That is the question all serious economists are asking but the financial markets are ignoring. A raft of data confirms that the US economy has gone into decline in the third quarter of 2008 with the largest fall in consumer confidence and spending in the same quarter since records began to be collected in 1947. At the same time European companies are reporting massive drops in profits and the Far East and Asian financial markets are in turmoil as their export orientated economies are starting to meltdown as a consequence of the slowdown in the US.

The US economic figures were truly horrific. Durable goods orders – cars, TVs washing machines etc – fell by 14% in the third quarter. The US economy shrank by 0.3% and this figure disguises the real depth of the recession brewing as a weak dollar, armaments spending and the stockpiling of goods lessened the fall. Only armaments will help in the fourth quarter of 2008.

The economy is shrinking as result of the decrease in consumer spending as the fall in house prices continues and credit for personal loans freezes up. Most economists are predicting a further decline in the last quarter of the year with a further year of shrinkage in 2009 with 2010 being a year of stagnation. No pick in the economy is seen before the start of 2011. This is the optimistic view with no real account being taken of the paralysis of the banking and financial system and the consequent freezing of credit.

Stock markets have rallied this week particularly in the US based on the hope of  a bottoming out in the first quarter of 2009 and pick up in the economy in the 2nd quarter of 2009. This is in complete contradiction to the most optimistic view we have outlined above. Also, they have rallied on the cut in US interest rates by 0.5% and an apparent stabilising of the banking system after the billions poured by governments around the world into banks coffers.

We see this as a temporary respite and banks will be under attack again as the full scale, depth and length of the recession becomes apparent as more and more economic numbers come out. Their till will be ringing empty soon as they have to make further write-downs on sub-prime based assets (which governments have not taken off the banks books), on their mortgage books as defaults and missed payments increase. Payouts by the banks will also be needed as loans to corporate finance and private equity schemes go sour because of the down turn and finally the $60 trillion exposure to credit defaults swaps (CDS) starts to create massive losses as companies start to go bust as the recession bites -  CDS are insurance sold by banks against company bankruptcy.

And as we have seen before a cut in interest rates by central banks to major banks does not encourage lending but the hoarding of money by these major banks.

This will see governments move again to pump more of tax payers money into the banks to stop them going under. Many governments will go for a full takeover of their banks to stabilise the system but will be left with unlimited losses to the worst recession since 1974/75. This is likely to happen in the first quarter of 2009.

Whether we will enter a full depression remains to be seen – a 10% fall in the size of the economy – but we are in the midst of the first globally synchronised recession since 1974 and certainly the greatest global financial crisis capitalism has ever faced.