Philip Hensher: Decline and fall - the world envisaged in chaos theory is now with us

Poor countries are helped out by rich countries. And what happens when rich countries, through their munificence, become poor countries?

(DARREN DISS)

The other day, I suddenly wondered why no major UK publisher had gone out of business. It seems unlikely, given the problems they face. A lot of young people have never read a book, and, like Victoria Beckham and Jamie Oliver, don't see why they should. If you really want to read something, there is the internet, I suppose. Pressures of this sort have done for various chains of booksellers. Why are publishers surviving pretty well the same pressures?

Or take universities. No UK institution of higher education has, so far, just closed down because there's no money any more. Perhaps we assume that it won't happen, that it can't happen. It happens elsewhere. In 2005, Huron University in South Dakota, USA, a university a century and a quarter old, was allowed to go out of business. Everything was sold. You could buy the football field for £25,000, which seems like a bargain for five acres of land, even if it is in South Dakota.

Why isn't that going to happen here? Everyone knows there's massive over-capacity in the higher education sector in the UK, and there is shortly to be a huge collapse in demand for its services. Some institutions ranked 110th or 120th in the league tables are seriously proposing to charge £27,000 for a degree from next year. Few people are going to be attracted by that, or by the idea that they won't have to pay it because their degree won't get them a good enough career, no one they know has any money, and there aren't any jobs anyway. One can perfectly well see 30 or 40 of our universities going the way of Huron. Maybe all of them.

If Woolworths can go bankrupt, or Lehman Brothers, or car manufacturers, then why not anything at all? There's no reason. In fact, everything appears more vulnerable to catastrophe than ever before. A 31-year-old trader, Kweku Adoboli, was allegedly free to flush $2bn (£1.26 bn) of UBS's money away before anyone noticed. Where is that money now? Like asking "what happened before the start of the universe?" it doesn't seem a sensible question.

Why not a whole country? Greece is going to default, clearly, and there seems no very good reason why half a dozen other eurozone nations should not follow it, sooner or later. What's the solution? Apparently, to pump immense amounts of dollars into the economy – to provide unlimited liquidity to keep the thing on the road into the new year. And Germany should shoulder the general debt, supposedly.

If neither of these sound like long-term solutions, that's because they aren't. Poor countries are helped out by rich countries. And what happens when the rich countries, through their munificence, become poor countries?

The massive increase in interconnectedness and mutual obligation in recent decades has created the world envisaged in chaos theory, where the flapping of a butterfly's wings, or the speculative behaviour of a single trader can now lay waste to large stretches of the globe.

Now there is talk of a "double-dip" recession, or a W-shaped one comparable to the early 1980s slump in America, where a false dawn was followed by renewed shrinkage.

Or it may be that what we now face is the prospect of an L-shaped recession, like the long Japanese nightmare of the past 20 years. Or we may plummet into something like the Great Depression, where the economy shrank, and shrank, and just went on shrinking for years on end. Or we could succumb to inflation. There seems no very good reason why, with all these dollars pumping into the economy, inflation should not escalate into hyperinflation. In the aftermath of the Second World War, Hungary experienced the sort of inflation where prices doubled every 15 hours. When the currency was recalibrated, one new unit was equal to four with 30 noughts after it of the old ones. Oh, yes, there are plenty of truly horrible things that can happen to us.

I've been reading a good deal of JG Ballard recently, and am haunted by that novelist-prophet's book, High Rise. In it, the inhabitants of a luxury tower block turn on each other, and civil war breaks out. It begins, memorably, with its hero sitting on his balcony eating the roasted hindquarters of his neighbour's pet Alsatian.

Is that what's going to happen? The truth is that we have been forced to live together, with the assurance that we are all serving the same end. The real reason for the project, of course, was to ensure peace and mutual dependency, and an end to war in Europe.

We talk about previous recent recessions as if the course of this one is inevitably going to go the same way. The institutions will be sustained; the relationships are going to emerge at the other end with the same general appearance, a little bruised. But circumstances have altered so immeasurably that the outcome, as well as the structure, may be unprecedented. The Great Depression of the 1930s, even with completely separate sovereign states, had a huge impact around the globe. With near-total systemic mutual reliance, what effect would a new depression on that scale have?

In all of previous history, one possible outcome in the bitter dispute between Germany and Greece would be that the two countries go to war. For the first time, the prospect of a European war was raised this week by the Polish finance minister, Jacek Rostowski, in an interview. He was in minatory mood, and meant to suggest that it was only the stability of the eurozone which was preventing this. But for the first time in decades, war starts to seem a remotely possible outcome to financial catastrophe.

We talk about possible outcomes to a double-dip recession as if they are limited to things that happened on a smaller scale in the 1990s and 1980s. What if we have unknowingly created the circumstances for an outcome that looks like the Thirty Years War? How would we know until afterwards, sitting on the balconies of our now worthless apartments, chewing on the roasted hindquarters of our neighbours' Alsatians?

The one thing we can be pretty sure about is that, first, we have created the conditions for those furthest away from the storm to descend and acquire as many of our assets and debts as they possibly can. Like tourists in Weimar Germany, plenty of people will find there are some lovely bargains to be had. We've been very relaxed about foreign acquisition in recent decades, and we must prepare to be still more so at the hands of the Chinese in coming years.

Second, there is going to be large pressure not just to leave the euro, not just the EU, but to dismantle all sorts of connections in the name of defence against more systemic failures, and France closes its doors to Spain, and in the end, Prussia erects a high wall against Bavaria.

One of the great achievements of recent years has been the humane connections made across borders. Could the mere mechanisms of money and finance permanently undo that achievement? Well, we will find out.