The phoney war is over as the firings begin

Central bankers have built their own Maginot lines of defence in a futile attempt to keep danger at bay.

The number of people out of work in the UK stood at 1.82 million last month and could soon top two million.

When Germany invaded Poland in Sept 1939, Britain declared war on the Nazis. With a certain reluctance and a Gallic shrug, France followed suit a couple of days later. The countries were at war, but what impact did it have? People continued to shop, to travel, to dance at the Ritz. It was a full seven months later that German troops marched on Paris. Nobody had been idle in the meantime - the Royal Air Force had dropped propaganda leaflets on Germany, while Canadian troops had landed in Britain - but there was an eerie calm on the continent.

There had been some action. A U-boat sank HMS Royal Oak in Scapa Flow, in the Orkneys. The Luftwaffe made a couple of raids on Britain, while the British Navy attacked the battleship Admiral Graf Spee at the Battle of the River Plate in South America. (The Germans scuttled it rather than have it fall into enemy hands.) The Soviet Union invaded Finland. There were speeches and complaints, and the Soviets were kicked out of the League of Nations. The Allied Forces debated launching an expedition on Scandinavia - a move that was swiftly quelled when the Germans swept through Norway.

Everybody knew that something bad was going to happen, but still the sound of the accordion swirled through the Parisian air. In the countryside farmers fed their animals, picked their grapes and schoolchildren cycled to school. The thought of another war was too terrible to contemplate. "How horrible, fantastic [read unbelievable] it is that we should be digging trenches and trying on gas masks here because of a quarrel in a faraway country between people of whom we know nothing. I am myself a man of peace from the depths of my soul," said Neville Chamberlain, then Britain's prime minister.

In the spring, once the snows had melted, the German troops started their tanks, drove to Luxembourg where they refuelled, and struck through the Ardennes. The attack was as successful as it was unexpected. Moving the clock forward 69 years - in the past month or so, there has been something of a phoney war in the business world. After the massive stock market falls, currency fluctuations, bank failures and rescues, it has been the turn of the central bankers to build their own Maginot lines of defence. For a while, their effort seemed to have halted the advance. Some stock markets stopped plummeting; others rose in relief. Interest rate cuts may appear a blunt tool, but in some cases they are the only option. For some central banks, such as the US Federal Reserve, interest rates are so low already - now just 1.5 per cent after the 50 basis points cut last week - that the move must work, or there is nothing else to try. It is like playing your joker early, or a heavyweight boxer aiming a wild swing in the first round in the hope of scoring a knockout blow.

The wild swing from the authorities was aiming to accomplish two things: first, to prevent a systemic collapse of the world's financial system; second, to prevent a slowdown and recession. This week, the Chinese government announced a US$587 billion (Dh2.15 trillion) package aimed at boosting the economy. Stock markets in Asia reacted initially with relief, followed a few days later by suspicion. If the world's toy maker could not stop the world from collapse, who could?

Meanwhile, the corporate world has been strangely subdued. What would be the effect of the financial fallout? Nobody seemed sure, although they feared the worst. Finally, it looks as though nothing can prevent a worldwide recession, although the fear of a complete financial meltdown looks less likely (but not inevitable, particularly as it appears that the US Treasury secretary Henry Paulson does not have a plan after all). But banks aren't lending, companies are in trouble and reacting in the only way they know how. The phoney war has ended: the firing has begun.

Jobs are going at a frightening rate. Unemployment in Britain rose last month at the fastest pace since 1991, up by 36,500 to 1.8 million. One economist is now predicting that it will hit two million by the end of the year. In the US, the Department of Labor announced that 1.2 million jobs were lost this year, with unemployment at 6.5 per cent and climbing - its highest level since 1994. There is even the threat of job cuts in China, with more than half the country's toy factories closing.

Like Mr Chamberlain, we have watched events in faraway countries with interest, but growing alarm. Surely such calamities cannot happen here? But gradually, as the oil price has slipped and dipped - this week below $60 a barrel and soon perhaps through $50 - the woes of the world may yet come to these shores. The tremendous property boom of the past few years, especially in Dubai, is over. HSBC Bank this week released the first figures that confirmed what many people had suspected: that property prices in both Dubai and Abu Dhabi are softening. Financial institutions are no longer prepared to lend with such largesse; many are not prepared to lend at all.

Like Mr Chamberlain, nobody wants war - or economic misery. But Czechoslovakia was not that faraway; nor today, is South Korea, the US, or even Iceland. Fighting an economic war is a curious concept, but we should not be so naive to assume that it cannot happen here, too. [e-mail]