Time for a Marxist interlude. Inherent contradictions of capitalism, anyone? Intrinsic instability? Or perhaps we could risk the simple rhetorical questions Herr Marx somehow forgot to ask. To wit: have you ever seen a poker game in which no-one can ever lose? And would you, in your right mind, ever trust such a game?

Capitalism works, so we are assured. This counts as, and possesses the worth of, an article of faith. What is actually meant - and I suggest you find a history book if you doubt me - is that capitalism "works" by failing periodically, and failing catastrophically. Strangely, no-one is ever to blame, far less arrested, for these acts of freakish nature.

Nevertheless, amid the unconscious, accidental poetry of dismal economics you will find the phrase "moral hazard". It means that you have to be stupid or mendacious to reward stupidity and mendacity. The "system" functions best when there are punishments as well as rewards. If, that is, the system functions.

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So it was with Lehman Brothers, fourth largest (until the weekend) of American investment banks. Those masters of the universe had let it be known that they were "too big" to fail. Apostles of the free market, advocates of "light touch" (zero) regulation, they despised state interference until the state - meaning the general population - seemed the lender of last resort. Disabused of that notion, they went bust. Some would call that capitalist efficiency.

Henry "Hank" Paulson, US Treasury Secretary, would be one of those. As a former Goldman Sachs demi-god he saw no contradiction between past life and present when refusing to hand free money to Lehman. Bear Sterns was one thing; Fannie Mae and Freddie Mac (just $5.4 trillion of American mortgage liabilities) another. But an example was to be made of the erstwhile "fourth largest" to keep hazard at bay and maintain a moral core. Pour encourager les autres, you understand.

The fun part, for a journalist, involves paper. Lehman, like its sibling institutions, had a lot of that. "On paper" the bank had $639bn in assets and $613bn in debts. Sustainable, you might have thought. But what did those assets truly amount to, and what did those debts actually mean? Some $40bn to $60bn of the latter are now defined as "toxic" (bad); Lehman has posted a $2.8bn quarterly loss (very bad); and no-one has a clear idea of what the supposed assets might really be worth (incomprehensibly bad).

This part of the paper trail begins and ends - Karl Marx would have been entirely at home - with the selling of insupportable debt to the very poor. It turned, as the first flickering of a bright idea, on the suckering of the disadvantaged, the exploitation of the simple desire for a home, and the fantastic belief that debt can be shuffled eternally. Lehman and Merrill Lynch ($50bn to Bank of America, itself "embattled") and the rest treated sub-prime reality as a paper concept, pixels on a screen.

These notions were then repackaged, "securitised", with good debt and bad bundled together like a job lot of tat in a car-boot sale. These "instruments", sold and resold and sold again, then became the excuse for still more borrowing, still more debt. Low interest rates - step forward Alan Greenspan and Gordon Brown - kept the party going for a decade. But the poor are a funny lot. They persist in failing to have money. Hardly worth the pieces of paper on which their names are written, the saps.

In a rational world - not this one - everything just described would count as bonkers. It would be funny, in a Carry On Banking sort of way. People would laugh at the very idea of wealth conjured from thin air and reality as a distraction for hapless civilians. But it has all come to pass. In some quarters they are wondering if the Lehman episode has brought a sorry year to a conclusion. I suggest that they review the autumn of 1929. And then look east.

Wall Street, 80 years ago, did not crash in a day. Week after week, people would tell one another that the crisis was over. Things were looking up. Happy days were here, or there, again. Instead, things went from bad to worse to hellish while the central banks allowed feral markets to hunt down capitalism's sickly runts. The people claiming to be in charge of Halifax Bank of Scotland this week will know what I mean. A "correction" becomes a purge in the blink of an eye.

Part of capitalism's problem - there's more where this came from - is its preference for paper before people. Those who talk seriously of the "real" economy give a flavour of the attitude. They even suggest that one can "decouple" financial markets from the planet occupied by food, heat, jobs, families, petrol prices, children and money you can spend in a shop. They base their behaviour on the assumption that lived reality is a concept best reserved for computer models. Then the clever sums fail to add up.

Britain fell for this fantasy in a very big way. A succession of Thatcher's Chancellors assured us that times would be better in a post-industrial service economy. Making things, things you could touch and use, was suddenly the oldest of old hats. Financial "services" were the modern alternative in a society that could no longer get away with paying coolie wages to its proletariat. Besides, you can't flog credit cards to peasants.

The result is that Britain is uniquely vulnerable to the firestorm. Lehman's London outpost has just "shed" 5000 jobs. A quarter of a million more inhabit the sprawl they still call the City. Scotland, skull for skull, perhaps has greater exposure, its insurers agog over the travails of American International Group, "the world's largest" (if broke) in their field. The paper industries that fed GDP that fed the housing market that fed the credit boom that fed Circularity, not to mention sheer deceit, will be themes for months to come.

Those currents of history of which Herr Marx was so fond become apposite, at this point. Wars and impressive munitions have distracted us from the end of the American century. Gore Vidal said it best when he observed that the empire fell, bar the shouting, when the US became the world's largest debtor nation. That remains the case. We depend on a reserve currency itself dependent on an economy that is, by any measure, bust. All those creative manoeuvres with collateralised debt obligations mask a fundamental truth: America is broke.

India is not, however. Brazil is not. China, with $1 trillion in foreign, mostly greenback, currency reserves does not have a sub-prime problem. It has a dollar problem. If there is to be - if there is - a catastrophic failure within the US system, Beijing stands to lose a bundle. If hey act to support Washington, however, the Chinese - and the Indians, the Koreans, the Arabs and the rest - will want assets you can trust and test in return.

It's what known as a fire sale. In the reasoning of Karl Marx, never actually mistaken about the tendencies of economic actors, it stands as a definitive crisis. The world just changed, ready or not.