Sobering Telegraph piece by Peter Oborne.

There have been warnings that we may be in for a repeat of the calamitous events of 2008. The truth, however, is that the situation is potentially much bleaker even than in those desperate days after the closure of Lehman Brothers. Back then, policy-makers had at their disposal a whole range of powerful tools to remedy the situation which are simply not available today.

First of all, the 2008 crisis struck at the ideal stage of an economic cycle. Interest rates were comparatively high, both in Europe and the United States. This meant that central banks were in a position to avert disaster by slashing the cost of borrowing. Today, rates are still at rock bottom, so that option is no longer available.

Second, the global situation was far more advantageous three years ago. One key reason why Western economies appeared to recover so fast was that China responded with a substantial economic boost. Today, China, plagued by high inflation as a result of this timely intervention, is in no position to stretch out a helping hand.

But it is the final difference that is the most alarming. Back in 2008, national balance sheets were in reasonable shape. In Britain, for example, state debt (according to the official figures, which were, admittedly, highly suspect) stood at around 40 per cent of GDP. This meant that we had the balance sheet strength to step into the markets and bail out failed banks. Partly as a result, national debt has now surged past the 60 per cent mark, meaning that it is impossible for the British government to perform the same rescue operation without risking bankruptcy. Many other Western democracies face the same problem.

The consequence is terrifying. Policy-makers find themselves in the position of a driver heading down the outside lane of a motorway who suddenly finds that none of his controls are working: no accelerator, no brakes and a faulty steering wheel. Experience, skill and a prodigious amount of luck are required if a grave accident is to be averted. Unfortunately, it is painfully apparent that none of these qualities are available: Western leaders are out of their depth.

Oborne thinks that banks in Spain and Italy may close — in the near future. So holidaymakers ought to be prepared.

British holidaymakers on the Continent should be advised to take care: hold only the minimum of the local currency, and treat with especial suspicion euro notes coded Y, S and M (signifying they were printed in Greece, Italy and Portugal respectively). Take plenty of dollars with you, which shopkeepers will certainly accept if there is a run on the banks, or if euros suddenly cease to be legal currency. The precautions may not prove necessary, but there is no point in taking risks.

Alarmist? Maybe. Maybe not.

Great post by Paul Krugman.

Amid all the debt hysteria, it’s worth taking a look at the actual arithmetic here — because what this arithmetic says is that the size of the deficit in the next year or two hardly matters for the US fiscal position — and in fact the size over the next decade is barely significant.

Start with interest rates. What matters for debt sustainability is the real interest rate, since what matters is keeping real debt, not nominal debt, from growing. (World War II debt never got paid off, it just eroded in real terms to the point where it was trivial). As of yesterday, the US government could lock in 30-year bonds at a real interest rate of 1.25%. That means that a trillion dollars in extra debt would mean $12.5 billion a year in additional real interest payments.

Meanwhile, the CBO estimates potential real GDP in 2021 at about $18 trillion in 2005 dollars, or around $19 trillion in 2011 dollars.

Put these together, and they say that an extra trillion in borrowing adds something like 0.07% of GDP in future debt service costs. Yes, that zero belongs there. The $4 trillion S&P said it needed to see clocks in at less than 0.3% of GDP.

These are not, to say the least, make or break numbers.

Yep. But what’s going on the US Congress has nothing to do with reality. or rationality, come to that.

Came on this — UK’s secret policy on torture revealed in yesterday’s Guardian.

A top-secret document revealing how MI6 and MI5 officers were allowed to extract information from prisoners being illegally tortured overseas has been seen by the Guardian.

The interrogation policy – details of which are believed to be too sensitive to be publicly released at the government inquiry into the UK’s role in torture and rendition – instructed senior intelligence officers to weigh the importance of the information being sought against the amount of pain they expected a prisoner to suffer. It was operated by the British government for almost a decade.

A copy of the secret policy showed senior intelligence officers and ministers feared the British public could be at greater risk of a terrorist attack if Islamists became aware of its existence.

One section states: “If the possibility exists that information will be or has been obtained through the mistreatment of detainees, the negative consequences may include any potential adverse effects on national security if the fact of the agency seeking or accepting information in those circumstances were to be publicly revealed.

For instance, it is possible that in some circumstances such a revelation could result in further radicalisation, leading to an increase in the threat from terrorism.”

Now let me see if I’ve understood this correctly. My reading of it is:

1. Torture is illegal in Britain, but civil servants are allowed to make use of information derived from torture by balancing the ‘value’ of the information obtained against the amount of pain inflicted to extract it.
2. So any MI5 or MI6 officer who knowingly receives information obtained by torture is breaking the law, in much the same way that someone who knowingly receives stolen goods is breaking the law.
3. If the great British public were to learn that this was going on, then it would endanger national security because the news that British public officials were passively (but illegally) condoning torture would enrage muslims and cause some of them to be radicalised.
4. So the thing to do is to continue condoning torture but to make sure that nobody knows we’re doing it.

And this is a democracy?

One of the things that constantly amazes me is the way in which governments and large companies can do unbelievably stupid things. How do huge bureaucracies staffed by intelligent people come to believe utter nonsense? The Libyan adventure on which Cameron and Sarkozy embarked so cavalierly is a good example — as Simon Jenkins points out in a really good Guardian column.

With the humanitarian juices running strong, and America a suddenly timid policeman, London was tempted with a precious moment of glory. The inner cabal of Cameron, George Osborne and Michael Gove reportedly saw Libya as a neoconservative epiphany. It would be like Thatcher's Falklands task force, a moment when politics aspires to statecraft and puts on the armour of crusade. The Downing Street sofa went electric.

These were men who had never gone to war and never known what war requires of government. Sound advice is drowned by a tide of patriotism. Wisdom is derided as weakness. I doubt if any of those who got Britain into this mess had the foggiest idea how they would get out of it, with Gaddafi dead or alive. Yet ahead they charged. They now have ears only for reports of imminent victory from the front, and from an intelligence service whose susceptibility to political pressure has been revealed by the Chilcot inquiry.

The serious question is why in all this did the normal checks and balances fail to operate. Where were the soldiers, diplomats and civil servants who knew Libya well, who knew about military intervention and the likely outcome of specific operations? Where was the scepticism due to any project so implausible as a "no-fly zone to impede the advance of government forces", when this did not embrace ground action (other by bombing) or a legal entitlement to remove a foreign regime? Where were the law officers or the crown? Where was the adviser to say to Cameron, you may want to do this but it must be all or nothing?

When the army wanted no part of the operation, Cameron should have smelled a rat. By assigning Libya to airmen and sailors, Cameron put in the driving seat the two services without an ounce of strategic sense.

It’s clear that there is no rational strategy behind what the governments of Britain and France are now doing. It’s all based on fantasies that the raggle-taggle crew of anti-Gaddafi forces constitute some kind of potential democratic government. That’s not to say that Gaddafi and his crowd aren’t monsters. But if you decide to take on monsters then you need to have a game plan which leads to their extinction.

LATER: Everything I said about government adherence to unworkable ideas also applies to the Eurozone project.