Welcome to 2009. This is a year in which the fate of the world economy will be determined, maybe for generations. Some entertain hopes that we can restore the globally unbalanced economic growth of the middle years of this decade. They are wrong. Our choice is only over what will replace it. It is between a better balanced world economy and disintegration. That choice cannot be postponed. It must be made this year.

We are in the grip of the most significant global financial crisis for seven decades. As a result, the world has run out of creditworthy, large- scale, willing private borrowers. The alternative of relying on vast US fiscal deficits and expansion of central bank credit is a temporary – albeit necessary – expedient. But it will not deliver a durable return to growth. Fundamental changes are needed.

Already it must be clear even to the most obtuse and complacent that this crisis matches the most serious to have affected advanced countries in the postwar era. In a recent update of a seminal paper, released a year ago, Carmen Reinhart of Maryland University and Kenneth Rogoff of Harvard spell out what this means.* They note the similarities among big financial crises in advanced and emerging countries and, by combining a number of severe cases, reach disturbing conclusions.

Banking crises are protracted, they note, with output declining, on average, for two years. Asset market collapses are deep, with real house prices falling, again on average, by 35 per cent over six years and equity prices declining by 55 per cent over 3? years. The rate of unemployment rises, on average, by 7 percentage points over four years, while output falls by 9 per cent.

Not least, the real value of government debt jumps, on average, by 86 per cent (see chart). This is only in small part because of the cost of recapitalising banks. It is far more because of collapses in tax revenues.

How far will the present crisis match the worst of the past? The continuing willingness of the world to finance at least the US – though not necessarily the smaller and more peripheral deficit countries, such as the UK – is a reason for optimism. It does allow the US government to mount a vast fiscal and monetary rescue programme.

Yet, as Profs Reinhart and Rogoff note in another paper, this is a global crisis, not a regional one (see chart).** It has reminded us that the US is still, for good or ill, the core of the world economy. In the big crises of recent decades, US demand has rescued the world. This was true during the 1990s, after the Asian crisis, and again after the stock market crash of 2000. But who, apart from its government, will rescue the US? And on what scale must it act?

This issue is addressed in another seminal paper, the latest in the series co-written by Wynne Godley and two others for the Levy Economics Institute of Bard College.*** The underlying argument is one with which readers of this column should, by now, be all too familiar.

What makes rescue so difficult is the force that drove the crisis: the interplay between persistent external and internal imbalances in the US and the rest of the world. The US and a number of other chronic deficit countries have, at present, structurally deficient capacity to produce tradable goods and services. The rest of the world or, more precisely, a limited number of big surplus countries – particularly China – have the opposite. So demand consistently leaks from the deficit countries to surplus ones.

In times of buoyant demand, this is no problem. In times of collapsing private spending, as now, it is a huge one. It means that US rescue efforts need to be big enough not only to raise demand for US output but also to raise demand for the surplus output of much of the rest of the world. This was a burden that crisis-hit Japan did not have to bear.