The American economy is now in recession. A slew of new data clearly reveals both a marked downturn in activity, combined with a rise in inflation — something not seen since the stubborn “stagflation” period of the 1970s.

Some economists expect a robust return to growth later in the year off the backs of aggressive rate cuts by the Fed, and a financial package from the President that will see cheques delivered to taxpayers — and others on low incomes — by June.

That may not be enough, especially as it’s now emerging that the Iraq war is the principal cause of worldwide recessionary trends from two directions : the rise in the price of oil, and the low interest rates that led to reckless lending to the sub-prime market.

A new book by Nobel prizewinning economist Joseph Stiglitz powerfully demonstrates these effects. The Three Trillion Dollar War — The True Cost Of The Iraq Conflict outlines the immense downside across the globe of what must now be deemed a policy catastrophe.

In terms of the current credit crunch, which arose out of the sub-prime mortgage fiasco, many — including Syntagma — had blamed Alan Greenspan, then Chairman of the U.S. Federal Reserve Bank, for keeping rates too low for too long. Combined with steeply rising house prices this gave the banks a one-way bet for lending to the trailer-park poor.

However, it’s becoming clear that the low-rate regime was engineered to mask the terrifying cost to the American economy of the wars in the Middle East.

We can now begin to assess the extent of the disaster to American interests the war is continuing to inflict. The conflicts have led to a strengthening of Gulf, Chinese and other sovereign wealth funds, which have bought up large chunks of prime U.S. assets, including blue-chip bank stock, while, in some cases, simultaneously enjoying a bonanza from higher and higher oil prices.

In ten years, bank stocks should prove exceptionally rich investments as they recover from current adverse credit conditions. The war has given secretive foreign funds a one-way bet.

It’s hard to estimate the effect all this will have on American power and influence around the world. A war that was meant to eliminate Al Qaeda and secure the world’s oil supplies, has had precisely the opposite effect.

Joseph Stiglitz works out the numbers and they make depressing reading.

The news that stagflation is reappearing on the scene is another blow for the West’s economic stability. Stiglitz’s book is required reading for all who want to understand the future of the global economy over the next two decades and the causes of the misery to come.

This is going to be a long haul.

Before you switch off, I don’t mean climate change. That’s a doddle since we have little control over it, despite what the doomsters think. Nor am I writing about nuclear war, surely a distant memory now.

I mean the alarming slide into a 1930s style worldwide Depression.

I’ve written a few times in Syntagma about the constraints of running a business in England, where the pound sterling is the currency, while our income is designated and paid in US dollars. Now one of the world’s major companies, Airbus — which is partly owned by the French state — has announced that its business model is shot through and broken.

Their problem is that the dollar has fallen even more against the euro than the pound. A euro is now worth $1.50. A few years ago there was jubilation when the euro achieved parity with the dollar. Eat your hearts out Eurocrats!

Airbus sells more airliners around the world than Boeing, but since aircraft prices are designated in dollars, they get paid one third less than Boeing compared with the period of parity. In a tight-margin international business that’s fatal. Many other European companies are feeling the pinch too — business confidence has all but collapsed in Germany, and the French are going through one of their periodic episodes of industrial unrest, with workers marching in the streets against Government diktat.

The driving mechanism behind all this is the massive US trade deficit. The Treasury is content to see a steady drop in the dollar as a correction to this deficit. Other countries see it as “beggar my neighbor”.

But more ominous forces are gathering now which will really put pressure on the world’s financial system. The new economies of China, Brazil and India are starting to move their large trade surpluses out of dollar assets into euro assets. The same is happening with the petrodollar states in the Gulf. Apart from setting up a future Wall Street crash, it’s also putting great strains on the eurozone, which is a ragbag club of nations speaking different languages and with very different economies.

The strain is such that Nicolas Sarkozy, President of France, is talking about limiting capital flows into the eurozone. The EU Commission has said this is possible because of a little known clause in an annexe to a policy document dating back to 2003. Europe always reverts to political will over the rule of law.

Since this decision could be taken by majority voting of finance ministers, Britain could be outvoted here. The result of a cap on capital inflows would be devastating to London, which is the world’s leading financial centre. In such circumstances Britain would have no choice but to withdraw from the European Union.

Stateside, the sub-prime mortgage fiasco is feeding into the wider situation and genuine fears of a 1929 crash and 1930s type depression are rife among those who know about these things.

Will it happen? Luckily for Americans, “cometh the hour, cometh the man”. Ben Bernanke, Chairman of the Federal Reserve, has spent his life studying the causes of the 1930s Depression, so is unlikely to allow the same mistakes to be made. He can also call on the advice of wily old Alan Greenspan, now retired, whose new book, The Age of Turbulence should be required reading for anyone interested in the global economy in the 21st century.

Syntagma’s guess is that Western economies are resilient and flexible enough to withstand the shocks that are coming without withering on the vine. The joker in the pack, though, is the eurozone, which lacks the strength of the Common Law countries in dealing with the rest of the world. There’s even wild talk in Brussels about a Fortress Europe, with the euro countries only trading with themselves behind massive tariff walls. Sound familiar? It’s Politburo time again in the Chancelleries of Europe.

I believe the euro currency will collapse within five years. Britain will withdraw from the EU to preserve its international trading position, and America will take a severe knock but will recover strongly to regain its former position.

As for the emerging “superpowers”, they face a collapse in their export trade from which they will struggle to recover — think Japan in the 1990s and the meltdown of the Tiger economies of the Far East.

There’s a lot of water to flow under this bridge yet. It’s a greater immediate threat than climate change, so let’s ease back on all the noise about carbon footprints, offsets and trading.

There’s Armageddon to deal with first.