Never mind that we may have talked ourselves into it. The financial crisis is for real, and escape may be impossible
FEAR AND gloom inhabit Britain's high streets and workplaces. Barely six months ago there was talk of a consumer boom, of soaring house and share prices and rapidly rising earnings, of the once undreamt-of prospect of "full employment". Now an autumnal chill is setting in.

Every day brings news of job losses and market falls. Those frightening noises in the far distance - first from Thailand, Indonesia and Japan, now from Russia, Brazil and Wall Street - seem to be closing in on us. We face an almost certain recession, and there is talk of the possibility of a global depression on the scale of the early 1930s.

Yet most people have little idea why those distant rumblings matter. They know that three factors, "the Asian crisis", "the strong pound" and "market turmoil", have suddenly combined in a dangerous cocktail, but they do not fully understand how the mechanisms of the global economy grind together. Despite the headline job-loss stories, most people in Britain are still untouched by the financial contagion that has impoverished a quarter of the globe. But they are beginning to sense that they cannot escape, and that things are going to get a good deal worse before they get better.

The City trader whose job and bonus are at risk, and whose spending power is suddenly reduced, provides a simple model of the way market swings ripple into the "real" economy. But let us take a different example, far from London and apparently unaffected by the global economy: my home town of Helmsley, North Yorkshire, population 1,500.

HELMSLEY, on the edge of the North York Moors, has its own prosperous micro-economy, fuelled by local tourism. It has no factories; its biggest businesses are bakeries and hotels, and it has few foreign visitors or connections. If the sun comes out this weekend, the town's market square will be filled with motorcyclists from Teesside and elderly couples from West Yorkshire.

The bikers - mostly fortysomethings with expensive hobby bikes and leatherwear to match - love the run over the hills from Middlesbrough, Hartlepool and Sunderland. They provide evidence of the improved wealth of that region after years of decline. Its old industrial base of shipbuilding and heavy engineering died 15 years ago: only the ICI chemicals plant at Billingham survives to remind us what it once looked like. Its new industrial base is dominated by names such as Samsung, Nissan and Komatsu.

More than 50,000 jobs have been created or secured in the North-east by the arrival of Asian- and European-owned assembly plants. Now that trend has gone into reverse. The Koreans have no more money to invest, and the development timetable for the showpiece Samsung plant in Tony Blair's Sedgefield constituency has been set back. In the deeply depressed Japanese domestic economy unemployment has reached record levels, and Japanese companies are cutting back overseas rather than suffer the humiliation of closing factories at home. At the same time fierce competition in the electronics industry - driven by Korean "dumping" - has reduced the world price of microchips from $55 to less than $3 per chip; hence the closure of both the Siemens and Fujitsu semiconductor plants on Tyneside, at a cost of 1,700 jobs.

Indigenous industries are suffering as well. As a major exporter to Europe, ICI has been savagely hit by the strength of the pound this year - largely a function of the Bank of England's policy of keeping interest rates high to combat inflation. As governments everywhere, including Asian tyrants, cut their defence budgets, the armaments group Vickers has shed more than 1,000 jobs and may have to close its Leeds factory. In the motor industry, the jewel of British industrial renaissance, Ford at Dagenham is on a four-day week, and Rover is talking of closing its Longbridge plant for the month of December. How long can it be before Nissan announces a cutback?

AS JOBS GO and plants close, smaller suppliers and local retailers feel the pinch. I would not want to own a showroom full of expensive motorcycles in Middlesbrough this winter; I predict a buyers' market in second-hand models. And nor would I want to be a publican or a brewer. Bass recently reported "diabolical" beer trading conditions, especially in industrial regions where pub customers are worried about their jobs.

If the Asian crisis and the strong pound mean that Helmsley's pubs are about to suffer from the declining fortunes of weekend bikers, the town's cafes and souvenir shops are about to feel a chilly wind from Wall Street. The grey-haired day visitors who patronise them are, for the most part, frugal folk living on pensions and savings. None of them, I venture to guess, were investors in Long-Term Capital Management (LTCM), the hedge fund based in Greenwich, Connecticut, which had to be rescued from a multibillion- dollar collapse last week. Nor had they bought shares in the bombed-out Russian stock market. But many of them, directly or indirectly, through unit trusts and pension plans, have a modest stake in the British stock market, which has lost more than 20 per cent of its value since its July peak, and which was tumbling again on Friday in response to a heavy overnight fall on Wall Street - prompted by, among other things, a mood of pessimism that followed the LTCM crash. Some of them may have had the misfortune to build share portfolios based on undoubted British names such as ICI and Barclays, both of which have lost half of their value this year. So teashop customers will also be feeling poorer (even more so if the Bank of England follows the US Federal Reserve by starting to cut interest rates next week, so reducing the income on cash deposits) and they, too, will be spending a little less.

Everyone has caught the mood. Sentiment is all important in economic swings, and in every recent measure of it the dials have been pointing downwards. House prices, which had been moving steadily upwards across the country, have fallen for the past two months. Repossessions and bankruptcies, though nowhere near the scale of the early-1990s recession, are on the increase again. One survey of business confidence after another produces "the worst results since 1992". We do not know quite how bad the prospects are for teashops or motorcycle dealers or giant industrial conglomerates, but we know by now that those prospects are much worse than we expected them to be this time last year.

That makes everyone more cautious with their money, forcing even companies that make basic consumer essentials to take a closer look at their production costs: Gillette, the American-based disposable razor company, announced the closure of 14 factories worldwide last week - swiftly followed by Wilkinson Sword, which shed 300 jobs in Northumberland. We suddenly find ourselves in a spiral of decline.

And we know also, both from experience of the last recession and from the accumulation of recent bad news, that it will be no good looking to the high street banks to ease the situation. Barclays, for example, has recently lost pounds 340m in Russia and another pounds 300m through bond-trading in its Barclays Capital subsidiary; it has also contributed $300m to the LTCM bail-out. Even Abbey National had a small exposure to LTCM.

THE DESTRUCTION of international banks' capital that has taken place this year will mean a huge reduction in their willingness to lend, even if lower interest rates make some businesses keener to borrow. There will be no mercy shown by the banks towards smaller firms that breach their overdraft limits because sales are lower than expected. Low-margin, thinly capitalised ventures at the bottom of the economic pyramid - such as cheap souvenir and bric-a-brac shops - will be among the first to go.

This is what globalisation, the catchword of the late 1990s, really means. The failure of the Japanese government to restore confidence in its financial system is delaying recovery of the Japanese domestic economy, which is damaging trade throughout Asia and putting jobs in Asian-owned plants in Britain at risk. The inability of the International Monetary Fund to prop up collapsing economies in Russia and elsewhere - and the inability of Bill Clinton to provide political leadership for the world - creates fears of growing instability. The irresponsibility of a handful of traders in Connecticut has sent ripples through the entire international banking community, now waiting to see what other huge exposures emerge.

All these factors are combining to drive an over-heated US stock market sharply downwards, and other world markets have followed. It is becoming more difficult for companies to raise capital through the stock market, or borrow it from banks, to invest in new ventures. If the fall in share values continues, it will make American consumers feel poorer and spend less. If the fall in Asian currencies makes imports into the US cheaper, it will damage US manufacturers and destroy American jobs. If America heads for recession, its major trading partners such as Britain head into even deeper difficulties. And there will be very little that the British government can do to arrest that process - especially a government committed to hefty additional welfare spending and therefore unable to stimulate growth by cutting taxes.

This may be an unduly pessimistic picture. But the speed at which so many economic indicators have turned for the worse in recent weeks has taken the optimists by surprise.The truth is that we do not know how far the British economy has to fall, but few commentators are still talking about a "soft landing". What we do know is that we are caught in an inexorable global process, which will have its effect, sooner or later, on every saver, every business and every small town.