The world risks sliding into a 1930s-style slump unless countries settle their differences and work together to tackle Europe’s deepening debt crisis, the head of the International Monetary Fund has warned.

On a day that saw an escalation in the tit-for-tat trade battle between China and the United States and a deepening of the diplomatic rift between Britain and France, Christine Lagarde issued her strongest warning yet about the health of the global economy and said if the international community failed to co-operate the risk was of “retraction, rising protectionism, isolation”.

She added: “This is exactly the description of what happened in the 1930s, and what followed is not something we are looking forward to.”

The IMF managing director’s call came amid growing concern that 2012 will see Europe slide into a double-dip recession, with knock-on effects for the rest of the global economy. “The world economic outlook at the moment is not particularly rosy. It is quite gloomy,” she said.

Since arriving in Washington in the summer, Lagarde has been forced to cut her organisation’s forecasts for global growth next year and is now putting pressure on countries outside the eurozone – including Britain – to play their part in containing Europe’s sovereign debt crisis.

An IMF plan, agreed at the Brussels summit last week, involves obtaining €200bn (£168bn) from European countries and then asking the rest of the world to contribute. Beijing has so far proved reluctant to join in a rescue of the eurozone and has said it is up to Europe to sort out its own problems.

Speaking at the State Department in Washington, Lagarde said: “There is no economy in the world, whether low-income countries, emerging markets, middle-income countries or super-advanced economies, that will be immune to the crisis that we see not only unfolding but escalating.

“It is not a crisis that will be resolved by one group of countries taking action. It is going to be hopefully resolved by all countries, all regions, all categories of countries actually taking some action.”

Lagarde said that the scale of the eurozone crisis, and its implications for other countries, meant that Europe’s governments could not tackle it alone. “It is going to require efforts, it is going to require adjustment; and clearly it is going to have to start from the core of the crisis at the moment, which is obviously the European countries, and in particular the countries of the eurozone,” Lagarde said.

Fear is spreading through the financial markets as investors pull their money out of the crisis-stricken euro-zone countries. With Chancellor Angela Merkel opposed to using the ECB’s firepower to solve the crisis, the monetary union appears increasingly in danger of breaking apart. Some economists are even arguing for Germany to reintroduce the deutsche mark.

Euro bonds? French President Nicolas Sarkozy apparently isn’t familiar with the term. He talks and talks, but he never mentions euro bonds. And then it’s Italian Prime Minister Mario Monti’s turn. Euro bonds? Never heard of them. Or at least he says nothing about them in his speech. The next speaker is German Chancellor Angela Merkel, who wouldn’t dream of mentioning euro bonds.

It is last Thursday, and the three European leaders have just had lunch together in Strasbourg and are giving a press conference on the subject of the euro. It must have been an amazing lunch, full of unity, harmony and understanding.

Or at least that’s the way they describe it. And when something is that pleasant, it makes complete sense not to talk about euro bonds, even though they are now the central issue in the debate over the euro crisis. Merkel is opposed to the idea and Sarkozy and Monti are in favor, but they don’t want to say as much.

Of course, there is, as always, a journalist around who is leery of the harmonious mood, which is why he asks about the bonds that everyone knows about but isn’t mentioning. Merkel says that she hasn’t changed her opinion on the issue, but without actually uttering the distasteful words. Sarkozy mentions the Rhine River, tells a joke about a hypochondriac, talks and talks and finally says that he and his counterparts will certainly come to an agreement. But he doesn’t mention euro bonds by name.

And then it’s Monti’s turn again, and what does he do? He does use the word euro bonds, but then he quickly switches to a new, more attractive synonym, noting that he would not be overly opposed to “stability bonds.” His words reveal that there is indeed a serious conflict within the euro zone.

Hopelessly Divided

Nothing works in Europe without Merkel. And the German chancellor isn’t just opposed to euro bonds. She also refuses to accept a move by the European Central Bank (ECB), backed by the French in particular, to buy up the bonds of ailing euro-zone countries on a much larger scale than it has done to date, in order to bring down the yields on those bonds. But that was not an official topic in Strasbourg, where Sarkozy assured his fellow leaders that France respected the independence of the ECB.

The staged harmonious mood stands in sharp contrast with reality. In the middle of its biggest crisis, Europe is hopelessly divided. One summit follows the next, and they all end with conciliatory statements and avowals, but not with any shared plan for how to save the euro.

The situation could hardly be any more dramatic. The European monetary union threatens to implode unless something happens soon. The ambitious project that was supposed to permanently unify the continent will have failed, with dramatic consequences for Europe and the rest of the world. Countries would go bankrupt, banks would have to be rescued once again, and the economy would sink into a recession that would last for years.

The moment of truth is approaching, now that the end game for the euro has begun. But what will happen now? In the coming weeks, but particularly in the first quarter of 2012, the ailing European countries will have to raise massive amounts of money. In Italy alone, more than €110 billion ($145 billion) in old debt is set to expire, which will have to be refinanced (see graphic). But who is going to give these countries fresh capital at the moment?

Losing Confidence

Investors have lost confidence in the euro-zone countries and in their ability to rescue the common currency. Not even the recent changes of government in Italy, Greece and Spain have been enough to persuade them otherwise.

There is a growing sense of fear, both in the financial markets and in government offices. Even serious bankers who exude confidence in public admit privately that the monetary union could soon fall apart.

The previous bailout attempts have been worthless, they say, noting that Europe must finally reach for the only weapon whose firepower is endless, the European Central Bank. The ECB must finance the debtor nations, even if its own constitution bars it from doing so. The central bank has enough money, and it can also print money if necessary.

Most European leaders share this realization by now — all except Merkel. She remains resistant, concerned about the central bank’s independence and monetary stability. She is also staunchly opposed to all attempts to pool the debts of euro nations through jointly issued debt known as euro bonds.

The German chancellor is increasingly isolated. At home, she must defend any concessions to save the euro against her coalition partners, the business-friendly Free Democratic Party and the conservative Christian Social Union (the Bavarian sister party to Merkel’s Christian Democratic Union). She must convince members of parliament from her own party and abide by the rules set by Germany’s Constitutional Court in its far-reaching decisions on the euro crisis. The FDP is creating alarm by polling its members on the party’s position on the crisis. In other countries, Merkel is seen as a stubborn defender of German interests who hasn’t recognized how serious the situation is — and is therefore jeopardizing the entire monetary union.

Jacques Attali, who used to be an adviser to former French President François Mitterrand, paints the concerns of partner countries in a particularly drastic light. After the two world wars, says Attali, it is “now Germany, once again, that holds the weapons for the entire continent’s suicide in its hands.” If Germany doesn’t change its position, says Attali, “there will be a catastrophe.”

Europe’s Failed Attempts to Save the Euro

From the foreign perspective, the situation is clear: Rescuing the euro depends on Germany, which merely has to abandon its resistance to pooling debt. But this sort of “liability union” would not only contradict the so-called no-bailout clause of the European treaties, under which no euro-zone country can be held liable for the debts of another, but it would also be particularly dangerous for the Germans. As Europe’s largest economy, Germany would shoulder the biggest burden and, in the end, could even be plunged into ruin with the rest of the euro zone.

Merkel is also concerned that the debt-stricken nations would immediately revert to their old bad habits if they felt that their rescue was certain. For this reason, the Germans only want to approve aid in return for strict conditions.

The chancellor has behaved very cautiously from the start. She has made an incrementalist approach the cornerstone of her crisis management, and has always insisted there would be no bold stroke that would slice through the Gordian knot. She wants to think about solutions in terms of an end result. But what if this end result remains so nebulous that tiny steps are in fact the only alternative?

As a result, the efforts to manage the crisis have hobbled along from one summit meeting to the next, without any evidence of lasting success. International investors have set their sights on more and more ailing countries, which in turn have been forced to pay higher rates on their sovereign bonds.

Timid Steps

The instruments and programs with which Merkel and her counterparts have sought to control the crisis have proved to be too timid. Because the first bailout package for Greece was inadequate, it was followed by a second one. The European bailout fund was also enlarged. But because the fund still isn’t fully functional, the ECB is constantly intervening in the bond markets, buying up Italian and Spanish sovereign debt to stabilize yields.

But the chronic stopgap measures have failed to reestablish confidence in the monetary union. There have also been glaring inadequacies in crisis management, as a result of infighting over competencies as well as jealousies between the European Commission and national governments, the ECB and the politicians, and among the central banks of individual countries.

There is also no love lost among the senior-most representatives of the European Union and the euro zone. European Commission President José Manuel Barroso envies European Council President Herman Van Rompuy for his prominent position, while Van Rompuy in turn challenges Euro Group President Jean-Claude Juncker’s authority. All of this infighting leads to strife, ambiguities and a cacophony of voices.

Barroso’s hapless actions are a case in point. Less than two weeks after the crisis summit in late July, he settled his scores with the European heads of state and government, saying that their resolutions were not far-reaching enough, and that their implementation was deficient. The intervention did not exactly build confidence in Europe’s ability to get its act together, and the risk premiums on some European government bonds rose significantly as a result.

Too Small

Even worse than the disharmony is the fact that the euro zone’s backstop fund, the European Financial Stability Facility (EFSF), is not functioning correctly. It was originally set up for crisis-ridden peripheral euro-zone members, but it was soon clear that it was too small even for that. The member states had to add additional guarantees so that the EFSF’s effective lending capacity could actually reach €440 billion as originally planned.

But even that amount was quickly stretched to its limits. The markets were not in the least bit impressed by the Europeans’ commitment. A few weeks ago they targeted two countries, Italy and Spain, which would overburden the EFSF if they had to be bailed out.//

In the future, the EFSF’s remaining funds of €250 billion are to be leveraged, or increased, to between four and five times their current value, using complex financial constructs involving the participation of private investors. The reasoning is that this could also protect countries like Italy or Spain, in the event that they are faced with liquidity problems due to turbulence in the euro zone. If necessary, the funds could also be used to prevent banks from collapsing.

But the euro rescuers did not take investors into account when they were doing their calculations. During his recent promotional tour of state-owned funds in China and investors in Japan, EFSF chief executive Klaus Regling, who had hoped to persuade Asian investors to put their money into the bailout fund, encountered noticeable reticence. The managers of the large investment funds apparently no longer trust the Europeans to get their problems under control.

To make the new instruments more attractive, the EFSF itself must become more heavily involved than planned. This would reduce the necessary leverage considerably. At a meeting of euro- zone finance ministers this week, Regling intends to present solutions that amount to only a doubling or, at most, a tripling of the EFSF funds. . . . . . .

read the full article here.

Revelation 15:11-19″

“And the merchants of the earth will weep and mourn over her, for no one buys their merchandise anymore:  merchandise of gold and silver, precious stones and pearls, fine linen and purple, silk and scarlet, every kind of citron wood, every kind of object of ivory, every kind of object of most precious wood, bronze, iron, and marble;  and cinnamon and incense, fragrant oil and frankincense, wine and oil, fine flour and wheat, cattle and sheep, horses and chariots, and bodies and souls of men. 

The fruit that your soul longed for has gone from you, and all the things which are rich and splendid have gone from you,and you shall find them no more at all.  The merchants of these things, who became rich by her, will stand at a distance for fear of her torment, weeping and wailing,  and saying, ‘Alas, alas, that great city that was clothed in fine linen, purple, and scarlet, and adorned with gold and precious stones and pearls!  For in one hour such great riches came to nothing.’ Every shipmaster, all who travel by ship, sailors, and as many as trade on the sea, stood at a distance  and cried out when they saw the smoke of her burning, saying, ‘What is like this great city?’    

“They threw dust on their heads and cried out, weeping and wailing, and saying, ‘Alas, alas, that great city, in which all who had ships on the sea became rich by her wealth! For in one hour she is made desolate.’ 

from the Globe and Mail:

What should U.S. Federal Reserve chairman Ben Bernanke do next? London-based economist Detlev Schlichter says, succinctly: “Abdicate.” What should U.S. President Barack Obama do next? Mr. Schlichter says, succinctly: “Abdicate.” With Mr. Schlichter, you aren’t left with much doubt about his position. He says the world’s major currencies are destined to crash. “The dollar, the euro and the yen are locked in a race to the bottom,” he writes on his website, papermoneycollapse.com. The only question is which one crashes first.

Mr. Schlichter argues that we are only part of the way through the market meltdown – and that the worst is still to come. How much worse? Considerably worse, he says, than the Great Depression.

U.S. industrial production is 12 times higher now than it was in 1929, he says; but the amount of U.S. dollars in circulation is 200 times higher.

The U.S. net debt was 150 per cent of GDP in 1973, when then-president Richard Nixon took the country off the gold standard; yet its net debt reached a record high in 2010: 370 per cent. The United States will fall further, Mr. Schlichter insists, because it has further to fall.

Mr. Schlichter is the German-born, British-based author of a provocative and disturbing new book, Paper Money Collapse: The Folly of Elastic Money and the Coming Monetary Breakdown. An investment manager with JPMorgan, Merrill Lynch and Western Asset Management for 20 years, he quit to write his stern warning of an impending dollar doom.

From his own melancholy perspective, he thinks the crisis will come a little later on – because, he says, the central banks still imagine that they can keep the printing presses running indefinitely. The longer the presses run, Mr. Schlichter says, the more calamitous the crash. And Mr. Bernanke has hardly begun.

Mr. Schlichter recalls Mr. Bernanke’s famous assertion in 2002 that, with the world’s largest printing press, the Federal Reserve can produce “as many dollars as it wishes at essentially no cost.”Mr. Schlichter says: “Within the logic of the present system, the next step [by central banks] must involve the use of the printing press to fund further state expenditures, to fund corporate spending and, ultimately, to fund consumer spending.” In other words, the central banks won’t stop printing money until they’ve quantitatively eased people’s car loans and people’s credit cards.

Mr. Schlichter’s analysis rests on an Austrian-school interpretation of things. (“There is no means of avoiding the final collapse of a boom brought about by credit expansion,” Ludwig von Mises wrote in 1949 in Human Action. “The alternative is only whether the crisis should come sooner … or later as a final and total catastrophe of the currency system involved.”) The essential premise of the Austrians is that paper dollars get depreciated, sooner or later, “to a dime a dozen.”

Paper Money Collapse traces the history of paper currencies that weren’t at least partly guaranteed by a fixed-quantity commodity (which, for all practical purposes, means silver or gold). The Chinese invented paper and ink in the year 1000, Mr. Schlichter notes – discoveries that led quickly to paper money. He tracks China’s paper money through a number of dynasties. His conclusion: All of these experiments ended with worthless currencies. The Chinese abandoned paper money in 1500 (returning to it, under Western influence, in the 1800s).

Paper currency, he says, hasn’t fared any better in the West. He defines hyperinflation as a monthly rise in consumer prices of 50 per cent or more; the 20th century, he says, witnessed 29 such hyperinflations involving “elastic money.” Mr. Schlichter thinks that the collapse of U.S., European and Japanese currencies will be the worst in history. It will be a collapse “of epic proportions.”

Mr. Schlichter does not recommend an investment strategy for “the coming monetary breakdown.” And gold, he insists, should not be regarded as an investment. Gold, rather, is simply money, a medium of exchange – and the most successful form of it in history. But the cash in your pocket doesn’t pay interest or dividends and the gold in your pocket doesn’t, either.

“A collapse of paper money will be a momentous event,” he writes. “It will produce a transfer of wealth of historic proportions.” But it does not mean the end of civilization. All wealth is not illusion. And real wealth will survive.

The Vatican called on Monday for the establishment of a “global public authority” and a “central world bank” to rule over financial institutions that have become outdated and often ineffective in dealing fairly with crises.

The document from the Vatican’s Justice and Peace department should please the “Occupy Wall Street” demonstrators and similar movements around the world who have protested against the economic downturn.

“Towards Reforming the International Financial and Monetary Systems in the Context of a Global Public Authority,” was at times very specific, calling, for example, for taxation measures on financial transactions.

“The economic and financial crisis which the world is going through calls everyone, individuals and peoples, to examine in depth the principles and the cultural and moral values at the basis of social coexistence,” it said.

It condemned what it called “the idolatry of the market” as well as a “neo-liberal thinking” that it said looked exclusively at technical solutions to economic problems.

“In fact, the crisis has revealed behaviours like selfishness, collective greed and hoarding of goods on a great scale,” it said, adding that world economics needed an “ethic of solidarity” among rich and poor nations.

“If no solutions are found to the various forms of injustice, the negative effects that will follow on the social, political and economic level will be destined to create a climate of growing hostility and even violence, and ultimately undermine the very foundations of democratic
institutions, even the ones considered most solid,” it said.

It called for the establishment of “a supranational authority” with worldwide scope and “universal jurisdiction” to guide economic policies and decisions. . . . . . .

Sir Mervyn King was speaking after the decision by the Bank’s Monetary Policy   Committee to put £75billion of newly created money into the economy in a   desperate effort to stave off a new credit crisis and a UK recession.

In an interview on the BBC (via ZeroHedge), IMF advisor Robert Shapiro said some incredibly alarmist things.

He tells broadcasters that if eurozone leaders don’t address the crisis properly we will see a meltdown as soon as later this month.

In his words:

“If they can not address [the financial crisis] in a credible way I believe within perhaps 2 to 3 weeks we will have a meltdown in sovereign debt which will produce a meltdown across the European banking system.

We are not just talking about a relatively small Belgian bank, we are talking about the largest banks in the world, the largest banks in Germany, the largest banks in France, that will spread to the United Kingdom, it will spread everywhere because the global financial system is so interconnected. All those banks are counterparties to every significant bank in the United States, and in Britain, and in Japan, and around the world.

This would be a crisis that would be in my view more serious than the crisis in 2008…. What we don’t know the state of credit default swaps held by banks against sovereign debt and against European banks, nor do we know the state of CDS held by British banks, nor are we certain of how certain the exposure of British banks is to the Ireland sovereign debt problems.”

And Shapiro is not just some random guy living with his girlfirend.

Aside from being an advisor to the IMF, Shapiro is the co-founder and chairman of Sonecon, LLC, and was formerly the U.S. Undersecretary of Commerce. He has a Ph.D. from Harvard, among other degrees, oversaw the Census Bureau, and has been a Fellow at Harvard, Brookings, and the National Bureau of Economic Research.

If the international Bond market stops buying U.S. government debt then the U.S. is in serious trouble! 

Even now the U.S. Federal Reserve Bank a quasi-private institution is purchasing more U.S. Debt than anyone else, even the Chinese, because there are no longer enough buyers in the international bond market. And this is because the world has decided that the U.S. is no longer a good credit risk. But the Fed can only purchase so much debt.  

What happens is this: The U.S. Treasury holds weekly and monthly bond auctions to sell U.S. Government debt to Bond funds and foreign countries in order to get more money to fund the federal budget. In the past all of the bonds that the U.S. Treasury wanted to sell were bought by the bond funds and foreign countries, meaning the auction was fully subscribed. However now that the U.S. government has decided to increase its debt so much it has had to drastically increase the value of the bond sales,  to the point that Bond funds and Foreign countries will not buy all of the bonds, meaning the auctions are undersubscribed. A VERY BAD THING! It means the International Bond market has decided the U.S. is now a bad financial risk. And if you lose the trust of the international Bond market, your country is in deep deep trouble financially. This is actually the last step before financial collapse! 

So the U.S. Treasury has turned to the U.S. Federal Reserve and made an agreement with them, The U.S. Federal Reserve will purchase all the bonds that no one else will buy. There is a huge problem with this though: In order for the Federal Reserve to buy the bonds, it has to have the money to do it. And how does it get the money? 

And this is the BIG DANGEROUS part: The U.S. Treasury issues I.O.U.’s to the Federal Reserve, and the Federal Reserve then CREATES the money with which to buy the Bonds, because the U.S. Dollar today is an I.O.U., a debt instrument obligating the government to pay the Federal Reserve a tangible asset equal to the value of the money that the Fed issues! So what you have in actual fact is for each bond the Fed buys, what is owed for the Bond automatically DOUBLES! 

So not only do you have an automatic doubling of the debt you have massive growth in the amount of U.S. dollars in circulation which depreciates the value of the dollar drastically, and if you have added to that the fact The international Bond market will not buy U.S. Debt, it then turns into a vicious free fall of the value of the U.S. Dollar and hyperinflation. And the World would immediately stop using the dollar as the international currency of exchange, which would accelerate the dollars fall! 

The immediate impact of all of this would be similar to, but much worse than what happened to the Soviet Union after Communism fell, Their economy collapsed their government could no longer afford the massive military that they had and within 10 years they had to scrap ¾ of their military. We would within a very short time fall from being the only superpower to not having any power at all on the world stage. 

If you want to get a good understanding of the International Bind market and the power it wields you need to get this book: “The Ascent of Money” by Niall Ferguson, he is a well known history professor at Harvard.

from Reuters:

The world’s largest bond fund has gone ultra bearish on the United States, dumping all of its U.S. government-related debt holdings.

The move by Bill Gross’s $236.9 billion PIMCO Total Return fund completed last month comes in the wake of a vicious Treasury market sell-off and just days after he questioned who will buy Treasuries once the Federal Reserve halts its latest round of bond purchases in June.

Gross, who also helps oversee a $1.1 trillion investment portfolio as PIMCO’s co-chief investment officer, has repeatedly warned against U.S. deficit spending and its inflationary impact, which undermine the value of government debt and push up yields as investors demand more compensation for risk.

Over the last five months, worries over the ballooning U.S. budget gap estimated at $1.645 trillion for 2011, political stalemate in Washington over how to narrow it and inflationary fears have all contributed to a steep sell-off in Treasuries. The benchmark 10-year note has seen its yield, which moves inversely to price, rise more than one percentage point since early October to 3.46 percent by Wednesday’s close.

Gross expects further carnage. Just last week, he told Reuters Insider that a 4.0 percent yield for 10-year notes is a “rational expectation” if the Fed “disappears as the buyer of last resort.”

Gross, as with many other investors, has raised red flags over demand for Treasuries when the U.S. central bank ends its controversial quantitative easing program. This week, he posed the following in his widely read monthly report: “Who will buy Treasuries when the Fed doesn’t? The question really is at what yield, and what are the price repercussions if the adjustments are significant.”

Already, bond prices have taken a massive beating on that possibility and as the U.S. economy recovery strengthens. The 10-year Treasury yield hit a 9-1/2 month high of 3.77 percent on February 9, rising 40 basis points in the short period from the end of January.

Gross sold all of its U.S. government-related securities, including U.S. Treasuries and agency debt, from its flagship Total Return fund, as of the end of February 28, according to the firm’s website on Wednesday.

That’s down from when the portfolio held 12 percent government-related debt at the end of January. The last time PIMCO was this negative on U.S. government-related debt was in January 2009.

A PIMCO spokesman declined to comment. . . . .

read the full article here.

from The Daily Telegraph:

Those exhorting OPEC to boost output should be careful what they wish for. The cartel card can be played once only, and it risks exposing the fragility of the global energy system if the Gulf powers are seen struggling to deliver.

The flow of Libyan oil has so far fallen by 1m bpd. This may not sound much against global supply of 88m, but oil prices are determined by levels of spare capacity once supply tightens.

Beyond a certain point, the price spiral can kick in with explosive force until the economic damage crushes demand.

Libya’s conflict has already cut spare capacity by a third. Hopes for a quick solution are fading as the country succumbs to civil war along ancient lines of tribal cleavage. A raft of new projects planned for the Sirte Basin by mid-decade will be mothballed.

Chris Skrebowski, editor of Petroleum Review, said the long-denied oil crunch is starting to bite. “We cling to the comfort blanket that spare capacity exists, but it is mostly fictional, or inoperable. If you take 2m bpd off the figure, the whole dynamic of global oil supply changes,” he said.

A Wikileaks cable cited a Saudi geologist claiming that the kingdom’s reserves had been overstated by 40pc. A second cable questioned whether the Saudis “any longer have the power to drive prices down for a prolonged period”.

Some investors see trouble. They are buying oil options contracts for $150 and $200 a barrel with expiry dates late this year, either as a bet or as an insurance against Mid-East mayhem. Barclays Capital said the options “call skew” is more stretched now that it was during the 2008 spike.

The implication is that markets are less sure this time that the crisis will blow over quickly, perhaps because the events the last month amount a strategic rupture.

The entire political order of the Middle East has effectively disintegrated, risking of years upheaval in a region that provides 36pc of global oil supply and holds 61pc of proven reserves.

Mass protest by Bahrain’s Shi’ite majority against the ruling Sunni dynasty has been a rude awakening for investors who thought oil wealth would shield the Gulf against turmoil.

“We in the West have been listening to the wrong people,” said Mr Skrebowski. “We have not been talking to the young: we missed what was happening underneath.”

Bahrain sits at the epicentre of the world’s energy system. It is a hop to Saudi Arabia’s Eastern Province, home to an equally aggrieved Shi’ite population and the kingdom’s giant oil fields.

Bahrain’s Al Khalifa family has sought to defuse the island’s crisis since the original crack-down, when seven people died. Yet protesters have refused to drift away, digging in at the financial hub and staging rallies outside the interior ministry. Sectarian violence between Sunni and Shia has been escalating.

What happens on the tiny island is being watched with alarm across the Gulf. The “demonstration effect” has already led to Shia protests in the Saudi oil region. Saudi police have released a Shia cleric arrested last week for demanding a constitutional monarchy.

Yet the country’s Wahabi clerics also warned against “sedition” and violations of Islamic law, while the interior ministry said all rallies were banned and warned that police would use “all measures to prevent any attempt to disrupt public order.”

The threats aim to quash a “Day or Rage” planned by cyber-protesters for Friday, allegedy swollen to 17,000. A similar event in Syria was nipped in the bud by secret police.

The world’s economic fate now hangs on the success of Wahabi repression. Any sign that the Saudis are losing their grip risks an oil shock large enough to derail the global recovery.

Nobody knows where the “inflexion point” is. Bank of America says we are already in the danger zone since energy costs as a share of global GDP have reached 8.5pc, near historic peaks.

Deutsche Bank said the outcome differs depending on whether spikes are driven by booming demand or a supply crunch. It warns that a sudden jump to $150 will abort world recovery.

Former Fed chief Alan Greenspan said economists have been “bedevilled by over the years” trying to quantity the effect of oil shocks. “We don’t know fully where all the channels are. My view is that when oil prices get up to this area and start to move up even higher, you do have to start to worry.”

A senior economist at the worldwide bank HSBC has warned of civil unrest in Britain if food prices continue to soar.

Speaking on Jeff Randall Live, senior global economist Karen Ward cautioned that the UK could experience the kind of food riots seen in other countries.

“Even in the developed world I think we have very, very low wage growth, so people aren’t getting more in their pay packet to compensate them for food and energy, and I think we could see social unrest certainly in parts of the developed world and the UK as well.”

She went on to highlight the link between high food prices and the escalating cost of crude oil.

“More and more we are seeing that some of these foodstuffs are actually substitutes for energy itself, particularly biofuels. So I think the energy markets are a significant contributor to these food price gains.”

The comments come as the United Nations warned the cost of food is now at the highest level for 21 years and set to rise further.

Food costs have gone up for eight months in a row, with the National Farmers Union forecasting the trend will continue for the rest of 2011.

The cost of basic foodstuffs has been caused by increasing demand and extreme weather destroying crops and has been partly to blame for the unrest sweeping the arabic world.

Rising prices contributed to riots across North Africa and the Middle East in the past several months that have toppled leaders in Egypt and Tunisia.

Wheat has nearly doubled in price over the past six months and rising demand has caused the cost of sugar to rise by 14% over the past 12 months.