Not many things would have to go wrong before the world economy slid into a 1930s-style recession, with problems in the financial markets adding to the downward economic spiral. We are in uncharted waters.
And if the world does move into recession, which is a growing possibility, or suffers from a prolonged period of slow growth, which looks very likely, there is a serious risk of corporate and bank failures, as well as foreign debt defaults.
The outlook is in serious danger of becoming worse because of the failure of the leading industrial nations to reach an expected 3% growth for the year. In addition, dollar falls have become a drag on world growth, and depressed commodity prices are at levels not seen in decades. This is taking its toll on developing countries and increasing the risk of international debt defaults.
Lastly, the international financial revolution, with the shift in capital market operations away from bank lending to the issuance of marketable or securitized debt instruments, brings to the fore new risks. Problems in one part of the financial markets can be transmitted more quickly and more powerfully than at any time in the past.