The difficult question of when the current financial/economic slump will end is fraught with complications. However, the answer is really quite a simple proposition.

Assets prices are falling so fast, no financier can back them until a loan against them is guaranteed against loss.

What that means is that asset prices have to find a floor. Only then will the real economy find willing partners in the financial economy and finance start to flow. When will that happen?

Guesstimates vary from the ridiculously optimistic — the British Treasury forecast — to the ridiculously pessimistic — “never”.

In between, the more realistic: “2012″.

From there we may see a slow growth back to financial and economic health, but it will need a sea-change in regulation and business administration. In particular we need to create bulkheads against the madness of globalized swings that can disrupt the strongest of economies. As David Brook wrote in the New York Times:

“We’re living in an age when a vast excess of capital sloshes around the world fueling cycles of bubble and bust. When the capital floods into a sector or economy, it washes away sober business practices, and habits of discipline and self-denial. Then the money managers panic and it sloshes out, punishing the just and unjust alike.”

As the BBC’s Business Editor, Robert Peston points out: “If you combine consumer, corporate and public sector debt [in the UK], the ratio of our borrowings to our annual economic output is a bit over 300 per cent, or more than £4,000 billion [six trillion dollars].”

Those numbers make even 2012 seem optimistic.

The only safe answer is, “Rebuilding starts when there are no more cliffs to fall off.”

A version of this piece appeared recently on The Money Log.

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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A version of this article appeared in Syntagma recently.

As we predicted here, this credit crunch cum downturn cum recession cum slump cum … was always going to happen in slow motion. That’s because of the normal lags involved in the transfer of economic conditions between countries and continents. Britain is said to be around nine months to a year behind America.

While the U.S. downturn started at the back end of last summer, it’s only now starting to decimate the British economy and parts of the eurozone. If we want to know how bad it’s going to get, we only need to peer across the Pond.

Gold rushes come and go in the world’s innovation capital, California. But when they go … they really go.

The City of Vallejo in California has filed for Chapter 9 bankruptcy, making history it seems. Half Moon Bay, home to some internet digerati, may well be next. According to John Moorlach, Orange County board chief, “This is the tip of the iceberg: everybody is going to line up for Chapter 9 in California.”

What can it mean to people on the ground when their city goes belly up? What of their assets, houses etcetera? It will be interesting to watch this pan out.

According to Goldman Sachs and Lehman Brothers American house prices are likely to fall 25pc from peak to trough. With between 10m and 12m households in negative equity already, there’s still a way to go.

Shares across the developed world are set for big falls too. Albert Edward Société Générale’s global strategist says, “Nowhere and nothing will be immune. We are on the cusp of an equity meltdown that will slash and shred portfolios. We see a global recession unfolding. Liquidity will drain away and crush the twin emerging market and commodity bubbles. The recent hope that ‘the worst might be over’ is truly staggering. Profits are disintegrating.”

Ambrose Evans Pritchard of the Telegraph (UK) — ever the Cassandra (rightly so, in my view) — says pointedly, “Britain, Europe, Japan, and China will go down before America comes back up. This is turning into a synchronised bust, after all. The Global Slump of 2008-09 is under way.”

The Bank of England and the European Central Bank are still stubbornly refusing to cut rates because of inflation fears, which will be the least of our miseries in the next two years and should abate soon as global demand falls off the much-imagined cliff.

It’s probably true that Ben Bernanke’s Federal Reserve has saved the U.S. and other countries from another Great Depression. But nothing can stop a slump now because it’s already happening.

The Bank of England today refused to be drawn down the U.S. route of swingeing rate cuts as it held them steady at 5pc.

New Irish Premier Brian Cowen with President Mary McAleese

The hiatus was fuelled by the inflation clause in the Bank’s remit from the Treasury in the face of unremitting pressures on world and national prices.

Other voices were insisting that the credit crunch will be with us for two more years leading to widespread mortgage “rationing” by banks and lenders.

However, a consensus is building that a “Great Depression” is not in the offing as the resilience of the banking sector — with plentiful central bank support in america, Britain and Europe — is proving greater than many expected. Some commentators are even forecasting a “soft landing” for Western economies.

However, a two-year credit crunch will decimate the housing sector on both sides of the Atlantic. Particularly hard hit will be be the Club Med countries and Ireland, which is undergoing a particularly harsh decline in its house markets.

New Premier, Brian Cowen, has a hard road to travel, as the principal driving force of the Celtic Tiger economy comes to a standstill.