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Right now there is a lot of focus on political and geo-strategic risk: Nouriel Roubini thinks the oil price spike out of the Arab revolts could push the world economy into stagflation. There is also the risk that currency war breaks out into open trade war.

But a note from an investment analyst this week has focused my mind back on the original issue: banking. More specifically European banking. And with a brand new government in Ireland, proclaiming "electoral revolution", and molotovs on the streets of Athens, it's a good time to relook at the intertwined issues of sovereign debt and banking.

The chart on the left shows a series of bubbles that represent the size of the assets - ie the loans made - of various banks. They are arranged on a curve. Those at the high end of the curve are heavily leveraged: that is the ratio of loans to capital (money the actually have at hand) is up to 50/1. Those at the bottom right of the curve have a lower leverage ratio, hovering around 15/1 - but the horizontal scale is important: they are holding 15/1 of more risky assets.

Now take a look at the colours in the graph: blue for US banks, turquoise for UK banks, pink for EU banks.

Yes the EU banks are clustered at the highly-leveraged end of the curve and - take note - even where they are leveraged less towards the bottom right, they sit to the risky side of things.

If we think about the highly leveraged banks, they are holding mainly assets that the Basel Committee thinks are low risk. And that means government debt. I am hoping by now that regular readers of Idle Scrawl will see where this is going but if not, take a look at the graph on the right (above).

This shows the rising cost of insuring government debt against default for various European countries. The top four lines are, in descending order Greece - ghastly - then bailed out Ireland and not-yet-bailed out Portugal (on a virtually identical path) then Spain.

So the assets being held by the big European banks - government bonds - though rated as virtually risk free are in fact being judged by the markets as carrying increased risk of a sovereign debt default.

When it last reported, the .

Most of that exposure is to the public sector and the now-intimately-linked banking sector. And most of the "foreign" exposure is in fact from European banks - though the exposure of US banks to certain categories of peripheral Europe debt is certainly not negligible (indeed about half of all US prime money market funds are invested in EU banks).

This highlights the policy risks concentrated in Europe. If the ECB and the various peripheral Europe governments mishandle austerity and monetary tightening - i.e. raise interest rates too fast or cut public spending and raise taxes too far - provoking a second downturn, then it is Europe that is massively exposed to "itself".

And remember this is a chapter that re-opens with the European summit in March: most Irish observers told me Ireland would go for a renegotiated bailout at the moment Portugal goes for its first attempt - sometime in Q2.

Brent Crude today has reached $119 a barrel. It is of scant concern to those fighting for their lives in Libya, or to maintain and extend democracy in the rest of the Arab world, but there are now clear economic risks arising from this power-shift in the Middle East, and they're starting to filter through to investment decisions.

Here's the main danger:
> the conflict spreads, temporarily choking off supplies
> speculators pile in (there are 2.5x the number of call options to put options on oil futures markets right now)
> this drives the price up towards where it ended up in 2008 - around the $150 mark
> and this chokes off the recovery leading to an oil price slump and a commodity price slump

Nouriel Roubini that the oil price rise was a major transmitter of negative growth out from the financial crash in 2008.

An oil price spike, however temporary, could again reduce the world's spending power, turning recovery into stagflation.

For this reason some investment analysts are now hedging their bets towards a second downturn: just issued a note saying that a point may soon be reached where "demand destruction" takes place - ie the oil price tanks the real economy.

Most analysts don't think the social unrest will spread to Saudi Arabia - however the risks arising from the commodity Venezuelans call "the devil's excrement" are more longterm and complex.

One of the reasons the West bent over backwards to get Gaddafi on board in the mid-2000s is because Libya's oil represented the last major source of fresh, high-quality, cheap to produce oil that was not being tapped by the oil majors. If you buy the Peak Oil scenario, the tendency in future would be to go to more expensive, hard to get, lower-quality venues, such as offshore in the Gulf of Mexico (with all the political risk that now involves), or the tar sands of Canada.

In addition there is the political factor for the oil majors: most decent onshore reserves are now controlled by national oil companies, who have changed the term of trade with the big oil companies to their own advantage.

Libya was - in theory - a chance to decrease the strategic risk. Unlike Saudi oil it does not have to go through three pinch points: the straits of Hormuz, the Mandab Strait and the Suez canal. It can, and does, go mainly straight to Europe (only 14% of Libyan oil goes in the "wrong" direction, through the Suez canal to Asia).

So Libyan oil - once Gaddafi was squared and Megrahi returned to Tripoli - was seen as "out of the chaos zone".

On the terms of the oil contracts things are complex: we don't know the full details - hopefully somebody will be obliging enough not to destroy the documents should Gaddafi's last day in power arrive.

However the general trend in Libya had not been great for the oil majors: Libya's cut reportedly moving from the traditional 60/40 split between Libya and the oil company to, in one case, 92%. Oil analysts believed that in the past year a "conservative faction" had gained control of oil policy and was squeezing ever more revenue for the regime out of oil contracts. (See by Fawzia Sheik of oilprice.com)

But the suspicion is that for BP, the numerous political contacts, back-slapping sessions, LSE donations etc. may have been worth it on a strategic level - however large a cut the Libyan state was taking - because any new source of cheap supply is better than none, and the exploration deals alone were, for BP, pretty huge at the time.

This is what is thrown into confusion as the Libyan people take control of their destiny.

It looks now like enough of the regime has defected to make a smooth transition possible, whereby the existing oil contracts are honoured and production not massively affected. (This would be thrown into doubt if , of alleged sabotage plans by Gaddafi, were to come to pass).

If the supposedly "conservative" oil faction goes down fighting with Gaddafi, and a stable replacement is established, then the opportunity is there for the oil companies finally to deal with a new government which respects the international rule of law.

If however the whole thing ends in chaos, the net political risk to Middle East oil is strategically hiked - because the rest of the oil - in Saudi, Kuwait, the Gulf Monarchies - lies within range of Iran's Fajr-3 missiles, and indeed the Iranian production would be vulnerable to any social revolution there.

Across the region it is likely that increased democracy will mean increased distribution of oil wealth - and other economic rent income, such as with the Suez canal and various pipeline transit fees - to the people. Even without the revolution, as the surviving despots dole out free cash, this is starting to happen. What that means is oil prices will be, tendentially, higher than they would have been where wealth is simply hoarded and then spent in the boudoirs of Park Lane hotels.

In the long-term the economic outcomes of these revolutions will affect all the other outcomes - and Europe has begun to realise this means stability here too.

The obvious answer is for Libya - with massive foreign exchange reserves and healthy economic growth even under Gaddafi - to create the kind of country that people might want to live in rather than to leave.

This now looks possible. It will be a major challenge for the State Department, the FCO and the Quai d'Orsay to start summoning the kind of will to help it happen that has eluded them previously.

Here's how the dynamic of the Middle East revolution is unfolding, and in the process morphing from an essentially political movement against a bunch of corrupt dictators who nobody (not even their allies) ever liked, into a wider movement that is unsettling centres of economic power.

The dynamic driving the revolts was never purely economic, but there was an economic through-line: 24% youth unemployment in countries where 2/3 of the population are under 30, a downturn in growth rates after 2008, and then commodity price inflation hits.

If you read about the life of Mohamed Bouazizi, who burned himself to death sparking the Tunisian revolution, you get a tragic micro-case study of how this plays out for millions of people: he can't get a regular job because he lacks connections; he becomes a street trader living on credit, but then an official confiscates his wares. His sister points out: "those with no connections and no money for bribes are humiliated and insulted and not allowed to live".

There is then, an intimate connection between corruption, the powerlessness of the poor, of autocratic regimes - all of which are seen as "political" issues - and the economic facts of life for the urban poor.

Freed of autocracy, suddenly allowed onto the streets to find a voice, they merge with the "graduates with no future" who have been networking to build this moment for months and years. And where there are organized workers' movements the workers - as in Egypt - finally come onto the streets and again find a mixture of political and economic freedom. The state run trade unions chase out their appointed heads and the next thing is, wage demands break out.

In country run by old men, where the borders between corruption and perfectly legal patronage and cronyism are blurred (I am writing this in Dublin Airport!), for the youth, the workers and the urban poor, each in their own way, there is no separation of grievances between economics and politics.

What's happening now is that the second phase of the revolutions is already opening up. The Egyptian workers launched a round of wage demands; the Bahraini poor want economic reforms and access to jobs.

Such struggles - I have written at length about them in history - do not conform to the deadlines of 24 hour news channels. They are more like an infantry battle in which you only find out who is winning when the losing side throws its last reserves in and then crumbles. This can take months and the battlefield is the boring, subcutaneous world of the clocking-in desk at the door of shabby factories on the outskirts of suburbs nobody has heard of.

That's one dynamic that's been unleashed in North Africa.

A second one is the oil dynamic - now spectacularly unfolding in Libya. If the regime falls there will be a temporary glitch in the world's oil supplies and the price will spike. It would spike even higher if Iran blew up. But ultimately, western leaders are presuming, "democracy" or democratic values will win out and in the ensuing stability prices will fall.

There is a non-negligible risk of stagflation in the west while this happens: doomsters Nouriel Roubini and Mohamed El Erian have both warned of this in the last couple of days. But there is also the issue of ownership and control of the oil wealth of nations.

Libya, where growth is spectacular - 10% - and inflation low, has 30% unemployment. If the peoples of the middle east actually achieve some form of democratic control over the allocation of oil wealth, the terms of oil contracts etc, it will at the very least change the terms of trade between the developed world and the major oil producers.

OPEC, for example, has worked well as a cartel because it is an association of like-minded despots. The Bush administration may have dreamed of busting up OPEC with a pro-western government in Iraq, before the invasion, but it soon gave up on that - indeed it took the best part of a decade even to get oil contracts to the major producers signed.

And while the oil producing despotic regimes were concerned with the oil price and the oil supply, they were not examining the terms of trade, the restrictions on development, the economic rights of their own populations. There is a chance now that governments in these countries will embrace a more complex and challenging development path than cartel-pricing oil and swanning around the posh hotels of London and Paris.

A third big thing has changed. Libya was courted by western governments because there was a win-win. Gaddafi gave up his WMDs and gave intelligence about the WMDs of others; in return his family became suddenly welcome in the social circles of Berlusconi's Rome and Blair's London. And in return the West could suddenly access a big pool of cheapish (to extract) oil; while it would ultimately have to prospect the tar sands of Alberta, here suddenly was a new supply of the old, bubbly, sweet stuff on tap.

The miscalculation came in that - even if Gaddafi survives - the level of lethal force he has reportedly used means the whole deal is over. As Libyan diplomats jump ship, and fighter pilots defect, the whole ability of autocratic governments to use force against insurrections is being eroded.

And this in turn is being seen by opposition movements from Beijing to Puerto Rico.

The revolutions that spread across Europe in 1848 were driven by different factors: but once people had seen revolution succeed, the desire for it became a common factor. In most places those revolutions produced only counter-revolution, autocracy and then - after 20 years - the beginnings of industrial development. It is hard to see the revolutions of 2011 ending with a Louis Napoleon, a General Heynau, a Bismarck etc everywhere. Indeed David Cameron's speech in Kuwait indicates that the democratic powers in the world would rather see them end with stable democracy.

But democracy opens the way to economic instability, and to an economic re-balancing of wealth and power. All across the developing world people sense this is possible - and that the actions of their own rulers, even if unconstrained locally, are becoming constrained by the global forces.

Transcript (roughly) of a talk I just gave at the

Movements in the exchange rate between one currency and another have become the great unmentionable in macro-economic policy. Half the world has an exchange rate policy - the other half claims not to have one.

Yet as the financial crisis has morphed into first a fiscal crisis and now in many countries a social crisis, the global currency markets have become a new stage on which the basic drama is to be played out: who pays for the crisis?

It was the Brazilian finance minister, Guido Mantegna, who declared that the world was in the midst of a currency war in September 2010.

In fact we are in the midst of several currency conflicts and I will list them:

China versus the USA: in which the US wants China to allow the RMB to rise against the dollar, weakening China's competitiveness by raising the price of Chinese exports.

There is the USA versus the Emerging Markets: in which the USA's quantitative easing policy is seen to be exporting inflation, again forcing the currencies of Brazil, South Korea and other export giants to rise against the dollar.

With the Brazilian real up 40% against the dollar in two years Brazil responded to QE2 with
a. A tax on foreign purchases of bonds, designed to suppress the flow of capital in Brazil
b. $40bn of intervention into the spot market for its own currency
c. This month, a ban on short selling of the dollar against the real in Brazil

There is the Euro versus the dollar. Analysts at Goldman Sachs estimated that the entire negative impact of European austerity programmes in 2010 could be offset by a fall in the Euro's exchange rate to parity with the dollar: to the extent that this does not happen, Europe bears the cost of its own crisis.

Then there is north Europe verus south Europe. The Eurozone is locked into one exchange rate but peripheral Europe has, over a nine year period lost competitiveness against the core industrialised and export-led countries above all Germany. Southern Europe cannot devalue, so it is being forced to impose an internal devaluation by the Eurozone authorities - which means massive austerity, wage cuts and the erosion of welfare state provision.

Then there is Japan versus America. When America did QE, so did Japan - in part justifying the move on the grounds that QE was an act of exchange rate competition.

Finally there is Britain versus the rest of the world. Sterling underwent a 25% devaluation during the Lehman crisis, stabilising at a net 20% fall against the currencies of its main trading partners. In this way Britain has offset the cost of the crisis, avoiding double-digit unemployment but amplifying the impact of the commodity price inflation that has now taken off.

The most amazing thing about these currency wars is that few ruling politicians will admit to taking part in them. But they exist - and I now want to situate them within the unfolding crisis that began in 2008.

The best metaphor I have for understanding this crisis, is the 1982 movie Alien.

In the movie, the alien is sitting on John Hurt's face, breathing on his behalf. The ship's doctor decides to cut it off. But as he makes the incision - blood spurts out and the alien's blood is acid. It burns through the floor of the ship, and the cast run down to the next floor and sure enough it's burned through the ceiling, dripped to the floor and is now burning through that as well. They run to the next level and the tension's rising - because if the acid burns thru to the ship's hull - bang! - end of the movie. But it stops. The floor holds it, or the acidic qualities burn themselves out.

In this metaphor the banks are the alien. The blood is toxic debt. The first floor burned through is the global credit market - that disintegrates. But then it burns through the real economy. Output, global trade, stock market values plummet in the final quarter of 2008 and early 09.

Then the state rescues the free market. The state, which was told to butt out of the market, that it could never play a useful function, that it could never regulate better than the two parties in a deal could. Suddenly the state steps in. Bailouts whose value in both the UK and the USA came close to totalling a year's GDP. Fiscal stimuli totalling around 12% of GDP in the USA, China. Quantitative easing in the USA, UK and Japan again totalling a similar amount. And that stabilises the crisis.

Now here's the problem. Some parts of the state formation were not strong enough to hold the toxic matter in check for ever. So it has now begun to burn through and destroy aspects of political arrangements in the world. I will list them:

• The Eurozone - where the social model in the peripheral countries has to be destroyed so the Euro can live;


• Bipartisan politics in the USA - which cannot survive the entry of the state into economic life without provoking a severe existential crisis among the population;


• British social democracy - insofar as its economic programme was based on being a conveyor belt of tax revenues from the financial and service sectors down to poor communities whose lives never got any better;


• Finally, and now spectacularly, the whole economic model in Arab north Africa based on state capitalism and patronage suddenly could not deliver rising employment to its new educated middle class and - with the return of commodity price inflation in 2010, began to be shaken by revolts and unrest.

You have to see this third phase of the crisis as the interplay between efforts to foist the cost of the crisis onto a country's own population - and efforts to offload it onto another country's population in the form of currency appreciation and inflation.

Korea, the Phillipines, Indonesia, Colombia and South Korea are all engaged in some very public thinking about the same kind of capital controls as Brazil imposed. And currency manipulation spills very easily over into trade sanctions.

The US Congress passed the Currency Reform for Free Trade Act authorising the government to take punitive trade sanctions against any country whose currency was deemed to be undervalued by more than 5%.

Here's a graph of undervalued currencies: most of them in Asia, as proposed by HSBC's forex team. (ref Cline and Williamson, Petersen Institute/HSBC).

American policymakers make continued and resolute statements that they have no intention of weakening the dollar through loose monetary policy. Mervyn King has, in private been more frank: a senior and reliable source inside the bank told me Mervyn "was very proud of himself for talking down sterling" during the 2007/8 crisis.

When I studied the political economy of the Great Depression, in the early 1980s, we tended to focus on the Keynesian and Marxist explanations - falling effective demand; disequilibrium; the rate of profit. Everyone agreed that the money supply had collapsed and that prices had fallen but Keynesians tended to see this as a consequence, not a cause.

One of the fruits of the rise of neoliberal economics in the 1980s is that everyone is much more enlightened as to the monetary and forex explanations for why the stock market crash turned into an output sliump. Indeed the greatest contributor on this subject is . He argues that US monetary contraction was a result of faulty institutions and bad policy and that the bad policy was a result of the USA's determination to stick to the Gold Standard, at a time when many of its competitors were leaving: that is, to maintain an unviably high price for the dollar against gold.

"To an overwhelming degree the evidence shows that countries that left the Gold Standard recovered from the Depression more quickly than countri that remained on gold."

Those that devalued first, like France or Belgium, recovered first. This, to me, despite all the public statements, is the logic behind the policies of all the major economies.

China struggles to maintain its undervalued currency. The USA struggles to devalue causing a secondary conflict with Emerging Asia and Latam; ditto the UK; the Eurozone is caught in the middle - but the Bernanke law forces peripheral Europe into an internal devaluation.

One school of thought sees this all leading to a resolution of the global imbalances - on capital flows, on trade, on current account. I don't. It is already leading to disorder - in North Africa rising food prices are just one factor in the unrest but they are a factor and they are in part the result of the wall of money flowing from the developed world into the Ems.

Premier Wen Jia-Bao has with disarming frankness explained what the impact would be of the desired change in the Yuan-Dollar rate:

"If the yuan isn't stable, it will bring disaster to China and the world. If we increase the yuan by 20-40 percent as some people are calling for, many of our factories will shut down and society will be in turmoil."

There is an other reason why the "orderly rebalancing thru currency war" story does not stack up - and it's been pointed out by HSBC's forex analysis team. (Currency Wars: What are they good for? November 2010, Bloom D et al)

Looking at the Plaza Accord of 1985 - designed to rebalance the current account situation between the USA, German and Japan, and to cure high US unemployment - HSBC concludes:

• The scale of the changes needed to address current account imbalances is too large to do in the medium term;


• Even if you achieve a big exchange rate adjustment, the trade imbalances are very sticky - they don't easily respond: you don't get in other words a bunch of toy factories opening up in Tennessee


• And finally there are unintended consequences. The Plaza Accord laid the basis for the loose monetary policy in Japan that fuelled its property boom and bust - a bust which, lets remind ourselves, Japanese property prices have never recovered, even 20 years later.

So what to do?

China has proposed a new global reserve currency; America proposed and withdraw a voluntary cap on current account surpluses at the Seoul G20. [There's been some scant movement on this actually at the G20 meeting this week but nothing spectacular]

But the two proposals would have to be seen as elements of a much bigger global restructuring of capitalism that is beyond the scope of this discussion.

I will finish with a warning. I recently played the excellent mega wargame Hearts of Iron III, which stretches from 1936 to 1947. It models internal politics, espionage, resource allocation and of course trade. But by 1936 - if you are a country like France, Britain or the USA you do not have much to worry about: nearly all your trade is with your own currency bloc. Its an affront to the modern mind to propose - as France - a perfectly economically equal trade between Chile and yourself only to be rebuffed with the reminder: "Chile is a puppet of the United States".

By the mid-1930s the Gold Standard had been replaced by near hermetic trade and currency blocs. Soon another one would be formed, around the Reichsmark.

That is what happens when, to go back to the Alien analogy, the acid burns through to the hull of the spaceship.

If you know anybody from the babyboom generation who was involved in politics, and ask them the year that everything changed, it is not 1968 but 1956 they will cite.

That was the year the British establishment broke over its failed military adventure in Egypt; when it became clear that power had really shifted in the world; that the Soviet Union would crack down on dissent in Eastern Europe; the year in which, despite labelling Gamel Abdel Nasser another Hitler, the Brits were eventually forced to back down from confrontation with him.

I've spent the day following up the Bahrain crisis. I was on Twitter at 2am UK time, as it broke, and my screen erupted with near-live photo feeds of what was happening at Pearl Square.

Since then I've spoken to Middle East experts, global risk strategists, protesters, and old British "hands" in what's left of this country's great game east of the Suez Canal (i.e. not much).

The risk people are right now monitoring such tangible signals as the amount of flour in bakeries from Casablanca to Tabriz; the words used in the sermons of small-town Imams, and the loyalty of various junior officers to various regimes. The old hands persist in their belief that democracy cannot be allowed to come to the "immature" countries that are now demanding it. But what's really interesting is the way it's starting to look to global strategists.

Ian Bremmer, of the Eurasia Group, told me tonight he believed the crisis illustrates there is a G-Zero situation - that is, not the G7, G8, nor G20 is really in control of things; that the Obama administration does not have a "doctrine" for the Middle East - that, in other words the question: "What does the State Department do now?" is for the first time in living memory not the most important question in world affairs.

All this, to me, is redolent of the Suez moment - when the Brits realised they did not rule the roost anymore, and that America did. Only now we're beginning to feel in global politics what business consultants have known for half a decade: it's a "multi-polar world" (copyright Accenture plc).

I've asked several people whether, at CENTCOM, the USA's strategic HQ in Qatar, they would have a plan for what to do if the entire backyard of absolute monarchies that they were supposed to be defending against Iran suddenly melted down into chaos at the very moment the Iranian regime also became engulfed in a revolution. Nobody knows. But my guess is it was not the front and centre scenario they train for.

And so this year of fire blazes on, into the unknown.

This morning I inadvertantly volunteered to serve on the UK's Monetary Policy Committee. For some reason, almost at the same time, the pound slumped against the dollar. But I am glad to say the two facts are not linked.

Mervyn King, the governor of the Bank, had been explaining how "there was no obvious answer to the question" of what to do about 4% inflation; and that what mattered was not the inflation rate now but in 3 years time.

I pointed out - see the clip above - that the inflation rate does matter to people seeing their wages disappear into their local Costcutter at an alarming rate. And that it was 4% as a result of a series of decisions taken by him - namely to revel in the fall of sterling, to print £200bn and to cut interest rates to their lowest level since Samuel Pepys.

At this point the governor invited me to explain what I would have done and I made a possibly unguarded suggestion that they might like to stick me onto their committee and find out.

Mervyn King then pointed out that I have not exactly been an inflation hawk over the past 36 months, and that I would have possibly been the first to raise questions had they raised rates sooner and tanked the economic recovery.

I replied that this was a fair point, and that maybe there really is nothing the Bank can do, but that therefore the man in Costcutter should probably conclude that the 2% target is a fiction. The governor rejected this.

The substance of today's press conference however, was still grim, despite these moments of levity. What Mervyn King was at pains to explain is that "we are only now seeing the impact of the 2008 events" on people's real incomes. Either your wages are eroded by inflation or by rising mortgage interest rates and credit card bills. That's the Hobson's Choice you are faced with once the banking sector collapses and has to be bailed out, and then the bailer-out - ie the government - gets forced into the biggest peacetime austerity programme in living memory.

And he is right. But what I was doing with that question is trying to let some of the frustration that is out there among our readers and viewers into the perennially genteel world of the Bank, Treasury et al. What Mervyn King is really saying is: direct your anger somewhere else - and in numerous speeches he has made clear where that should be - at the bankers and those who mis-regulated them.

(I should add that I am not seriously volunteering to be on the MPC: I would expect wholesale capital flight, let alone a collapse in sterling were this to happen)

However it might not be a bad idea to put a few ordinary people on the MPC. Because, in the end, all it has to do is tweak a dial, 0.25% this way or that. Anybody who has used a faulty shower mixer could do it.

Ultimately, the reason sterling fell during Meryn's press conference was more prosaic. Having got themselves into a froth about imminent interest rate rises, following Mervyn King's letter to the Chancellor yesterday, the writer of that letter then effectively blew away the froth.

I read the subtext of Mervyn's rationale for that, with repeated references to "unforseen shocks", as as follows: until we know the European banking system is safe, and that the Eurozone authorities are not going to run around like Fred Karno's Army when the markets finally flatten Portugese sovereign debt, we can't really project anything safely, and therefore monetary strategy cannot become decisively tighter.

The ONS has CPI inflation is 4%.

Inflation is, and has been, way above target for most of the last two years. The Bank of England claims it is "looking through" such inflation to the longer term.

This, frankly, is called ignoring your own target.

There are very good reasons to do so: first, the Bank is right that the global price pressures are not easily dealt with by depressing the spending power of UK consumers. However, if you accelerate those price pressures by deliberately talking down sterling, and lauding your own achievement, then don't complain about being at the mercy of global inflation.

Second: if they hike interest rates very much right now it will tank consumer spending power, growth and therefore the recovery. This in turn will mean the deficit reduction plan having to be even harsher than currently planned.

Third, by mutual tacit arrangement with the Treasury, the Bank stands ready to loosen monetary policy (ie keep rates at near zero and print more money), should the long-expected rebalancing of the economy fail to occur, and we get a public-sector led second recession.

Last year, on the eve of QE2, the US Treasury and central bank toyed with the idea of "targeting" bond yields. That is, declaring that they would go on printing money until the effective interest rate on government borrowing fell to, say, 2%. That's an entirely logical and orthodox thing to do for those who've studied other QE experiments.

However, targeting interest rates means not targeting inflation.

But the Bank of England can't seem to have this debate, because its remit is fixed. Indeed even its critics are compelled to debate the Bank's performance against the given inflation target. So we are left with a target that is increasingly in the markets understood as fictional.

Once the markets believe someone's targets are fictional they tend to test this hypothesis, rather in the way rugby flank forwards tend to test puny centres whose commitment to tackling is believed to be fictional.

And so, intuitively, to consumers. In their alter-ego as workers they begin to put in wage claims for 5% on the grounds that "you need 5% just to stand still against the real cost of living" (RPI is now 5.1% and rising).

The inflation target was designed by Gordon Brown in an era when the net impact of China on the world was deflationary: now it's inflationary. And when we thought we'd abolished boom and bust (now we haven't).

So is it time to rethink the inflation target? We might discuss this on Newsnight if we can get any of the politicians interested in the question.

And by the way isn't it time the mandarinat of Threadneedle Street started engaging with the British public on these issues: in actual interviews where actual journalists get to ask them actual questions - not the medieval ritual the Bank has constructed around the Quarterly Inflation report (of which more tomorrow)?

Ever since I heard the term "Big Society" I've seen my nearest library as the thermometer for its success. It's an in South London, squashed between a convenience store and a builders' merchants - actually it's even squashed beneath something: social housing, because the gargoyled mock-tudor towers have been long ago turned into flats.

We owe the library to a pioneer of the Big Society: Jemina Durning, who upon marrying the Manchester Liberal politician John Benjamin Smith set about bestowing libraries: one , the other at Ascot racecourse.

Jemina stares nobly in profile from a wall plaque on the library wall, just above where the little platoons of Kennington positioned their wallpaper table and petitions this month, to warn Lambeth Council not to cut, close or otherwise harm the Durning Library.

This area is one of those enclaves in London where you still find old money and new poverty intermixed. Somali migrants and hereditary peers of the realm. The local dry-cleaner is always replete with the pink and blue striped shirts of the city boys who live here.

There is, every year, a Fete in a local square, where for one summer afternoon the boules players make way for stalls run by our version of the Big Society: the primary school, the Tandoori, whose charitable well-digging projects in Bangladesh are supported by the numerous politicos who eat there. We have a Kurdish community centre, an African-themed Anglican church, a highly respected gay massage parlour and a thriving street life centred around the promenading of small dogs.

So the fate of the Library is going to be really simple. Either it survives as a publicly owned institution, or it gets taken over by the combined community forces of this area and run as a Big Society charity. Indeed given its political connections and old money traditions, this is one of the few places in Britain where raising the money would be no problem.

The problem is, as evidenced by the protests that have already started, middle England would rather have its libraries run by a council than by a charity. It would prefer to concentrate its charitable activities on other things - from well-digging in Bangladesh to extra services at local schools and nurseries and clinics, the rehabilitation of offenders etc. It would prefer not to have to worry about disabled access ramps, CRB checks, and the obligations of running a Grade II listed building.

However this may soon not be an option. Last week Lambeth Council cut £1.2m from its cultural services budget, and the mobile libraries and silver surfers groups have already got the chop. There is uneasiness about the future of Jemina Durning's gift to Kennington.

Today David Cameron has . The inititative is, he says, about three things:

"devolving power to the lowest level so neighbourhoods take control of their destiny; opening up our public services, putting trust in professionals and power in the hands of the people they serve; and encouraging volunteering and social action so people contribute more to their community."

I have yet to meet a single person who disagrees with these principles. Indeed many of those involved in trying to save the library believe they are living the dream already.

The problem is, as Mr Cameron acknowledges today, he is losing the battle of the narrative. For the middle classes of an area like this, in truth, the library is not a must-have in their own lives: any ten of the Georgian town houses around here will have more books between them than the library contains, and much greater computing power.

But the library embodies a promise: that young mums will always have somewhere to meet; that the digitally disconnected will always have somewhere to go online; that the elderly will always be able to find a large print book; that the cold and lonely will have somewhere dry to sit. Above all that the poor and marginalised will have access to literature.

Jemina Durning's philanthropic gesture shows there is no intrinsic reason why this promise cannot be met through private and voluntary means, rather than public. But we have become used to it being provided through the state.

That is, in part because - not long after the library opened - that other fearsome Kennington lady , fought together with her Fabian Society buddies for the state provision of public services. The Manchester Liberalism of the Durning-Smiths died and was, by the 1920s, replaced with a social liberalism inspired by Keynes and Beveridge, which saw the public sector as a good thing.

So Mr Cameron is right about one aspect of the Big Society: "this is quite different from what politicians have offered in the past".

And, , Middle England is quite conservative.

I'm in Portugal, where the country's cost of borrowing spiked above 7% again yesterday, forcing the ECB to resume buying the government's debt. There have been strikes all week, but in marked contrast to the rest of peripheral Europe - and in defiance of Glenn Beck's global intifada predictions - it's all laid back. There was no picket line at the big commuter station yesterday, just a near total strike. You could hear the station clock ticking.

But the markets are worried for the usual reasons. Here the political debate is all about austerity, but it's between a vocal parliamentary opposition of Communists and New-Leftitsts (ie to the left of Communists) versus the Socialist government, which is backed by the right, which is labelled "Social Democrat". These names alone would have a commentator like Glenn Beck choking on his Cheerios, because the whole panoply is profoundly committed to Europe and the social model. The debate is which bit to chip away at to calm the markets. Nobody proclaims the shrinkage of the state, the rise of the Big Society, the benefits of austerity.

So what are the risks? Portugal is getting its budget deficit down - but by cutting a public sector which, since EU membership has kept the country buoyant, it risks provoking a new recession. Here, as in the UK, there is talk of rebalancing - but the biggest challenge is that they import more than they export. Industries are being devastated by the triple whammy of recession, falling public sector demand and the underlying shift of low-value production away form places like this into Asia.

There is no air of crisis but one of resignation and, despite the gaudy gentility of this utterly polite and fastidious nation, gloom. There are dole queues in every town: the faces are mostly those of migrants and the older workers. This reminds me of Britain in the 1980s - they crowd into small rooms on plastic seats to wait for their number to be called.

The big decisions about this country's future will be taken in Brussels now. WHat the markets were betting on, yesterday, is that Brussels will - as is now traditional in the choreography of EU sovereign debt woe - fail to act decisively, or agree a clear way forward.

With the CP and Left Bloc owning 20% of parliamentary seats - and 23% of the vote - and with all major parties tied into the austerity measures - there is what investors call a "non-negligible" political risk too: if the left's 23% crept up towards 30% that would place pressure on Portugal's ruling political class - many of whom were active in their own Egypt moment, the day in April 1974 when they brought down the right wing dictatorship of Salazar.

The speculator were out yesterday - but Portugal's real problem is not speculators: it's people who hold bonds for the long term benefit of savers and pensioners. They're getting out of Portugese bonds because 7% interest is not a high enough price for the risk they might not get some of their money back. Call it illogical, but that's what even big investment funds in the USA are starting to say.

See my report next week on Newsnight.

We've had revolution in Tunisia, Egypt's Mubarak is teetering; in Yemen, Jordan and Syria suddenly protests have appeared. In Ireland young techno-savvy professionals are agitating for a "Second Republic"; in France the youth from banlieues battled police on the streets to defend the retirement rights of 60-year olds; in Greece striking and rioting have become a national pastime. And in Britain we've had riots and student occupations that changed the political mood.

What's going on? What's the wider social dynamic?

My editors yesterday asked me put some bullet points down for a discussion on the programme that then didn't happen but I am throwing them into the mix here, on the basis of various conversations with academics who study this and also the participants themselves.

At the heart of it all are young people, obviously; students; westernised; secularised. They use social media - as the mainstream media has now woken up to - but this obsession with reporting "they use twitter" is missing the point of what they use it for.

In so far as there are common threads to be found in these different situation, here's 20 things I have spotted:

1. At the heart if it all is a new sociological type: the graduate with no future

2. ...with access to social media, such as Facebook, Twitter and eg Yfrog so they can express themselves in a variety of situations ranging from parliamentary democracy to tyrrany.

3. Therefore truth moves faster than lies, and propaganda becomes flammable.

4. They are not prone to traditional and endemic ideologies: Labourism, Islamism, Fianna Fail Catholicism etc... in fact hermetic ideologies of all forms are rejected.

5. Women very numerous as the backbone of movements. After twenty years of modernised labour markets and higher-education access the "archetypal" protest leader, organizer, facilitator, spokesperson now is an educated young woman.

6. Horizontalism has become endemic because technology makes it easy: it kills vertical hierarchies spontaneously, whereas before - and the quintessential experience of the 20th century - was the killing of dissent within movements, the channeling of movements and their bureaucratisaton.

7. Memes: "A meme acts as a unit for carrying cultural ideas symbols or practices, which can be transmitted from one mind to another through writing, speech, gestures, rituals or other imitable phenomena. Supporters of the concept regard memes as cultural analogues to genes, in that they self-replicate, mutate and respond to selective pressures." (Wikipedia) - so what happens is that ideas arise, are very quickly "market tested" and either take off, bubble under, insinuate themselves or if they are deemed no good they disappear. Ideas self-replicate like genes. Prior to the internet this theory (see Richard Dawkins, 1976) seemed an over-statement but you can now clearly trace the evolution of memes.

8. They all seem to know each other: not only is the network more powerful than the hierarchy - but the ad-hoc network has become easier to form. So if you "follow" somebody from the UCL occupation on Twitter, as I have done, you can easily run into a radical blogger from Egypt, or a lecturer in peaceful resistance in California who mainly does work on Burma so then there are the Burmese tweets to follow. During the early 20th century people would ride hanging on the undersides of train carriages across borders just to make links like these.

9. The specifics of economic failure: the rise of mass access to university-level education is a given. Maybe soon even 50% in higher education will be not enough. In most of the world this is being funded by personal indebtedess - so people are making a rational judgement to go into debt so they will be better paid later. However the prospect of ten years of fiscal retrenchment in some countries means they now know they will be poorer than their parents. And the effect has been like throwing a light switch; the prosperity story is replaced with the doom story, even if for individuals reality will be more complex, and not as bad as they expect.

10.This evaporation of a promise is compounded in the more repressive societies and emerging markets because - even where you get rapid economic growth - it cannot absorb the demographic bulge of young people fast enough to deliver rising living standards for enough of them.

11.To amplify: I can't find the quote but one of the historians of the French Revolution of 1789 wrote that it was not the product of poor people but of poor lawyers. You can have political/economic setups that disappoint the poor for generations - but if lawyers, teachers and doctors are sitting in their garrets freezing and starving you get revolution. Now, in their garrets, they have a laptop and broadband connection.

12.The weakness of organised labour means there's a changed relationship between the radicalized middle class, the poor and the organised workforce. The world looks more like 19th century Paris - heavy predomination of the "progressive" intelligentsia, intermixing with the slum-dwellers at numerous social interfaces (cabarets in the 19C, raves now); huge social fear of the excluded poor but also many rags to riches stories celebrated in the media (Fifty Cent etc); meanwhile the solidaristic culture and respectability of organized labour is still there but, as in Egypt, they find themselves a "stage army" to be marched on and off the scene of history.

13.This leads to a loss of fear among the young radicals of any movement: they can pick and choose; there is no confrontation they can't retreat from. They can "have a day off" from protesting, occupying: whereas twith he old working-class based movements, their place in the ranks of battle was determined and they couldn't retreat once things started. You couldn't "have a day off" from the miners' strike if you lived in a pit village.

14.In addition to a day off, you can "mix and match": I have met people who do community organizing one day, and the next are on a flotilla to Gaza; then they pop up working for a think tank on sustainable energy; then they're writing a book about something completely different. I was astonished to find people I had interviewed inside the UCL occupation blogging from Tahrir Square this week.

15. People just know more than they used to. Dictatorships rely not just on the suppression of news but on the suppression of narratives and truth. More or less everything you need to know to make sense of the world is available as freely downloadable content on the internet: and it's not pre-digested for you by your teachers, parents, priests, imams. For example there are huge numbers of facts available to me now about the subjects I studied at university that were not known when I was there in the 1980s. Then whole academic terms would be spent disputing basic facts, or trying to research them. Now that is still true but the plane of reasoning can be more complex because people have an instant reference source for the undisputed premises of arguments. It's as if physics has been replaced by quantum physics, but in every discipline.

16.There is no Cold War, and the War on Terror is not as effective as the Cold War was in solidifying elites against change. Egypt is proving to be a worked example of this: though it is highly likely things will spiral out of control, post Mubarak - as in all the colour revolutons - the dire warnings of the US right that this will lead to Islamism are a "meme" that has not taken off. In fact you could make an interesting study of how the meme starts, blossoms and fades away over the space of 12 days. To be clear: I am not saying they are wrong - only that the fear of an Islamist takeover in Egypt has not been strong enough to swing the US presidency or the media behind Mubarak.

17. It is - with international pressure and some powerful NGOs - possible to bring down a repressive government without having to spend years in the jungle as a guerilla, or years in the urban underground: instead the oppositional youth - both in the west in repressive regimes like Tunisia/Egypt, and above all in China - live in a virtual undergrowth online and through digital comms networks. The internet is not key here - it is for example the things people swap by text message, the music they swap with each other etc: the hidden meanings in graffiti, street art etc which those in authority fail to spot.

18. People have a better understanding of power. The activists have read their Chomsky and their Hardt-Negri, but the ideas therein have become mimetic: young people believe the issues are no longer class and economics but simply power: they are clever to the point of expertise in knowing how to mess up hierarchies and see the various "revolutions" in their own lives as part of an "exodus" from oppression, not - as previous generations did - as a "diversion into the personal". While Foucault could tell Gilles Deleuze: "We had to wait until the nineteenth century before we began to understand the nature of exploitation, and to this day, we have yet to fully comprehend the nature of power",- that's probably changed.

19. As the algebraic sum of all these factors it feels like the protest "meme" that is sweeping the world - if that premise is indeed true - is profoundly less radical on economics than the one that swept the world in the 1910s and 1920s; they don't seek a total overturn: they seek a moderation of excesses. However on politics the common theme is the dissolution of centralized power and the demand for "autonomy" and personal freedom in addition to formal democracy and an end to corrupt, family based power-elites.

20. Technology has - in many ways, from the contraceptive pill to the iPod, the blog and the CCTV camera - expanded the space and power of the individual.

Some complications....

a) all of the above are generalisations: and have to be read as such.

b) are these methods replicable by their opponents? Clearly up to a point they are. So the assumption in the global progressive movement that their values are aligned with that of the networked world may be wrong. Also we have yet to see what happens to all this social networking if a state ever seriously pulls the plug on the technology: switches the mobile network off, censors the internet, cyber-attacks the protesters.

c) China is the laboratory here, where the Internet Police are paid to go online and foment pro-government "memes" to counteract the oppositional ones. The Egyptian leftist blogger says on his website that : "in a dictatorship, independent journalism by default becomes a form of activism, and the spread of information is essentially an act of agitation." But independent journalism is suppressed in many parts of the world.

d) what happens to this new, fluffy global zeitgeist when it runs up against the old-style hierarchical dictatorship in a death match, where the latter has about 300 Abrams tanks? We may be about to find out.

e) - and this one is troubling for mainstream politics: are we creating a complete disconnect between the values and language of the state and those of the educated young? Egypt is a classic example - if you hear the NDP officials there is a time-warped aspect to their language compared to that of young doctors and lawyers on the Square. But there are also examples in the UK: much of the political discourse - on both sides of the House of Commons - is treated by many young people as a barely intelligible "noise" - and this goes wider than just the protesters.

(For example: I'm finding it common among non-politicos these days that whenever you mention the "Big Society" there's a shrug and a suppressed laugh - yet if you move into the warren of thinktanks around Westminster, it's treated deadly seriously. Dissing the Big Society has quickly become a "meme" that crosses political tribal boundaries under the Coalition, yet most professional politicians are deaf to "memes" as the youth are to the contents of Hansard.)

That's it - as I say, these are just my thoughts on it all and not researched other than through experience: there are probably whole PhD theses about some of this so feel free to hit the comments.

Likewise if you think it is all balderdash, and if you are over 40 you may, vent your analog-era spleen below.

Like two rival sound systems on an edgy council estate, the Austrian School of economics and Keynesianism have been squaring up throughout this crisis, their jeans metaphorically drooping to reveal ideological undershorts of deeply contrasting colours.

There's even - really (!) - been adramatising the theoretical conflict between Friedrich Hayek and John Maynard Keynes.

Now, on ´óÏó´«Ã½ Radio Four, we are doing our bit to raise the tone of this debate by devoting two whole half-hour programmes to the renewed controversy between left and right in economics.

Last night, on Analysis, Jamie Whyte explained the , showing how the onset of fiscal crisis has added weight to its objections not just to heavy regulation but to the modern role of central banking. You can listen to the programme here.

Next Monday I'll be presenting a companion piece about the Financialisation School. Originating in sociology, human geography and that corner of economics where Marx and Keynes rub shoulders, these theorists argue there's been a structural transformation in the past 20 years, in which finance has come to dominate everything else: company structure and investment priorities; consumption behaviour and of course banking.

The is critical of mainstream Keynesian economics and its remedies go way beyond tweaking consumption upwards through fiscal and monetary stimulus. They want an economy where wages rise and credit declines, where companie stop aiming for double-digit profit rates, where public provision replaces privatisation and where the banks face regulation designed to outlaw activities we see as normal.

Says , professor in economics at London's School of Oriental and African Studies:

"Market negating regulation is what we need - regulation whereby the state intervenes and stops the financial market from following its own often mad impulses. This market negating regulation will have to be about prices - controlling interest rates in other words; will have to be about quantities, controlling the flows of credit. We're talking about capital controls and about credit controls."

"So the pre-Thatcher era?" I ask.

"That's it", he says. "The benefits of the dynamic globalised financial economy are very hard to pin down. It is very difficult to see what free movement of capital has contributed to the growth of the global economy."

Tune in next Monday night at 20.30, ´óÏó´«Ã½ Radio Four. Catch the first programme here, or again on air on Sunday night, 21.30.