It used to be said that central banks were the most profitable businesses on earth. They chop down a $1000 tree, pulp it into paper, cut the paper into strips, print on them, and call it a billion dollars.

There’s money in them thar trees

In America this is now happening on a grand scale at the Fed — electronically, at least. The practice will be coming to Britain before you know it. The Old Lady of Threadneedle Street is already gathering up her skirts and sizing up her lumberjack outfit.

Even the austere Trichet of the ECB has been caught lasciviously eyeing up the axe. The Black Forest may not have long to live.

Gordon Brown, who famously once shared a bed with a lady called Prudence, will soon adopt policies widely recommended by Robert Mugabe of Zimbabwe.

The world has succumbed to the Zen-like contradictions of Wonderland. Alice has finally gone through the looking glass.

Almost anything could happen … and probably will.

John Evans

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Update: The U.S. House of Representatives has rejected the Treasury’s $700 billion rescue package. The Dow is down 770 points as I write.

Around a year ago Syntagma was among the first to use the word “Depression” in relation to the trajectory of Western economies.

Today, Monday 29 September, the word is on everyone’s lips.

Despite the rescue package now going through Congress, U.S. Treasury officials are in wild panic mode as truth finally dawns: there is nothing they can do to halt the steep declines in credit issuance that will deliver the most virulent bout of debt-deflation the world has known since the 1930s’ Great Depression.

We are hearing that officials close to Henry Paulson are privately painting a much bleaker picture of the fragility of the global economy than that of President Bush last week.

A Republican is quoted as saying that the message from government officials is that “the economy is dropping into the john. We could see falls of 3,000 or 4,000 points on the Dow. That could happen in just a couple of days.

“What’s being put around behind the scenes is that we’re looking at 1930s stuff. We’re looking at catastrophe, huge, amazing catastrophe. Everybody is extraordinarily scared. It’s going to be really, really nasty.”

A spokesman for BNP Paribas said, “Money markets are imploding. If no action is taken very soon, there is a significant risk that the global economy will collapse.”

But what action can be taken now? Imagine a palatial building across many acres eaten through by hordes of termites. Builders rush in to replace a pillar or two hoping to stabilize the structure. But architects shake their heads knowing that nothing can save the rotten edifice from collapse.

The U.S. Federal Reserve fears an “adverse feedback loop” with terrifying consequences. The “liquidation” of failed banks policy that led to the Great Depression is alive and well and raising its head in the Republican party. That may give them a short-term bounce among very angry voters, but the result could be catastrophic.

John McCain, who seemed to be coasting to victory just a few weeks ago appears to be undermined by his own side. His chances of the White House get slimmer by the day.

Central banks in Britain and Europe are maintaining their high-interest rate policy, despite the need to loosen up credit. Libor — the rate at which banks lend to each other — rose again this morning, regardless of the $700 billion U.S. package. They need to cut and cut again despite their genteel anxiety over “moral hazard”.

We are witnessing a slow-motion shipwreck, caused partly by panic, by different officials working to rigid, uncoordinated targets, and by the lack of anyone competent enough to take overall charge and impose a coherent escape route on the entire system.

The politicians have imploded, the bankers have failed, and the markets are reflecting that turmoil in the only way they know how.

How very fragile are the pillars of our civilization.

John Evans

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Gold rushes come and go in the world’s innovation capital, California, but when they go … they really go.

We’re hearing that the City of Vallejo has filed for Chapter 9 bankruptcy, apparently a first for a municipality. Half Moon Bay, home to a few internet big shots, may well be next. According to John Moorlach, Orange County board chief, “This is the tip of the iceberg: everybody is going to line up for Chapter 9 in California.”

What can it mean to people on the ground when their city goes belly up? What of their assets, houses etcetera? It will be interesting to watch this pan out.

According to Goldman Sachs and Lehman Brothers American house prices are likely to fall 25pc from peak to trough. With between 10m and 12m households in negative equity already, there’s still a way to go.

Shares across the developed world are set for big falls too. Albert Edward Société Générale’s global strategist says, “Nowhere and nothing will be immune. We are on the cusp of an equity meltdown that will slash and shred portfolios. We see a global recession unfolding. Liquidity will drain away and crush the twin emerging market and commodity bubbles. The recent hope that ‘the worst might be over’ is truly staggering. Profits are disintegrating.”

Ambrose Evans Pritchard of the Telegraph (UK) — ever the Cassandra — says pointedly, “Britain, Europe, Japan, and China will go down before America comes back up. This is turning into a synchronised bust, after all. The Global Slump of 2008-09 is under way.”

The Bank of England and the European Central Bank are still stubbornly refusing to cut rates because of inflation fears, which will be the least of our miseries in the next two years and should abate soon as global demand falls off the much-imagined cliff.

It’s probably true that Ben Bernanke’s Federal Reserve has saved the U.S. and other countries from another Great Depression. But nothing can stop a slump now because it’s already happening.

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?