One of Britain’s leading economists Peter Spencer, Chief Economic Advisor to the Ernst & Young ITEM Club, has warned that “printing money” to buy assets such as corporate bonds and consumer loans, was needed now or the country faces a repeat of the Great Depression.

“My concern is that people don’t fully understand the dangers lurking out there. The Bank of England needs to move towards quantitative easing immediately – you don’t have to wait until you get to zero percent interest rates. If someone is choking to death you don’t think twice about giving them an emergency tracheotomy. There may be dangers, yes, but the alternative is that they die,” he said.

“We are now in danger of seeing the economy choke: and once you get into a situation where people are hoarding as much cash as you can throw at them and interest rates are stuck at zero, you’re in real, real trouble.”

He continued, ominously, “Our forecasts are relatively optimistic. The recession is already baked in. The question is whether we go from here into a decade of deflation – if they make more mistakes that is pretty much on the cards – or some pretty horrific numbers this year and some positives later on. They have days – not weeks – to play with.”

It was hardly a well-kept secret. The Bank of England had received a raft of appalling numbers from the real economy this week. It was bound to cut rates deep today.

An hour ago, the Old Lady of Threadneedle Street duly obliged and cut by 100 basis points to two percent, the lowest figure since 1951.

It is clear that this is going to be a steeper and longer slump than most forecasters would own to until very recently. Next year will see the deepest of economic winters across the world.

Reflecting the gloomy forecasts, other central banks are slashing rates too.

Sweden’s central bank today cut its key rate by a record 175 basis points, to two percent, the largest since 1992 when the country famously nationalized its major banks.

New Zealand also announced a cut of 150 basis points to a five-year low of five percent. Further cuts are on the cards.

Indonesia made a surprise 25 basis-point cut to its rate, to 9.25 percent.

Yesterday, the Bank of Thailand cut rates by 100 basis points to 2.75 percent, some of which may have been due to recent political turmoil in the country.

On Tuesday, the Reserve Bank of Australia surprised markets with a 100 basis-point cut to 4.25 percent.

The European Central Bank is expected to cut again today, but signals are mixed. The Shadow ECB has called for swift, deep cuts from its current rate of 3.25 percent. However, voices close to the ECB warned not to expect them. The lack of a strategy is a major criticism of the “Bank without a Treasury”.

All bank authorities are aware that 2010 is the year when inflation will return with a vengeance if a prolonged deflation can be avoided. Most are fighting the latter tooth and nail, while making noises about having the medium term under control.

We shall see.

Deflation is now the biggest, persistent threat to Western economies. Inflation, recently the major enemy, has swiftly retreated, as widely predicted.

In Britain, many are now waking up to the gravity of the situation. Former Chancellor of the Exchequer, Ken Clarke, has dismissed comparisons with the 1970s, ’80s and ’90s, likening current conditions explicitly with 1929/30.

Normally cautious Bank of England Governor, Mervyn King, forecasts a 2 percent contraction in the British economy next year, with interest rates falling rapidly to nought percent for the first time in history.

Deflation is now the enemy we must all factor in to our expectations in the near-to-medium terms. So why is deflation necessarily worse than inflation?

In an era of massive indebtedness, both private and public, deflation increases the burden. As incomes decline, debts remain the same — at levels signed for in better times. It’s the exact opposite of the apparent wealth created during periods of rapidly rising house prices.

Professor Peter Spencer of York University says, “It is going to be absolute murder in Britain if inflation turns negative. The big difference with past episodes is that we are now much more heavily indebted. Few people owned their own houses in 1930s. Debts were miniscule.”

Another symptom of deflation is that consumers wait for lower prices before shopping, causing job-losses in the High Street and yet more bad economic news. Japan’s “lost decade” of the 1990s is the technically-perfect example of this psychology of fear taking hold. It is still suffering.

So what can be done either to pre-empt or cure the curse of falling prices across the board?

Curiously, Keynesianism which, in its misinterpreted version is disastrous in normal times, does hold out some hope in depressive conditions. Expect central banks to start printing money soon and dropping it from helicopters, if they haven’t started already. Want to buy some rising stock? Buy helicopter shares. [This is not financial advice.]

If you’re one of those noble souls who saved assiduously during the asset bubbles, you will just have to stand by and watch the profligate oafs who caused the problem clean up, while your own responsible hoard of value drains away.

It’s just not fair, but it will probably have to happen “for the greater good”.

You have only one consolation: you can give the politicians who presided over the madness a good kicking at the next electoral opportunity.

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Can we really have witnessed the demise of three top investment banks in so short a time? Bears Stearns, Lehman Brothers and Merrill Lynch have all disappeared off the radar in quick succession.

What is happening to the world’s — and especially the American’s — financial system?

It started with the slicing, dicing and splicing of U.S. mortgages of sub-prime customers. The structured financial instruments that were sold off around the world became known as CDOs (Collateralized Debt Obligations).

They have poisoned the world’s financial system, like seeping toxic waste. Now a new danger is forming on the horizon.

CDSs (Credit Default Swaps — insurance policies for bonded commercial IOUs), which are out there in their trillions and trillions, are beginning to crumble in the face of massive defaults.

The world’s biggest insurer AIG is already in Lehman territory — its shares plummeted by 70 percent in early trading yesterday. The long-foretold CDS crisis is with us at last.

So what precisely are CDSs and how will their demise affect most of us in coming days, weeks, months and years?

George Soros estimates that the value of CDSs now equals half of U.S. household wealth, an almost unimaginable number — let’s call it $23 trillion.

CDSs are hedges made by investors in case a company defaults on its debts. In effect you bet on a company failing to protect your investment in the event it does just that. The problem arises when large numbers of companies go bust and the CDSs themselves become worthless since no-one can pay them out.

A CDS seller undertakes to compensate a buyer if a corporate bond defaults. Since there is no limit to the size of cover taken out, the value of CDSs often exceeds a company’s debts. Moreover, many CDSs are bought with borrowed money so the infection of the system drives deep into the financial heartland like veins in a blue cheese.

The danger now is debt deflation: a rapid reversal of debt issuance, or deleveraging as it is called.

Tim Congdon of the London School of Economics says, “Banking system capital is being wiped out. The risk is that this could lead to a contraction of credit and set off a self-reinforcing downward spiral, leading to the sort of debt-deflation we saw in the 1930s.

“It is already clear that money growth has ground to a halt over the past three months. We must prevent it from actually contracting. If the Fed and European Central Bank don’t cut interest rates soon, it is going to be a problem.”

The Bank of England’s rigid inflation target, set by Gordon Brown when inflation was low, is now a millstone round Mervyn King’s neck at a time when energy, food and commodity price rises are being imported from global markets.

The Eurozone is similarly caught in a time warp relating to Germany’s neurotic fear of hyperinflation. Add the growing divergence between euro economies and a far deeper than necessary downturn is guaranteed for Western European countries.

America is already suffering a double blow: the fading of the effect from the summer tax stimulus and a loss of export competitiveness as the dollar rises.

What began as bad government, worse regulation, grasping banks, financial structures that lacked resilience because they were built on sand, have left us with a perfect storm that is about to come ashore and swallow large parts of the economy.