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.”

During and after the Great Depression of the 1930s many people asked the same question.

As it turned out, capitalism wasn’t dead, just undergoing one of its periods of creative destruction, when old practices and outworn businesses are ruthlessly purged.

Free markets are a natural phenomenon, like grass. If you cut grass, it grows back again. So does capitalism. It is government that is an unnatural construct of human ingenuity. Long, hard-won experience tells us it should be limited in size and scope.

John Evans has written a piece on what will happen to capitalism under the title, Is socialism the new quid on the block?

The “failure” of capitalism should be seen as part of a greater failure involving government and its duties to society. These are principally, sensitive regulation of systemic elements of the modern economy, like banks and other financial services, and ensuring monetary and fiscal balance across its operations.

It is now clear that government has failed systemically over the past decade by taking on too much debt, a condition mirrored in consumers’ personal balance sheets, and by serious mismanagement of the regulatory process.

Read Is socialism the new quid on the block?

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.

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.”