UK producer prices data released today show how quickly the recession is developing. The cost of manufacturers’ raw materials dropped by 3.3 percent in November. Add in the rapid falls in oil and commodity prices and even lower figures lie ahead.

Among economists, “quantitative easing” is the topic of the moment. QE, as it’s abbreviated, means getting money in people’s pockets quickly.

Dropping banknotes out of helicopters is an image often used, but basically, central banks simply print more money and buy assets like shopaholics. They may purchase companies, corporate or government bonds, infrastructure projects, anything they can lay their hands on at short notice, in fact.

Howard Archer from IHS Global Insight: “The further substantial falls in producer output and input prices in November reinforces belief that consumer price inflation will plunge over the coming months in reaction to sharply lower oil and commodity prices, waning food prices, contracting economic activity, faster rising unemployment, December’s VAT cut and very favourable base effects. These factors seem certain to easily outweigh the inflationary impact of the very weak pound. Indeed, it seems highly likely that consumer price inflation will move back below the Bank of England’s 2pc target level in the early months of 2009 and will turn negative during the second half of the year.

“Consequently, we expect the Bank of England to enact a further hefty interest rate cut in January as it attempts to limit the length and depth of the recession. At this stage, we forecast the Bank of England to reduce interest rates by a further 75 basis points from 2.00pc to 1.25pc in January, but we would not rule out a larger cut if the economic downturn continues to deepen. We expect interest rates to fall to a low of 0.50pc in the second quarter of 2009 and then stay there for the rest of the year. However, it is far from inconceivable that interest rates could come all the way down to zero.”

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.

That seems to be a choice that has to be made by each succeeding generation, depending on the business cycle and/or the severity of downturns.

In the current recessionary period the situation is so bad it’s become a crisis in both the financial markets and the real economy. Already many governments are having to nationalize part or all of their banking system. Financial services never seemed so brittle.

Is that really the case though? In a carefully-argued article, The world needs Up-To-A-Pointism, John Evans suggests that by staying within the boundaries where governments and free markets work best, the world would be a much more stable place to live and do business.

Although mostly mutually-exclusive, the interface between regulation and free markets could be made to operate more efficiently, to the benefit of both.

A dollar default is unthinkable in these affluent modern times. Or is it?

Last week a “flight to safety” of investors in America’s $3.5 trillion Treasury money market was only halted by Secretary Henry Paulson’s swift action in nationalising the banking sector’s bad debts.

Read The Great Harvard Sausage Scandal 2008 over at Syntagma.

Of course, most of the movers and shakers have already salted away their massive bonuses and are probably even now relaxing with a cocktail or two on their yachts in Monte Carlo harbour.

They have left us with a colossal mountain to climb. In the UK, house prices have a further 25-30 percent to fall, according to Roger Bootle, and already Britain’s largest mortgage lender, HBOS, has failed. How many other banks will go before we hit bottom?

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