Administration’s puny fiscal stimulus package, will be enough to prevent a US recession.

Although the rate cut staved off—at least for a day—a panic on Wall Street similar to those seen on stock exchanges in Asia and Europe on Monday, markets are almost unanimously pricing in a recession in 2008, regardless of what the Fed does.

Currently, the Fed’s first priority is to bail out the banks and stabilize the financial system by injecting massive amounts of liquidity.

Monetary policy, however, cannot ward off a coming recession because the present crisis is not ultimately rooted in financial institutions’ inability to borrow, however important this problem may be in the short term for preventing a market collapse.

What is involved is not a conjunctural financial downturn, but rather a systemic crisis of the world capitalist system that finds its sharpest expression in the decline of the global position of American capitalism.

Underlying the present financial turmoil is the unraveling of economic processes bound up with financial speculation that has been developing over the course of some three decades.

From the early 1980s, responding to the protracted decline in the profitability of US manufacturing, the American ruling class embarked upon a relentless assault on the wages and basic rights of the working class, thereby effecting a wholesale redistribution of social wealth upward to the financial elite.

This was combined with a turn away from production—except in those areas offering the lowest labor costs and highest profitability—and towards an economy continuously more dependent upon financial speculation, parasitism and outright fraud.

As the present worldwide stock market crisis has made clear, the decline of US capitalism has robbed it of the ability to sustain the world markets, but left it with sufficient negative weight to drag the rest of the world economy down with it.

The immediate credit crisis stems from mounting consumer insolvency, which is in turn rooted in the massive amounts of debt taken on by workers in response to the fall in their wages and rising costs of living.

The unsustainable process of household debt accumulation began to unravel in 2005-06, when housing prices began to fall and homeowners defaulted on their mortgages in record numbers.

In recent months, increased default risks have spread into other areas of consumer debt, with banks increasing their provisions for future defaults, in some cases by as much as an order of magnitude.

The drive by the US ruling class to systematically impoverish the vast majority of the population to the point where they cannot afford to pay their debts is producing an economic readjustment on a scale not seen in decades.

The present social order offers no avenue to ward off such a catastrophe, since the scale of debt forgiveness, job creation programs and income support necessary to avert recession cannot be implemented without a sweeping redistribution of wealth from the super-rich to the vast majority of the population.