So much for the 'decoupling' thesis -- the belief that emerging market economies could maintain adequate global growth in the face of a developed-world recession.

All of the world's major economies -- the United States, the European Union, and Japan -- have most likely slid into a recession -- the Organization for Economic Cooperation and Development (OECD) announced in its most recent projection.

A tri-polar contraction

The OECD sees GDP in the three major zones contracting 1.4% in Q4 and 0.4% for all of 2009 -- a decline in output that will create a global recession for at least the first half of 2009.

Economist Richard Felson told BloggingStocks Friday it's difficult if not impossible to put a positive spin on the OECD's latest projection -- a projection he believes will prove to be accurate.

"Other than the bursting of the commodity price bubble and a pull-back in inflation, it's hard to see any positives," Felson says. "The world needs expansion in at least one and ideally two of the major economies to maintain adequate global growth, so you can see the fix we're in, from a demand standpoint. That's all the more reason for governments in both the developed and developing worlds to increase fiscal stimulus."

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.

Now one would think that the dollar, viewed as the source of much of the world's commodity price inflation this decade, rising from long-term lows would be a cause for celebration.

Not exactly.

While the dollar's rally against most of the world's other major currencies does mean commodity price pressures are likely to continue to subside -- and that's good news for inflation, economists say -- the dollar is nevertheless rising for the wrong reason. Namely, an economic slowdown in Europe.

Euro, pound plunge on recession concerns

"It's not so much as the dollar is strengthening but that the euro and pound are weakening on the likelihood that central banks in Europe will have to cut interest rates more to deal with a recession," economist Peter Dawson said. "Europe is also seen as later in the business cycle than the U.S., which means the U.S. economy is likely to recover sooner, which also helps the dollar. "

Nouriel Roubini, the once obscure New York University economics professor who two years ago predicted the current global financial crisis, now says the world's largest economy will need a large fiscal stimulus from the federal government to avoid a serious economic downturn.

Further, failure by Congress to pass a large fiscal stimulus, as well as undertake other measures, will lead to a 18 to 24 month recession, which will push unemployment above 9%, Roubini said on his website, the RGE Monitor.

Sees need for large fiscal stimulus

"Much more needs to be done including further monetary policy easing, a large fiscal stimulus program to boost demand at the time when private aggregate demand (consumption and investment) are sharply falling; and a plan to reduce the mortgage debt burden of millions of distressed households," Roubini said.

Further, Roubini said the U.S. government will have to double its purchase of bank stakes and require these banks to eliminate dividends to save them from bankruptcy. He also now sees bank/financial institution credit losses stemming from the collapse of the subprime mortgage market of about $3 trillion, up from his earlier estimate of $1-2 trillion.

The above statistics paint a sobering prospect/picture of economic contraction, but Roubini does see a ray of light:

The manager of world's largest bond fund is taking a positive stance regarding market confidence following U.S. and European efforts to stabilize the global financial system.

PIMCO chief investment officer Bill Gross said Friday finance minister and central bank action worldwide should soon loosen-up credit and bond markets.

"We're talking weeks here," Gross said in an interview with Bloomberg News.

Gross' Total Return Fund has yielded 4.4% annually over the past five years, besting 99% of its peers in the government / corporate bond category, as of October 16, according to data compiled by Bloomberg News. California-based PIMCO has $840 billion under management.

Gross: more rate cuts needed

Gross has also called on the U.S. Federal Reserve to lower its benchmark interest rate to 1% from the current 1.5%, arguing that asset deflation has taken hold and that the threat of headline inflation is gone, Reuters reported.

The world major economies are using a combination of fiscal and monetary policy actions to end a liquidity crisis that threatens to severely damage economies worldwide by constraining commercial operations.

Gosh. Golly. Gee Whiz.

That was the reaction Monday of traders and economists to the European Union's coordinated decision to invest a staggering $2.4 trillion in interbank loan guarantees and bank recapitalizations, ft.com reported, to end the global financial crisis.

(Of course, 'gosh, golly' etc. were not exactly the reactions of traders and economists -- this is a family-appropriate financial blog -- but you get the point.)

Europe's decision sparked a global rally in stocks. The Dow closed up 936.42 points -- the largest one-day point gain in its history -- to 9,387.61.

Europe takes the lead

At minimum, Europe is saying that its economic stake in the current global financial system is so large that it's willing to err on the side of over-committing public funds, economist Peter Dawson said.

"Europe's response is very large, unexpected, and it could prove to be the pivotal move in this crisis," Dawson said. "Europe appears to be saying, 'well the United States is doing what it can do, given its political constraints' now let's do what our political culture allows. Basically, Europe is saying 'the storm of fear starts to lose its strength here.' "

The measures were both sweeping and unprecedented in size and scope, Dawson said. Germany said it offered about $680 billion in loan guarantees and will invest $108 billion in its banking system, ft.com reported. France said it would provide up to $435 billion in loan guarantees and invest as much as $52 billion. The United Kingdom has committed about $70 billion for investment in key banks, along with a guarantee for banks deposits and interbank lending. The Netherlands, Spain, and other nations announced similar plans.

Nouriel Roubini, the once obscure New York University economics professor who two years ago predicted the current global financial crisis, now says leaders of the world's major industrialized economies and developing countries must implement an 'all fronts' approach to avert a financial calamity and a global depression.

"It will take a significant change in leadership of economic policy and very radical, coordinated policy actions among all advanced and emerging-market economies to avoid this economic and financial disaster," Roubini said on his web site, RGE Monitor.

Roubini urged that national policy makers take immediate action to end the crisis, which has dramatically tightened credit conditions worldwide, constraining the ability of corporations to undertake daily operations, which will hurt GDP growth rates in every region.

And, ironically or by coincidence, leaders will have an opportunity to dialogue and implement a common strategy: officials from the International Monetary Fund, World Bank, and Group of Seven (G-7) nations meet in Washington, D.C. this weekend for their previously-scheduled annual meeting.

Think it's hard for the U.S. Congress to agree on a policy?

Try getting a policy passed by the European Union.

Strictly speaking, of course, the European Parliament (both chambers), not the EU, is akin to the Congress, but the 27-nation EU is proving to be almost as unwieldy as the EP.

The EU's decision to increase the guarantee on bank deposits to 50,000 euros or about $68,000 Tuesday represented the first common, or unified approach to the financial crisis, The New York Times reported Tuesday, despite incontrovertible data indicating that the credit crunch is restricting lending, both short- and long-term, and is slowing commerce.

EU stance: 'Every nation for himself'

Economist Richard Felson told BloggingStocks Tuesday the EU's lack of unified action highlights the limitations of Europe's supranational political system. "For those European nations using the euro, these nations are unified by a common central bank. But fiscal policy, in terms of a treasury department, remains at the nation-state level. That makes it much harder to coordinate a bank rescue, for example," Felson said.

That's the main reason the EU hasn't passed a rescue package similar in scope to the U.S. Congress', Felson said. "Europe's economy is just as large as the U.S.'s and it's likely to experience distressed/bad debt aftereffects almost as large as those in America. It requires a unified response, but thus far it's been 'every nation for himself.' It's very disappointing, from a governance standpoint."

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.

So far, there's little indication the financial crisis is subsiding.

The euro and British pound fell against the dollar, and money market rates climbed early Monday in Europe as banks hoarded cash.

The euro and British pound fell about 1 cent versus the dollar to $1.3610 and $1.7568, respectively, early Monday as traders sensed both the European Central Bank and Bank of England, along with national governments, will have to take monetary and policy actions to address the crisis.

The London interbank offered rate, or LIBOR -- the rate banks charge each other for overnight dollar loan, increased 37 basis points to 2.37%. The Euribor, a similar rate for the euro, rose 1 basis point to 5.35%, an all-time high.

Currency Trader Andrew Resnick told BloggingStocks Monday, currency, credit and stock markets in Europe all indicate the financial crisis will impact many of the economies in the euro zone.

"Germany's decision to guarantee all private German bank accounts kind of spooked the currency market, and drove the euro and pound lower. It's a good, defensive action, but it prompted people to ask 'how deep is the problem in Europe?'" Resnick said. "We're going to need more action to address the crisis from both the European Union and the central banks of Europe to boost liquidity."

A problem that originated in the New World is re-exposing some long-standing nuanced opinions in the Old World.

France and Germany disagreed over how to prevent the global credit crunch from further hurting European banks. Germany, Europe's largest economy, does not want to set up a bailout / rescue fund that France is seeking. Luxembourg Prime Minister Jean-Claude Junker said the fund, which France argued should be as large as 300 billion euros or about $415 billion, isn't needed.

Economist Richard Felson said the United Kingdom also is against the idea, with Britain arguing that an ad hoc intervention policy would be sufficient for now. "A lot will depend on how the U.S. rescue package, provide it passes the U.S. House, performs in lowering overnight interest rates and restoring confidence," Felson said. "There's the sense in the U.K. that while the crisis extends beyond America's borders, the bulk of the bad-asset fallout will still be U.S.-based."

The U.S. Senate passed a revised rescue package, 74-25, Wednesday night and the U.S. House is expected to vote on the measure as soon as Friday.

However, the measure had little impact on overnight interest rates, at least initially. The London Interbank Overnight Rate, or LIBOR, rose for a fourth day, up 6 basis points to 4.21% Wednesday night, as banks continued to hoard cash.

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.

One might think that with the financial system in the world's largest economy in need of additional liquidity to avert a financial panic, foreign investors would be preparing similar fixes at home and/or standing at the ready to assist the United States, if needed.

Not quite.

Although central banks around the world have coordinated policies and cooperated fully, leaders of foreign governments balked at similar bailout plans, and many foreign sovereign investors also remain on the sidelines, The Washington Post reported Thursday.

While policy makers in Europe and Latin American agree that the global financial system is facing its greatest stress and threat since the period up to and after the 1929 stock market crash, they saw little need - - so far - - for major rescue packages in their own countries, The Post reported. Further, sovereign wealth funds, likewise, showed little interest in stepping up to the plate.

The world: well-capitalized spectators

Economist David H. Wang said Britain has cooperated fully, France has proposed a special G-8 summit to deal with the financial crisis, and Russia has acted to stabilize its stock and credit markets, but the rest-of-the-world is "watching the events as they unfold."

Wang said three factors are at work in the rest-of-the-world's cautious stance: national interest, a shift in the geopolitical balance of power, and posturing.

"Regrettably, but predictably, much of the world has turned inward and chosen to focus on its own domestic banks and institutions. There's also the belief, in nations like Brazil and in Middle Eastern economies, that they're more-insulated from the crisis, due to expanded non-U.S. trade relationships and the ability to undertake financial transactions and store value in other currencies, such as the euro," Wang said. "They also see the financial crisis in the context of a transition to a multi-polar financial world, from one dominated by the United States."

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."

What's a telling sign of slowing global growth? Continually decreasing oil demand forecasts.

The International Energy Agency again lowered its global oil demand forecasts for 2008 and 2009 as high prices and reduced U.S. consumption lowered overall demand for crude, the organization announced Wednesday. It lowered its 2008 forecast by 100,000 barrels per day to 86.8 million barrels, and 2009 estimate by 140,000 barrels to 87.6 million barrels.

The IEA's announcement had little impact on oil prices early Wednesday as oil rose 60 cents to $104.43 per barrel. However, it should be noted that two bullish factors also affected prices Wednesday: an OPEC announcement of a commitment to existing production quotas with a pledge not to exceed them, as some cartel members have in the past; and Hurricane Ike in the Gulf of Mexico, which threatened to damage oil rigs and infrastructure as it approaches the Texas-area coastline, according to weather.com.

Oil's price surge takes a toll

Oil has declined about 30% since hitting a record high of $147.27 per barrel in July 12. Economist Richard Felson told BloggingStocks Wednesday the dip in oil's price over the past two months is not nearly enough to blot-out the process-changing affect of oil's four-year price surge.