The French CAC stock market is at its lowest in three years, and the word of crisis in the Fannie Mae and Freddie Mac U.S. mortgage giants has sent deep tremors across Europe, where it is seen as heralding a somber new act in the unfolding drama in world finance.

It can help to put matters in perspective. Even as it fell below 11,000, the Dow Jones Index is still almost twice as high as it was when Federal Reserve Chairman Alan Greenspan first warned of "irrational exuberance in the markets" more than a decade ago.

The U.S. economy is more than 40 percent larger now than it was then, and there are more than 500 million new consumers on the world market in China, India, Russia, Brazil, Eastern Europe, the Middle East and elsewhere. Naturally, that means rising demand, which helps to fuel price increases for energy and food and raw materials, and that is putting more pressure on the strained mature economies of Europe and North America.

The problem is there is no coordinated international policy to respond to the crisis. Worse still, the U.S. and the European central banks are trying two divergent and even contradictory strategies.

In Washington, facing a financial market crisis and looming recession, Federal Reserve Chairman Ben Bernanke is trying to stop things from getting worse by flooding the economy with liquidity and low interest rates to help the banks, consumers and businesses. Despite the risk of more inflation, Bernanke reckons the immediate problem of keeping the economy at least chugging along is the more urgent.

That is not how his European counterpart, Jean-Claude Trichet, sees it. Trichet, president of the European Central Bank, who unlike Bernanke is not a trained economist, sees inflation as the more profound threat. Trichet's last move was to increase euro interest rates by 0.25 percent on July 3, making them more than twice as high as the lower U.S. rates, where Bernanke is in effect offering free money. American interest rates are lower than the rate of inflation.

So the euro economy is being tightened while the dollar economy is being loosened. The two great pillars of the global economy are at odds.

This is serious, because worried academic economists as well as the markets are starting to feel some odd echoes of the awful decade of the 1930s. The Wall Street crash of 1929 was made worse by bad policies that included raising tariffs on trade, trying to balance budgets, squeezing out the bad loans and tightening the economy, just as Trichet is doing today.

We all know the result, at least in those countries like the United States that followed orthodox economics until FDR launched his 1933 New Deal. Countries like Roosevelt's United States and Hitler's Germany, which loosened their economies and stoked credit, began to haul themselves out of depression, and in Germany's case spectacularly so.

Obviously, the global economy is very different now. But reasonable economists have been able to disagree over whether Bernanke or Trichet is following the right course because so many of the signs of rising inflation were deeply worrying, and the fear was of a return to 1970s-style stagnation.

But that has changed. Until this year the world had been seeing a steady expansion of the money supply as banks and mortgage houses eagerly extended credit. There was money to burn. Last year the growth of credit to private, non-financial corporations in the United Kingdom was running at 16 percent. Now it's in minus territory.

"Real money growth is virtually nil," notes Professor Tim Congdon of the London School of Economics. "The British economy is taking a thrashing, and it is going to get worse. Corporate money balances have contracted 3 percent over the last three months, which is double digits on an annualized basis. This is a serious squeeze for companies."

It is just as bad in the United States, which is now seeing "the worst credit conditions since the 1930s," according to the Lombard Street Research team. Economists at Northern Trust now suggest that American banks cut their lending at a rate of almost 10 percent in the second quarter, which means "the money supply is crumbling in the U.S."

This spells recession, which is why Bernanke is printing money, preferring to keep the show on the road while risking serious inflation in the future. But that future inflation will have to be tackled eventually, probably by the kind of recessionary tight money regime that Fed Chairman Paul Volcker imposed in 1980. And that's why Trichet raised interest rates. But can the global economy function with such divergent strategies in the United States and Europe? We don't know.

What we do know is there are signs of hope. The U.S. exporting manufacturers are booming, according to the latest Commerce Department trade figures. Frank Vargo of the National Association of Manufacturers says exports are up 12 percent this year, "a sizzling pace."

"Coupled with a slower 4 percent rise in imports, the export performance has resulted in a further reduction in the manufactured goods trade deficit which, through May, is 11 percent smaller than last year," said Vargo. "There is no question that the value of the dollar, which has returned to roughly equilibrium rates, is playing an important role in this export growth as well."

"Exports are keeping U.S. manufacturing afloat this year as domestic demand is very soft," said Vargo. "We need to do everything possible to continue our export expansion, which is why the NAM is pressing so hard to get barriers against U.S. exports eliminated in Colombia, Panama and South Korea by congressional passage of trade agreements with those countries."

All this is true, but the weak dollar boosts the oil import bill and keeps the trade deficit high, squeezing domestic consumption. And it is also squeezing other countries, whose appetite for continued U.S. manufactured exports looks set to shrink. There is no easy way out of this.

The only consolation, in Shanghai and Mumbai as well as in Europe and the United States, is that at least on this Bastille Day, no one is fool enough to echo that memorable response of French Queen Marie Antoinette to the bread shortage that sparked the 1789 Revolution: "Let them eat cake."

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