So it was less than reassuring when Joaquin Almunia, the European Union's commissioner for economic and monetary affairs, said Monday, "The fundamentals of the euro area and the European economies remain solid."

He had just cut the forecast for this year's economic growth in Europe by 10 base points, noting that bad second-quarter figures were the result of unexpected downturns in the Dutch, French and Italian economies. In fact, the French economy came close to a screeching halt, (0.3 percent growth is not reassuring), and both consumer and business sentiment are heading ominously downward across Europe as the banking crisis continues to worry people.

But by comparison with Japan, Europe is doing great. This year's revised gross domestic product figures for Japan were published Monday, and they showed the Japanese economy had shrunk at an annualized 1.2 percent in the second quarter of this year. Not grown, but shrunk.

Meanwhile in the United States, Frederic Mishkin, one of the governors of the Federal Reserve and the one closest to Fed Chairman Ben Bernanke (they wrote a book together), warned that the troubles in the banking system were starting to spill over into the rest of the economy.

"Consumer and business spending could also be damped as a consequence of the recent financial turmoil," Mishkin said. "Economic activity could be affected more severely in other sectors should heightened uncertainty lead to a broader pullback in household and business spending."

U.S. Treasury Secretary Henry Paulson warned Tuesday that "we expect this period of turbulence to go for a while" -- longer than the Asian crisis and Russian default of 1997-98.

Put all of this together and we have a slowdown in Europe and the United States and a shrinking of the Japanese economy. Those three groupings account for more than 65 percent of global GDP. So if the European, American and Japanese consumers all start cutting back at the same time, to whom will the Chinese and Indian exporters sell their products?

The question is acute because China, India, Vietnam, South Korea, Taiwan and other Asian exporters have just been investing hugely in more productive capacity. China and India alone are bringing on stream the capacity to produce another 100 million tons of steel.

Who is going to buy it?

And what happens to the still-soaring Shanghai stock market when China's exports suddenly stop growing, but the interest still has to be paid on the loans that were taken out to finance the new capacity?

There is another context in which these rather gloomy prospects look even more troubling. The Doha Round of the world trade talks has stalled. The liberal system of multilateral free trade that has produced so much growth over the recent decades is in trouble. Economic nationalism is on the march. The U.S. Congress stopped China from buying Unocal and stopped Dubai from buying the U.S. ports that had been owned by P&O.

And this week, France and Germany called on Europe as a whole to band together against the predatory trading and investing policies of Russia and China, and their sovereign investment funds, which should not be allowed to buy into strategic European industries.

"The use of public funds, through subsidies or managed exchange rates, to distort competition is a real concern," said French President Nicholas Sarkozy and German Chancellor Angela Merkel at their informal summit. "The use of non-tariff barriers and restrictions on investments and political manipulation of exchange rate has reached a worrying degree."

"If we do not give preference to Europe, then I ask myself why did we bother to build it?" Sarkozy demanded.

The Democratic majority in the U.S. Congress is threatening various kinds of tariffs and sanctions against China if it refuses to revalue its currency against the dollar. (In fact, the yuan has risen by 9 percent against the dollar in the last two years, and U.S. exports to China grew by 33 percent last year). Even normally sensible Democrats like Sens. Hillary Clinton and Barack Obama are supporting the move, because they fear their presidential campaigns could suffer if they did not.

This kind of economic populism, which is more likely to provoke a trade war than to make the Chinese publicly lose face by surrendering to pressure, might normally be condemned to presidential veto. But with an election year coming up and the Republicans terrified of losing more seats in both houses of Congress, there may well be enough votes to override a White House veto. The outraged Chinese could then stop buying U.S. Treasury bonds -- and who then will allow the U.S. economy to continue to live beyond its means?

In sum, we have already had a perfect storm in the financial markets, when the little-understood technology of quant funds and derivatives and special-investment vehicles suddenly hit a degree of market volatility that the computer algorithms had not been programmed to handle. We may soon be heading into a perfect storm in the world-trade system, during an election season in both the United States and Russia that is likely to heighten the rhetoric of economic nationalism.

None of this should matter. We all know what causes recessions and depressions, and few know better than Bernanke; the Fed chairman is an expert on the Great Depression. In theory, we know how to stop them from happening. In theory, we all know that free trade has been the goose that laid the golden eggs. We know that the imbalances between the Chinese and the U.S. economies will not be fixed by some modest currency revaluation; the wage differentials are far too high for that. But we are in a season when the passions of politics are outweighing the logic of economics. These are dangerous times.

Oh yes, and Ed Lazear, chairman of President Bush's Council of Economic Advisers at the White House, declared this week that he did not expect a recession "this year or next," adding that the U.S. economy is "fundamentally strong." Oh dear.

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