The August tremor on global markets was probably a false alarm but there is a non-trivial risk that it may have been picking up real stress in the US economy and the world’s dollarised financial system. The VIX volatility index hit an intraday high of 65 on August 5.

This has only ever happened twice before: in October 2008 and in March 2020, when COVID shut the economy and briefly broke the US Treasury market.

“We think it would be a mistake for the Fed to conclude that the turmoil was a head-fake,” said Krishna Guha from Evercore ISI. “Happily we think the Fed leadership get this. Having seen a live demo of what an adverse macro-market plunge into a hard landing would look like, it will want to make extra sure this does not materialise.”

Fed minutes published this week revealed that several members wanted a rate cut in July even before the trouble in early August. “Many participants noted that reducing policy restraint too late or too little could risk unduly weakening economic activity or employment [and] could transition to a more serious deterioration.”

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The first stage of a labour downturn is clearly underway. Job offers in cyclical sectors such as restaurants and construction are plummeting. The second stage of rising layoffs has not begun but may not be far away. The worry is that it can happen suddenly once confidence snaps, setting off the self-feeding cascade of a classic recession.

Steven Blitz from TS Lombard said the Fed is now paying the price for its (ridiculous) policy of data dependency. “When the bad data shows up, policy is already late. There is a reason sharp downward revisions occur just before or during recessions,” he said.

Central banking is like ice hockey. You have to skate to where the puck is going, not where it is, and the lag times of monetary policy can be a year or two.

We will find out soon whether or not the Powell Fed has committed a second error by staying too tight for too long, the mirror image of staying too loose as the money supply exploded and the economy roared back at the end of COVID.

No other part of the world looks ready to take the baton as the US slows. The eurozone is still in a deep manufacturing recession. It is tightening fiscal policy by 1 per cent of GDP this year as the Stability Pact comes back in force. But it is China that keeps sinking further into depression, unable or unwilling to stop the onset of post-bubble debt deflation.

Used home prices in the 70-city index have dropped 14 per cent so far from peak to trough, falling almost every month since mid-2021 in slow torture, grinding away at the stored wealth of the Chinese middle class. Fear of further price falls is in turn leading to extreme precautionary saving and a mood of cosmic gloom. New home starts have fallen 63 per cent from their peak, a steeper and deeper property bust than Japan saw in the 1990s.

The authorities are dabbling with a resolution mechanism but the scale is not up to the problem. “The sums so far are still too small to make a meaningful difference,” said Capital Economics.

Xi Jinping is too alarmed by rising debt to let rip with demand stimulus. The People’s Bank is too worried about the exchange rate and mismatches in the Chinese bond market to let rip with serious money. The result is a death spiral in the monetary aggregates. Janus Henderson investors says two of its key measures are now dangerously weak. “True M1” is contracting at a 4 per cent rate (six-month annualised) and the China corporate liquidity ratio has dropped to unprecedented levels.

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Rather than grasping the nettle at this year’s Third Plenum, the Communist Party has opted to double down on its strategy, aiming to export its way out of trouble and dump its excess capacity on the rest of us. China’s slump is why iron ore prices have crashed. It is a large reason why Brent crude is hovering at two-year lows near $US76, even though the OPEC-Russia cartel is withholding three million barrels a day to prop up prices.

China rescued the world economy when the West came off the rails in 2008-2009. Fifteen years later it is more likely to compound a global recession.

Markets are betting that the Powell Fed will pull off an immaculate soft landing and keep the world afloat. Let us pray that they are right.

Telegraph, London