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Just as makenomics.com predicted in it's first post, we are on the brink of financial disaster, and yesterdays Evening Standard agrees. Despite a 2nd injection of cash yesterday (it's not a bailout but insurance, honestly) banks shares plummeted, RBS saw a 68% drop in their share price, Lloyd's 32%, Barclay's 25% and HSBC 11%. The confidence and trust that the markets are built on has vanished, and will continue to do so. Beware anyone walking through the city over the next couple of weeks, the ground may simply crumble away beneath you.

But this is not the only bad news to emerge today, forget those holidays abroad, the pound has dropped to $1.3965, it's lowest level since 2001. BBC news reported that some credit rating agencies are listing blue-chip companies as safer than UK government debt, remember what that type of rating did for the Argentine economy.

As the pound gets weaker, inflation is falling but how far will it go, especially since we're just about to print billions in new currency? Once the VAT cut drops out of inflation figures, as it's expected to do by the end of the year the expansionist monetary policy could well see inflation soar for years to come.

It's the opinion of this liberal blogger that, seeing as how there's no macro-econometric model around that can interpret these volatile times perhaps we should just stop trying to jump-start the economy quite so violently and quite so often. Between VAT cuts, expansionist monetary policy, a disastrously weak currency, recession, a minuscule inflation rate, plummeting asset prices, chaotic markets and trillion dollar bailouts, just how can we have any idea of what we're doing, even in the shortest of runs. Even the IS-LM model has it's limitations. Franklin

Unemployment and Banking; The week in London

With the economy in freefall faster than a plane into in the Hudson, applications for Masters courses are expected to hit record levels. The discouraged worker effect is being acted out right on our doorsteps. Redundancies are expected to hit 90,000 in London alone this year and many of these people will drop out of the labour force, re-enter education or simply wait out the recession. Unfortunately, such a strategy can only make things worse, as the decrease in output must surely hit growth and cause inflation to stagnate.

The woes continue with the news that the top 3 banks, Citigroup, Merrill Lynch and Bank of America had 3 month losses of £17 bn . Even JP Morgan who has managed to stay high and dry so far is faltering, announcing a 76% drop in fourth quarter net income. JP employees are now reeling at the news that jobs cuts are expected to amount to a third of the 6000 London workforce. As these workers default on their mortgages despite minuscule rates, and credit card bills go unpaid, expect many more problems in the banking sector.

To try and put all this in perspective, imagine if just a year ago as we were sat in class, the lecturer had said that banks could fail on a weekly basis, that interest rates could be tiny and real interest rates negative, we would have thought them mad. It makes you wonder, when it comes to the economy, does anyone apart from George Soros really know what they're talking about? Franklin