Cameron and Clegg say we need short-term pain for long-term gain. The media talks of a ‘double-dip recession’ as if the problems might last a bit longer than hoped, but then it will be back to growth and prosperity. The reality of the economic crisis is much worse than this.

The capitalist system is both bankrupt and busted. Global finance is being propped up by state funding. The motor of growth – debt and speculation – has blown up. The world economy is dead in the water.

Capitalism never recovered from the crisis of the 1970s. In the last 35 years, there has been no return to the rapid growth-rates of the postwar boom.

The US is now in decline, but it has been the main powerhouse of the world economy for almost a century. When the US sneezes, the world catches a cold. Annual growth rates tell the story.

During the Great Depression of the 1930s, the US economy grew by 1.3% a year – too little to mop up mass unemployment. The stimulus of war production in the 1940s raised the rate to 5.9%. At the height of the Great Boom in the 1960s, it was 4.4%. During the 1980s and 1990s, it was only 3.1%. In the 2000s, it was just 2.6%.

The world economy has been sluggish for a generation. But that is not all. During the Great Boom (1945-1973), most of the growth was in the real economy – the production of goods and services for actual use. In the Neoliberal Era (1979-2007), most of the recorded growth was fictitious.

Average US household debt more than doubled between the late 1970s and 2006. Total debt grew from about 1.5 times US national output in the early 1980s to nearly 3.5 in 2007. As a result, the banks’ share of US profits was almost half the total by 2001.

The economy was flooded with electronic loan-money. So demand was stoked, prices increased, and profiteers scrambled for a slice of the action. This turned into a gigantic bubble of fake wealth.

The economy kept growing because people were spending money that did not exist. Loans were secured against assets whose value was rising only because loans were available – a classic, self-feeding, speculative frenzy.

At the height of the frenzy, any madcap scheme was good to go. Banks started giving mortgages to people who could not afford to repay them. The value of this ‘sub-prime’ lending rose 232% between 2000 and 2007.

Sub-prime mortgages were packaged with better quality loans and sold on as ‘derivatives’, spreading bad debt around the entire financial system.

The banks were turned into casinos for the super-rich powered by the inflated values of paper assets. The gap between the fictitious electronic capital held by the world’s banks and the real value of economic production yawned ever wider.

When the property market slowed and sub-prime mortgagees began to default, the resulting panic rapidly turned into a contagion of collapsing asset-values and soaring debt that threatened to tear down the entire world banking system.

First came the ‘credit crunch’ and the run on Northern Rock in September 2007. Then Lehman Brothers announced astronomical losses of $3.9 billion and declared itself bankrupt in September 2008. (Right up to the last minute, Lehman bosses were helping themselves to eye-watering bonuses: $2.5 billion had been set aside for payouts that autumn.)

The collapse of Lehman precipitated a global financial panic. Head of the US Federal Reserve (the central bank) Ben Bernanke and US finance minister Hank Paulson announced to the world that ‘We are headed for the worst financial crisis in the nation’s history. We’re talking about a matter of days.’

In response, the world’s leaders tore up their free-market textbooks and carried out a series of monster nationalisations and bailouts. Almost immediately, a global total of $1.9 trillion of state funding was injected into the banks, two-thirds in direct spending, one-third in the form of guarantees. Since then, trillions more have been handed over.

This did not end the crisis; it merely transformed its character. The banks did not resume lending because the economy was nose-diving. They simply used state funds to pay off bad debt. The bubble turned into a black hole.

Worse, the burden of bad debt was simply transferred to the state, and the unfolding financial disaster moved into its third phase: a European sovereign debt crisis.

The crisis may have begun in Greece, but it quickly spread across the continent on fears about deficits, bank failures, and ‘investor confidence’.

European leaders were soon competing to reassure multi-million-euro speculators that they would get their money back. The chips in the game were spending cuts and tax rises.

The Con-Dem Government’s cuts of £113 billion and VAT hike to 20% form part of a European-wide series of austerity packages without precedent since the 1930s.

The financial crisis was caused by speculation, greed, and casino-madness. It represented the end of an era in which these forces had been given full rein by market deregulation, low interest rates, financial ‘innovation’, and rising debt. And now, in homage to these same forces, the jobs, pay, pensions, benefits, and public services of the European working class are to be sacrificed.

This gives us the second reason to fight the cuts. The motor of the neoliberal boom – ‘financialisation’ (debt and speculation) – is bust. And there is nothing to replace it: no alternative engine of growth. The economic system is deeply pathological – a ‘permanent debt economy’ – and it cannot be made good. The system needs to be changed, not shored up.