The European Central Bank (ECB) remains obdurate about cutting its 4pc interest rate despite the Fed going to the brink of its powers in Washington.

U.S. rates are expected to be cut by a whopping 1pc to 2pc today giving America an effective zero interest rate when inflation is taken into account.

The flight from the dollar will only get worse, especially with the ECB giving a two-fingered salute to the American authorities. It’s said that the eurozone (which does not include Britain) is in no mood to help the Americans — a situation similar to 1987, when the Bundesbank let the dollar slip into freefall, spooking the markets into a catastrophic drop.

Let’s not beat about the bush, Europe is engaging in a financial war with the U.S. As long as the ECB refuses to join in the rescue package, the dollar will fall spreading even more gloom around the markets. Some very senior commentators in the UK are now discussing the potential for a collapse of the entire banking system in the West and elsewhere.

Jean-Michel Six, Chief Europe Economist at Standard and Poor’s says, “There is a monetary war going on. The ECB view is that the Fed is a victim of its own mistakes and should pay for its past crimes. Frankly, they don’t see why they should be cutting rates when inflation is accelerating.”

British inflation measured on the CPI index, which doesn’t include mortgage costs, has risen to 2.5pc this morning. However, core inflation is down to 1.2pc, indicating that, apart from headline price rises in food and energy, deflationary pressures may be the real enemy in the months ahead.

Bernard Connolly of AIG thinks the ECB is making the same mistakes that led to the Great Depression in the 1930s. “The ECB represents the 1930s element in world central banking right now. It is adding to the atmosphere of panic in the foreign exchange markets and ensuring the collapse of the credit bubble in southern Europe and Ireland will be even worse.”

How long before cries of “Cheese-eating surrender monkeys,” are heard once again?

A man turns up at a small hotel for a night’s stay. He speaks urgently to the landlady and says he’s allergic to apples. “Please don’t serve me apples,” he asks.

“I promise you’ll get no apples here,” she replies.

That evening the man is tucking into dessert which is described as fruit pie. To his horror he suddenly feels very ill.

“You promised me no apples,” he cries out to the landlady.

“It’s not apples,” she says, as his head doubles in size, his lips turn blue and he goes into acute anaphylactic shock. “It’s apple pie.”

Now consider the ongoing saga of the European Constitution — newly renamed an “Amending Treaty” despite being 98 percent the same as the constitution. British Prime Minister, Gordon Brown, made a manifesto promise that the British people would get a referendum on it. He has reneged on that promise because he knows he would lose by a very big margin.

The promise referred to a constitution, he says, and the treaty is no longer a constitution.

The original document has been shuffled around a bit, as you would a deck of cards, some cosmetic stuff has been removed, and the name changed.

It’s not a constitution, claims Brown. Sure, it’s constitution pie.

Banks are rarely in the news as much as they are now. There are yet more writedowns from the giants of banking in their end of year reports.

Will that be the end of it? Probably not, but at least a fightback is underway by the bulls, while the bears seem to be temporarily in retreat.

With Ben Bernanke last week promising to cut rates with a scythe instead of the usual nail scissors, America will avoid a real slump and the world will move on.

Anatole Kaletsky in his Economic View column in the Times (London) thinks the U.S. may well avoid a serious recession (two quarters of negative growth) and prognosticates as follows for Britain and Europe :

By the second half of 2008, however, the euro will take over from the pound as the pariah of the global currency markets, since the eurozone will ultimately suffer more than Britain from the slowdown in the global economy because the European Central Bank will resist making the inevitable interest-rate cuts. This intransigence by the ECB will cause serious economic and political disruptions in Europe – and could even raise questions about the euro’s survival as a reserve currency in the long term.

The landscape will be changed though. The behaviour of the banks in recent years has been beyond any pale we might wish to contemplate in a nightmare, but then that’s not exactly new. Who said this, for example? :

“I sincerely believe that banking establishments are more dangerous than standing armies, and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a grand scale.”

That was Thomas Jefferson in 1816.

Plus ca change …

Update : Citigroup has just posted a near $20billion writeoff for Q4 2007. These are spectacular numbers which highlight the immense financial transfer from the West to the Far East that’s now underway thanks to the greed and stupidity of our bankers.

It’s Boxing Day here in England, a day traditionally reserved for giving presents (Christmas boxes) to the extended family and friends. I was going to take a rest from posting on Syntagma and other sites until January 2, but something is jangling away at me : the upcoming downturn/recession/depression/crash, depending on which view you take. The nasty end of that spectrum is now a real and menacing possibility.

The optimistic view says that Sovereign Wealth Funds — vast reserves of cash held by Gulf oil sheiks and “new economy” developing countries like China — will save world stock markets from collapse. Indeed such funds are buying up wagonloads of equity in some of the biggest Western corporations, Citicorp and Merrill Lynch, for example, and great chunks of Britain’s FTSE 100 companies.

Quite how allowing our biggest companies to be owned and run by a small group of Oriental potentates will look in 10 years time is anyone’s guess. I doubt we will think it such a smart move.

The pessimistic view — which I confess I’m now leaning strongly toward, despite my normally sunny nature — comes from the banks. Never mind the stock markets, look at how the bankers are reacting on the ground.

All banks are now hoarding cash like Ebeneezer Scrooge and virtually ceasing to lend. With house price indices slithering down a slope like novice ice skaters, and inter-bank rates running at around 8 percent, this has become a total banking crisis worldwide, and that has the potential for real evil in our economies.

Japan’s decade-long woes in the 1990s were caused by crises in its overprotected banking system, as were the Far-Eastern “Tiger” economies that collapsed at around the same time.

So how are we all reacting to this worldwide financial mess, now a “perfect storm” according to another banking pundit? Are we hoarding cash like the banks, or are we spend, spend, spending in the post-Christmas sales?

The real crunch comes if we all stop spending, as the Japanese did in 1990. Our economies will then spiral out of control as the High Street suffers and all kinds of businesses lay off staff in droves. Do we protect ourselves first by reining in, or do we support the wider economy? Since there will be little money to spend, the economy will suffer whatever anyone does. It’s a no-win situation from whatever angle you view it.

In retrospect it’s now clear that Alan Greenspan left rates too low for too long and spawned the mad rush to lend to the sub-prime market (Ninja mortgages : no income, no job, no assets). But on top of that, it is also now normal to be permanently in debt and to service it by moving it continuously between lenders engaged in a bitter battle for market share and a bigger slice of the easy action. These lenders are no longer willing to cough up, even if they were in a position to do so.

In Britain, the situation is getting dire. From the UK’s Telegraph : “Tim Congdon, a banking historian at the London School of Economics, said the rot had seeped through the foundations of British lending. … ‘How on earth did the Financial Services Authority let this happen?’ he asks. Worse, changes pushed through by Gordon Brown in 1998 have caused the de facto cash and liquid assets ratio to collapse from post-war levels above 30 per cent to near zero. ‘Brown hadn’t got a clue what he was doing,’ he says.”

And European treaties, like Maastricht, will make matters worse not better, says Ambrose Evans-Pritchard : “Maastricht rules may force the Government to raise taxes or slash spending into a recession. This way lies crucifixion. … Brown has disarmed us on every front.”

Crucifixion is a powerful word, especially at this time of year. “Brown has disarmed us on every front” is a damning indictment of the UK’s new Prime Minister, more particularly because he has just signed us up to another Euro treaty.

I wish Syntagma could bring you a better box on Boxing Day, but I fear it may be much worse than even the news we’re now getting suggests.

Maybe I should have continued with my holiday. See you on January 2.