World stock markets are now down over 20% from their highs set just last November. That technically is called a ‘bear market'. Stock markets have had their worst start in a year for 30 years and in the case of the US and the UK, the worst start ever since records began!

Why the panic? Up to Christmas, stock markets were generally static, not falling much. Capitalist investors were ‘in denial' as the psychiatrists say. They knew that there was a problem in credit and debt markets, because of the collapse in the US housing market and the losses then suffered by the big banks and other financial institutions that had bought so much of the so-called sub-prime (risky) mortgages. But stock market investors thought that this would not affect their investments because it would not touch the nicely growing capitalist ‘real' economy of making goods and delivering services.

Of course, this was wishful thinking. After Christmas, one big bank after another announced yet more losses as they ‘wrote down' the value of their debt securities they had bought on the expectation that house prices would keep on rising. To date, the banks and financial institutions have written off about $120bn. They may well have to admit to losses four times greater than that before they are finished, or 1% of world GDP.

Then the evidence about the state of US economy began to filter through to the minds of capitalist investors. Profits results from the big companies were down hugely, not just in the financial sector (20% of the US stock market), but also in other companies like Microsoft, the auto companies and other important services-based firms. US corporate profits looked to have fallen by about 5-10% in the last quarter of 2007. It will get worse in 2008.

Also, the US economy was now slowing down fast towards what is called economic recession, when national output actually drops back. The housing sector was in free fall, with prices dropping 5-10%, sales down 50% and mortgage defaults in the risky ‘sub-prime' sector rising to 20%. But it was not just there. The Christmas sales for the big US retailers were appalling, with no growth at all over 2006. And other services were falling back in sales.

And the credit and debt markets (mortgages, credit cards, auto finance) saw large rises in the cost of borrowing, even though the US Federal Reserve Bank had started a series of interest-rate cuts and the Fed, the Bank of England and the European Central Bank had launched a coordinated injection of $500bn of credit into the world's financial system. It was not working to turn the housing market around or stop the recession. So stock markets have panicked.

And they are right to do so. As the US economy heads into recession, it will drag the rest of the world down with it. Already, the UK housing market is heading the same way as in the US. House prices have fallen for three consecutive months in Britain and will fall further, even though the Bank of England plans to cut interest rates. The UK consumer spent little over the Christmas period because most British households are already highly indebted with big mortgages and credit card debts.

UK manufacturing is in the doldrums because the pound has been way too strong, keeping export prices too high. That's happened because the UK trade deficit (even bigger than that of the US as a share of GDP), has been financed by attracting ‘hot money' from Russians, Arabs and other oil-rich ruling classes (who buy homes, football clubs and British stocks). Thus the UK economy had staggered on, living off rising property prices and foreign borrowing. That is all coming to an end.

Now stock markets have noticed that Europe and Japan will slow down too. Just three months ago, most capitalist economists said that Europe and Japan would grow at around 2.5-3.0% in 2008, with the UK and the US a little slower. China and India would rocket along at around 10% a year. Now they have changed their tune. Most expect a recession in the US and slower growth in Europe and Japan. They still hope for good growth in China and India.

But it's going to get worse than that. With the UK and the US in recession, expect Europe and Japan to grow no more than 1% this year. And China and India will slow too - to about half their current growth rates. That's bad news across the board.

It means higher unemployment (probably double current rates in the US and the UK) and smaller pay rises (possible none at all), although the bonuses to the fat cats in the City of London and Wall Street won't drop much. It will be particularly bad for those economies that are increasingly dependent on finance capital rather than productive sectors of manufacturing and transport.

As we have argued in this column, ad nauseam, the UK is the most dependent of all the big seven economies on finance, property and so-called professional services (legal, insurance, consultants). So this world downturn will hit it hardest of all. God help us all with New Labour under Gordon Brown and Alistair Darling in charge! Their policy is to save the investors of Northern Rock not working people.