A week is a long time in politics. Two weeks seems even longer in economics. The last 15 days have undone what it took three years to repair and rebuild. What has happened since the Euro Summit on July 21 has been breathtaking. Market psychology has changed from strained borderline optimism to manic depression. That seems to be true of all markets: banking, securities, insurance, commodities and derivatives. All are emitting red signals flashing ominously. If one likes to mix metaphors, the world is now either firmly wedged between a rock and a hard place with no exit; or it is on the edge of a precipice from which it is about to take a step forward, i.e., fall off the cliff!

Core economic data on manufacturing and supply indices from every country suggest that the global economy and, by implication, global financial markets are in trouble. Why so when two seemingly intractable problems have been tackled and imminent disaster averted? The explanation may be that the market?s attention was diverted for months by the theatre of the absurd?the inexplicably outrageous behaviour (and failure) of political leaders and parties in the EU and US. It has now been jolted into looking at the underlying reality. Also, the twin debt crises of the Eurozone and the US have only been resolved temporarily. Large bandages have been used instead of sticking plaster when deep surgery, which is necessary, remains off the table. The full dimensions of the much deeper structural faults that the debt crises in the EU and US reflect (and we have not even begun to focus on the even larger debt crisis in Japan) have not yet been recognised by politicians in any of these three supposedly ?developed? economic spaces.

On July 21, Europe?s leaders decided not to self-destruct by repeating their two-year long series of incredibly unwise and counterproductive actions on debt crisis management in Greece and the EU?s periphery. That averted the immediate disruption of European financial markets. Paradoxically, though, it has triggered even deeper market concerns about the debt sustainability of large ?core? countries such as Italy and Spain. On July 31, the US Congress did the same. It stepped back from risking the US defaulting on its liabilities.

That prevented yet another potential nervous breakdown in global financial markets, where external creditors hold $6-7 trillion in US treasury obligations. But it has focused attention on: (a) the intractability of the longer-term US debt problem and (b) the reality that what was the cornerstone of the risk-free asset and currency underpinning the foundations of the global financial system?the USD and the USTs?are no longer what they seemed to be. Indeed, USTs now deserve no more than a AA rating if the logic and methodology of the rating agencies is to be applied dispassionately; and the USD no longer deserves to be a serious reserve currency.

Both events should have made markets breathe a sigh of relief on August 1, if not trigger jubilation. Yet, the opposite occurred. The second Greek bailout and aversion of US default were seen as game-changers. Markets were oblivious to what was happening beneath the surface. On August 1, the US debt deal was passed by Congress with a significant majority. It reconciled irreconcilable differences between the lunatic right (the Tea Party) and dogmatic left (diehard Democrats) wings in US politics. Relieved that a contrived crisis had been dealt with, global markets shot up?but only for a couple of hours. They collapsed as PMI/ISM data was released around the world.

What that data showed was the world economy slowing at a sufficiently rapid rate to arrive at ?stall speed? and tip over into zero or negative growth. All kinds of excuses were made (supply chain shocks from the Japanese tsunami, the royal wedding in the UK, unseasonable weather, monetary tightening in emerging markets, etc) to explain marked declines in global consumption. That, of course, translated into a fall in global production as the PMI data showed. Reality suggests that the excuses offered did not explain very much.

The real explanation may be this: fiscal and monetary stimulus in the EU and US kept the world economy barely afloat in 2009-10. That was done by: (a) EU and US governments spending money that, being excessively indebted, they did not have, and which their electorates, hit by falls in real incomes and jobs, were incapable of providing through additional taxation; and (b) their central banks printing money (via quantitative easing) to ensure sufficient liquidity?most of which flowed to emerging markets, causing rampant exchange rate ructions and inflation in them, instead of stimulating home economies to any significant degree.

In mid-2011, the world economy has reached a point where fiscal stimulus on the part of the EU, US and Japan is no longer possible. Firstly, all three developed regions are over-indebted. Continuing to run unsustainable deficits to stimulate their economies is now infeasible. It is difficult to see who (other than their own central banks) would be willing to finance the extra debt that would be incurred as a result of fiscal stimulus when their debt-GDP and debt servicing ratios are already unsustainable. Secondly, if the EU, US and Japan?s central banks printed money to buy government debt under such conditions, that would further fuel global inflation; which has already reached worrying levels. Stimulus through more quantitative easing will also fuel more inflation?mainly in emerging markets, where the excess liquidity will surely flow as the likelihood of it being invested.

In short, the world (especially the EU, US and Japan) has run out of ideas, strategies and tactics as well as ammunition to boost global consumption and output through artificial stimulus. There are no bullets left?silver, magic or otherwise. The sad reality is that nearly three years of stimulus have not restored the world to the kind of financial health and balance that it needs to grow ?naturally? again at a decent pace without artificial support that is now out of the question anyway.

What current reality suggests is that a neo-Keynesian strategy of avoiding recession?and thus delaying the necessary structural adjustments that recessions inevitably force by imposition because they are rarely made voluntarily?has reached the end of the road.

The world may now have no alternative but to permit inevitable and desirable structural adjustments?especially in the balance sheets of households, corporates and governments?to occur without further delay so that genuine sustainable recovery can commence without artificial props. The problem with that, however, is that it will imply: (1) a long period (perhaps this whole decade) of stagnation in the developed world which will (2) impair the continuation of rapid growth in emerging markets. More will be said about each in future columns. But the world economy as a whole will be sliding sideways for the foreseeable future?which is what the massive market corrections of the last two weeks seem to be signalling.

The author is chairman, Oxford International Associates Ltd