Beneath the surface of the financial meltdown another crisis is developing, in which the eventual resumption of economic growth comes up against the constraints of peaking energy sources and advancing climate change. The meltdown leaves the world without any effective global governance; instead we have a polycentric world, shaped by several great powers, yet ruled by none.

America’s resources are substantially depleted, and a large question mark hangs over the future of the US dollar. Americas Level of indebtedness is such that inflation is the only realistically imaginable route to paying it off, but why should foreign country creditors want large holdings in a currency that is bound to devalue?

It is hard to see how the US can even continue to project its military power, and could the US maintain its Afghan game without China continuing to buy US debt?, or what can the US do to counter the re – emergence of Russia that will almost certainly follow a rise in the price of oil?

All of this does not mean the end of globalization or capitalism. Only one type of capitalism has broken down, and that is the highly unstable version promoted by the US over the past 20 years.

 The near disintegration of the US financial system over the past year did not just come from the Bush era, but by the Clinton administration which caused some of the most dangerously misguided measures of deregulation with the repeal of the Glass Steagall Legislation regulating Banking.

A financial system that relies for its survival on asset prices never falling is inherently self destroying, which is exactly what has happened.

Meanwhile China, India, Brazil and other emerging countries are still industrializing very fast, and in time rising demand for dwindling natural resources will be reflected in a recovery in commodity prices and an increase in the power of resourced based states.

China has had an increasing presence in the Gulf, Africa and Latin America, and this can only continue. The Question is if China keeps growing are Western governments and companies prepared for a global market in which China comes out of the crisis as one of the winners? What we do know is of the likely hood of politically instability throughout the world, meaning regime change or state failure, Pakistan looks particularly vulnerable, and there have been disturbances in Moldova and Ukraine.

Governments have fallen in Iceland and Baltic states, and the UK is in deep trouble, as like Iceland the banking system was bigger than the economy. A further run on the pound could have serious consequences for the UK welfare state and create social warfare.

A Historic shift in geopolitics is taking place , in which power is leaking away from the US and its allies, but globalization continues in a disorderly type of way in which world’s great powers are competing with one other for natural resources.

The response to the global financial crisis will require more radical rethinking of fundamentals than the US presently projects.

All economies combine public and the private, but the crucial difference between economic systems lies not in their structure, but in their social and moral priorities.

The 1929 Great Depression did not suffer from anything like the gigantic overload of financial claims – 450% of GDP in the US at the outset of the current crash, as against 215% at the depth of the crisis in 1932, but it is inconceivable of the same mega investment program of World War 2 to bail out the US this time, for starters there is nobody big enough to take the US on, and there are no Stalin’s, or Hitler’s in site. Fortunately, the systematic and necessarily gigantic public investments to take on the worlds environmental crisis offers a more civilized equivalent to World War 2,which made it possible to overcome the heritage of the last Great Depression.

The funny thing about it is that in the short and medium run the crucial problem of the environment cannot be tackled by the profit seeking market any more than the development of nuclear energy or the conquest of space could be, but that does not mean private industry cannot be mobilized for it, and at the same time make money out of it as did industry in World War 2, but growth must be controlled, but how can confidence return to a shattered system?

Governments are faced with several questions to which the past provides no answers, or may force governments to reshape their entire “control”. The investment editor of London’s Financial Times put it, “how confidence can return to markets or the banking system without a period when governments exert control more explicitly than they do now”, up to and including “the hated n-word”, nationalization which is taboo in the US and UK……….kind of a classic catch 22 situation for the neo liberal world.

The current global recession will be a more defining event than any other business cycle since the 1930s, and there is no reason for concern about a crisis of confidence in the dollar, it will come, and it will be a good thing, as currency values equilibrate trade and the US dollar must fall back to a level that is consistent with a sustainable trade deficit.

The flight to dollars was led by the financial crisis, a flight which has reversed much of the decline in the dollar that occurred over the preceding 6 years, but at some point the financial situation will stabilize, and the US dollar will resume its decline, which is a necessary step to restoring financial stability, and when that happens the US will not be able to afford its military expenditure to the same current levels.

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