Officially, it's now two out of three regions.

Japan, the world's second largest economy, has officially fallen into a recession (pdf). Japan's gross domestic product contracted 0.4% in Q3 after declining 3.7% in Q2, the office said.

The contraction means that two of the world's three major economies, Japan and the Europe's euro zone, are now in recession. Last week, the 15-nation euro zone reported a 0.2% contraction for Q3 following a similar decline for Q2.

Economist David H. Wang told BloggingStocks Monday Japan has fared relatively well compared to the United States and Europe at the outset of the global financial crisis as Japan's banks have less exposure to toxic assets. However, that does not mean that Japan will not be affected by slowing U.S. demand for consumer goods, some of which are Japanese exports.

"Japan is now seeing the indirect effect of the financial crisis, an export sales slowdown," Wang said. "While the U.S. situation is serious, Japan's is not pretty either. Japan is more export-dependent than the U.S. and its aging population means domestic demand will remain weak. As a result, Japan's recession could be as long or longer than the U.S.'s recession."

We all know the impact that the current economic slowdown has had on American auto sales, and today we get news that European car sales are also feeling the pain, with auto sales dipping 15% during the month of October.

According to the European Automobile Manufacturers Association, or the ACEA, October marks the sixth straight month that new-car registrations have fallen, but things have been much worse since the summer, when concerns of a global recession really started to spread.

General Motors Corporation (NYSE: GM) was the worst hit major American automaker, which had a 25% decline in sales in October on a year over year basis. Japanese maker, Toyota Motor Company (NYSE: TM) did not fare to much better, with a 24% dip in sales. Ford Motor Company (NYSE: F) did a little bit better, with a reported 11.9% decline in October sales. Europe's largest automaker, Volkswagen, held up the best among the majors, with "only" a 7.9% drop.

Time provides the advantage of not only additional events, but also the ability to the compare these events to conditions and issues in previous eras -- an argument against 'instant-analysis' and a major reason my Ph.D. advisor said, "Don't study any public official's decisions until he or she has been dead for 20 years."

Hence, time is naturally providing more evidence and perspective on the recently-ended period of global economic growth, and increasingly the evidence is showing that it was a global economy of unsustainable imbalances -- balances that policy makers mistakenly ignored.

2001-2007: a policy void

First and probably foremost there was the oil price imbalance. Whether they were driven up by speculators, by institutional investors seeking a return on equity, global energy demand, and/or by other factors, economists had warned for years that the U.S. and global economies could not continue to grow at adequate rates with oil above $80 per barrel. In fact, every previous oil shock in the modern era was followed by a recession in the United States. Still, little was done from a policy standpoint to stem oil's price rise.

Similarly, the U.S.'s then-increasing trade deficit, a good part of which had been fed by purchases of imported oil, and the notion that U.S. consumers could serve perpetually as the growth engine of the export-oriented developing world, was unsustainable, given stagnant U.S. incomes, and its nadir savings rate. Yet little was done to address this imbalance.

Short-term interest rates continued to reflect bank-to-bank and financial institution uncertainty early Monday, amid local currency declines in emerging markets, as institutional investors bought dollars and the yen in an ongoing flight-to-safety pattern.

The London interbank overnight rate, or LIBOR, fell just 1 basis point to 1.28%. In addition, the London rate for three-month loans in dollars also fell just 2 basis point to 3.51%. The rate for the euro, or EURIBOR, fell about 1 basis point to 4.91%. However, interest rates in Asia rose, with the Hong Kong interbank offer rate, or HIBOR, rising 45 basis points to 3.74%

Short-term rates, including overnight rates, are key sources of cash for corporations and other large institutions, which use the cash to pay suppliers, make payroll, roll over debt etc. Hence, very high overnight and short-term rates will discourage corporations from conducting business, restricting commerce and slowing the economy, economists say.

Is the dollar's status as the world's reserve currency coming to an end?

It could be, if present trends driven by corrective measures taken to stem the global financial crisis continue, in the view of one monetary official.

European Central Bank council member Ewald Nowotny believes a 'tri-polar' global reserve currency system is developing among Asia, Europe and the United States.

"What I see is a system where we have more centers of gravity," Nowotny said Monday in an interview with Austrian state broadcaster ORF-TV, Bloomberg News reported Monday. "I see for the future a tri-polar development, and I don't think that there will be fixed exchange rates between these poles."

The dollar has served as the world's reserve currency for more than 30 years. A reserve currency is one which financial institutions -- and nations, for that matter -- seek to own during times of financial crisis, stress, or uncertainty. The reserve currency attracts investors in a phenomenon called a 'flight to safety.'

The euro, the currency of the euro zone, this decade has challenged the dollar's reserve currency status, following its introduction into global financial markets in 1999. (Physical euro banknotes and coins began to circulate on January 1, 2002.) A series of U.S. fiscal policy and trade policy errors, among other factors, has caused the dollar to weaken against the euro from about 82 cents per euro in 2001 to the present $1.3317 per euro.

One of the world's leading investors is expressing cautious optimism - - underscoring cautious - - regarding the fate of the global financial system.

Billionaire investor George Soros said Monday a pledge by European leaders to guarantee new bank financing is "a positive step" may help stabilize global financial markets, Bloomberg News reported.

Soros: We're finally getting the leadership we need

"In the last 72 hours, I think the European governments got religion and realized that this is a serious problem,'' Soros said at a press conference in Washington, Bloomberg News reported. "People are looking for some leadership and finally they are getting it." Soros is chairman of the $20 billion Fund Management LLC.

Along with actions by the major central banks to increase the supply of dollars in the global money supply, Europe's major industrialized nations announced fiscal policies to back bank-to-bank loans and recapitalize banks, The New York Times reported Monday. Britain said it will invest $73 billion in its banks, Germany is investing up to 500 billion euros or about $680 billion, and France will create an agency to offer state guarantees for banks and to channel money to them.

Further, Soros underscored that the United States government must recapitalize solvent banks, ft.com reported Monday. The U.S. said it intends to do that, but has not yet released details of its plan. Soros would like the U.S. government's recapitalization to take the form of preferred shares, which would dilute existing shareholders, but with private capital given the right to subscribe on the same terms, if private investors are able to put up more money, ft.com reported.

Twenty five trillion dollars in global market capitalization wiped out. At least $500 billion -- and most likely in excess of $1 trillion added to the United States' national debt. The Fed has loaned money to corporations, added massive liquidity to banks, cut interest, and the U.S. Treasury may invest directly in private banks, if it doesn't nationalize them.

And the currency of the nation primarily responsible for the global financial crisis -- the dollar -- how has it fared?

The dollar has been firm, for the most part, even rising against the euro and British pound. However, the dollar has fallen against Japan's yen. As of Friday at 2:35 p.m. EDT, the dollar had risen 2 cents versus the euro to $1.3382 and 1.5 cents versus the pound to $1.6947, but had fallen one-half yen to 99.33.

While you were sleeping, Asian markets followed the U.S. down. Japan's Nikkei lost 9.6% as a real estate investment trust and an insurance company -- Yamoto Life -- filed for bankruptcy. Markets in Hong Kong, Korea, Australia, Singapore and Thailand fell between 6.5% and 8%. In Europe, markets opened down 10%. Fear is rampant with the volatility index (VIX), a measure of fear, closing at an all time high of 63.92.

By chance, there is a meeting of G7 finance ministers in Washington this weekend, and there will be a push to do something by Sunday night. I think it would be a triumph if everyone in the meeting could agree on a common definition of the key problem: the freezing up of short-term lending markets (the TED Spread, a measure of short-term lending risk, hit a record 4.23%), the lack of capital in the global banking system, or investors fleeing the stock market.

Why would this help? Part of the reason that global efforts so far have failed is that there does not appear to be a common understanding of what is wrong and what it will take to fix it. This has been reflected in uncoordinated tactics -- flooding the markets with liquidity, cutting interest rates, guaranteeing money market funds, injecting capital into banks -- in the UK only -- and our DOA $700 billion reverse auction plan.

The financial crisis that's constrained credit around the world will slow the global economy considerably and quickly, the International Monetary Fund announced in its October 2008 report.

The IMF now expects global GDP growth to slow to 3.0% in 2009, down from 3.9% forecast in its July 2008 report.

Moreover, economists note it's important to highlight the differences in what constitutes a recession in the developing and developed worlds. Because emerging markets/ developing countries are capable of and require higher growth rates, a low GDP growth rate is roughly equivalent to a negative GDP growth rate in developed countries -- i.e. equivalent to a recession. The average of the two means the global economy can be considered to be in recession when global GDP falls below 3.0%, certainly if it falls below 2.5%.

Worst global GDP growth since 2001-2003

Economist David H. Wang told BloggingStocks the IMF's latest forecast points to a global recession, or the closest condition to it.

"It is a somber report, no question. Many developed nations will now record close-to-negative or negative GDP growth for 2009. Add slowing emerging market growth and a credit market that will be in recovery mode for much of 2009 on to high commodity prices, and it's a formula for the worst global economic conditions since the 2001-2003 period," Wang said.

The IMF now expects the U.S. economy to record 1.6% GDP growth in 2008 and just 0.1% in 2009. IMF 2008/2009 GDP forecasts for other key economies are as follows: United Kingdom, 1.0% / -0.1%; Germany: 1.8% / NA; France, 0.8% / 0.2%; Japan, 0.7% / 0.5%; China, 9.7% / 9.3%; India, 7.9% / 6.9%; Brazil, 5.2% / 3.5%; and Mexico, 2.1% / 1.8%.

For Detroit automaker General Motors (NYSE: GM) the tough times are being felt outside of the United States as sales declines in Europe are forcing the troubled manufacturer to suspend production at some European factories.

As the financial crisis that is being felt in America continues to spread, demand for autos outside of the country are also feeling the pressure, and in August, sales in Europe fell by 16%. As a result, General Motors has decided that it needs to reduce its 2008 production by about 40,000 vehicles by the end of the year.

To accomplish this production shift, the company is going to be shutting down several factories for a few weeks. Starting next week, GM's factory in Eisenach, Germany, where the company produces its Opel brand, is going to start a three-week shut down period. This news comes as another of the company's factories, one in Bochum, Germany is completing a current two-week shut down period to help reduce the company's inventories. Other temporary shut downs are taking place in England and Spain.

The frontal assault to check the financial crisis and stem rising fear in credit markets has begun.

The U.S. Federal Reserve Monday doubled its Term Auction Facilities - - its short-term loans provided to banks - - to as much as $900 billion.

"The Federal Reserve stands ready to take additional measures as necessary to foster liquid money-market conditions,'' the central bank said. The Fed also will begin paying interest on bank reserves.

The Fed added that it and the U.S. Treasury are "consulting with market participants on ways to provide additional support for term unsecured funding markets."

As part of the action, The Fed will increase its auctions under the 28-day and 84-day Term Auction Facility operations to $150 billion each. The two forward TAF auctions in November will be increased to $150 billion each, the Fed said.

I am the Global Editor at MoneyShow.com and each week I interview an investing expert. This week, I spoke with Allan Nichols, editor of Morningstar InternationalInvestor, who identifies the pitfalls and opportunities in global market today.

Q. Allan, how can investors protect themselves should the financial crisis in the US result in prolonged bear markets around the world?

A. Studies have shown the majority of returns from the stock market have been concentrated over a relatively few days, so it is important to have some exposure. My experience, though, has shown bear markets last longer than you think. Asset allocation is particularly important and I would increase cash from my bond allocation rather than from my stocks. Now is the time to buy really high-quality stocks at attractive prices, those that have sustainable advantages, or what Morningstar calls "moats."

Morningstar borrowed the concept of a moat from Warren Buffett. Just as a moat around a castle protected the castle from invaders, a company's moat protects the firm from competition. Moats can be generated from being the low-cost producer; having intangible assets, such as patents or other unique intellectual property; and high switching costs that make it uneconomical to change to another product or service. All of these improve a firm's ability to compete as well as earn returns above its cost of capital.

The dollar rose early Monday against the euro, pound and yen, but for all the wrong reasons -- a belief that more banks in the U.K. and Europe will face pressure and Europe's economy will slow further.

The dollar rose almost 2 cents versus the euro to $1.4367 and 3 cents versus the British pound to $1.8035. The dollar also rose about one-quarter yen to 106.25 versus the Japan's yen.

Currency Trader Andrew Resnick said the dollar's merely modest rise against the yen is the telling indicator in this currency market. Typically, a dollar rally would spark a large move up versus the yen as well, not just a minor increase. The fact that it hasn't indicates that institutional investors are paring-back their carry trades on concern the U.S. Congress' $700 bailout / rescue bill may not be enough to check the financial crisis, leading to slower growth in Europe, he said.

In a carry trade, investors, especially institutional investors, borrow funds in a country with a low interest rate (or borrowing cost) such as Japan [the yen], and buy assets in a country where returns are higher. The investment can take many forms including stocks, bonds, funds, or even the higher-interest currency itself, such as the British pound.

Just call it an endorsement of a collective security policy where 'you go first.'

That was how one economist characterized the G-7 group of finance ministers' stance toward the U.S. Treasury Department's proposed $700 billion intervention to stabilize the financial system.

In a conference call statement, the G-7 - - Germany, the United Kingdom, France, Japan, Italy, Canada, along with the U.S. - - said, "We strongly welcome the extraordinary actions taken by the United States to enhance the stability of financial markets and address credit concerns, especially through its plan to implement a program to remove illiquid assets that are destabilizing financial institutions," The Wall Street Journal reported Monday(subscription required.)

However, none of the other six G-7 members will adopt a program similar to the U.S.'s, German Finance Minister Peer Steinbrueck told reporters in Berlin after the call, Bloomberg News reported Monday.

Economist Peter Dawson told BloggingStocks Monday the G-7's stance is half-hearted, in his interpretation. "In its general statement, the G-7 is on-board with the [U.S] Treasury's program but [German Finance Minister Peer] Steinbrueck's comments are disappointing. Steinbrueck, or another G-7 representative should have followed up with 'and we stand ready to assist the United States and other nations with fiscal measures to support the above goals, if needed, etc.,' " Dawson said. "Right now, the G-7's tone is 'go forth U.S., but we're not getting in the pool right now, the water's too cold.' Given the G-7's complicity in causing the problem and their systemic interest, a more-engaged statement should have been issued regarding fiscal policy options."

Cites AIG's 'interconnectedness'

For example, Dawson said the G-7's corporate involvement in American International Group's (NYSE: AIG) is evidence item 'A' for stronger G-7 involvement. "G-7 companies, banks, and institutional investors benefited from AIG's credit default swaps and related products, and would be hurt by a systemic failure. Since they are parties to the problem, they should also bear some of the costs of the reforms and bailout," Dawson said. "But right now their stance is 'Go ahead U.S. We back your spending your money, but not ours.' That's an inadequate response from our G-7 associates."

One wouldn't call it the best week in the world for OPEC.

Once again, the world's best-known cartel has demonstrated that the coalition is not as cohesive or harmonious as a symphony orchestra.

Saudi Arabia, in confidential communications, let it be known that the kingdom would ignore the stated intent of other cartel members and continue to pump plenty of oil, The New York Times reported.

On Wednesday, OPEC announced that members would redouble effort to adhere to production quotas -- not exceed them as some members typically do -- an effort that, if effective, would be tantamount to a roughly 500,000-barrel per day cut in production, The Times reported.

OPEC's hawkish members said lower production is needed to eliminate what it believes is an oversupply in the market, and they cited this as the reason oil's price has fallen about 30% in two months to the $100-range, Bloomberg News reported. Oil closed Friday up 31 cents to $101.18 per barrel.