That ominous prospect of a drift was explicitly forecast this week by Stephen Green, chairman of the HSBC banking giant, based in Britain but with its 19th century roots in Hong Kong heavily committed to China and other emerging markets.

"There is no way a serious downturn in the U.S. is going to leave China immune," Green warned Tuesday.

But China is generating its own troubles. Average wages are rising at 15 percent a year, more than 25 percent in the coastal boom towns and even more once the new labor-rights legislation is factored in. China's textile industry, already operating on razor-thin margins, is struggling to cope with low-wage competition from Vietnam and Pakistan. The renminbi currency has risen more than 20 percent against the dollar since the controls were relaxed in 2005. The most ominous indicator is that China's purchasing managers' index fell below 50 in July, which would suggest that output is set to fall. And property values are dropping fast, down 9 percent year-on-year in Beijing and down 19 percent in the southern city of Guangzhou.

In India, wholesale prices were rising at 12 percent last month, forcing the central bank to raise the costs of borrowing to 9.5 percent. That was the third rise since May, to little effect. Pakistan has also raised interest rates three times this year. Indonesia, Thailand and the Philippines have all increased interest rates in the past month.

This inflationary surge is an Asia-wide phenomenon, but it's a global problem because the world economy now depends on growth in the emerging markets to avoid a full-scale recession. Last year the BRIC economies of Brazil, Russia, India and China were responsible for more of the growth in the global economy than the United States and Europe. And Russia is also facing severe inflation, now running at more than 15 percent, together with the 20 percent drop in its stock market.

In China alone, domestic demand last year grew 8 percent more than U.S. demand, even though in dollar terms China's economy is only about 20 percent of America's size. This year it looks as if China's domestic demand will grow 20 percent more. As the Group of Seven economies falter, only the emerging economies can keep the show on the road. And the signs are that they are starting to slow -- not surprising, considering how much they depend on strong exports to the United States and Europe.

But it will be some time before American and European consumers recover their hitherto voracious appetites for imported goods. The second wave of the mortgage crisis in the United States is gathering force. We all know about the subprime crisis, but now the alternative-A crisis is coming. Alternative-A mortgages are not as risky as subprime loans, but more risky than prime mortgages. And the number of alt-A loans that are in default rose by more than 400 percent over the past year. One in eight is now delinquent.

Moreover, even among prime mortgages, which are supposed to be safe, delinquencies have doubled to 2.7 percent, which means that banks and other lenders are facing more write-offs to come. The head of JPMorgan Chase, James Dimon, told analysts in a conference call he expected defaults on his bank's prime loans to triple.

Put it this way: Anybody who thought the news from the U.S. mortgage front was terrible ain't seen nothing yet. The ratings agencies are downgrading at an ever-increasing pace. They downgraded $85 billion in mortgage securities in the third quarter of 2007, $237 billion in the fourth quarter, $739 billion in the first quarter of this year and $841 billion in the second. The next two quarters could be worse, given the falling U.S. employment numbers. (The official unemployment figures, it should be noted, severely underestimate the true jobless figure. It excludes those who have stopped looking for work and also those 150,000 youngsters who arrive onto the labor market each month who have yet to be employed.)

And the number of unemployed Americans is set to rise even more as consumption slows. In recent weeks the number of national-chain retail store closures that have been announced (and not all are announced) adds up to a total of 2,544 stores, some of them giants like Macy's, Eddie Bauer, Gap Inc., Talbot, Home Depot, Foot Locker, Sprint and so on.

Former Federal Reserve Chairman Alan Greenspan this week warned that there was worse to come, with more government bailouts of failing banks expected, and that he did not expect the swollen U.S. inventory of unsold homes to start declining until the end of the year. And even that would not end the crisis unless somehow the world's stock markets continue to coast along at levels that are still on average more than twice as high as they were when Greenspan first warned of "irrational exuberance."

And those high stock market levels remain high despite the catastrophic losses in banking and financial sector shares. So far in this crisis that is just a year old, finance shares around the world have lost, according to Datastream, a staggering total of $1.6 trillion in value. That is 3 percent of global GDP, the equivalent of the GDP of Italy, and it has just disappeared. And if the oil price continues to fall, even if it slows inflation, that will be no cause for celebration; it foretells even more losses coming as China and India slow and the world stalls with them.

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