In extremis

Markets: Global markets are panicking. The deal on the US debt ceiling hasn't reassured. Safe-haven government bonds are at dizzying highs. Gold and the Swiss franc are at new records, forcing the Swiss authorities to intervene. The Japanese may also act soon to stop the yen rising further. It is all reflective of extreme risk aversion.

The markets' specific fear is that the global economy is going to turn down again. That risk must be taken seriously. US growth is anaemic — July’s ISM survey of manufacturing activity fell sharply to a level just above contraction. The euro zone crisis has worsened. Italy and Spain are under pressure, despite a second Greek bailout, and are too big to bail. Investors still fear sovereign defaults that will hurt European banks. The more Europe must strain fiscally, the greater the danger that growth will slow even in the Franco-German core.

Data also points to a manufacturing slowdown in China. The Sino-American growth engine may be stalling. And troubles in the West raise questions about demand for Asian exports. But the macro-economic fears are probably overdone. Not all the US signs are pessimistic. Fresh unemployment claims have dipped to a three-month low. Global growth may have been harmed by natural disaster in Japan, and should strengthen in the second half of this year. And Asian growth has so far remained firm, despite rate rises to curb inflation.

But thin summer markets could easily fall a long way. If stock markets continue to decline, the US Federal Reserve will be concerned. Tumbling equities weaken consumer confidence. That indirect threat to economic recovery is why the Fed may reluctantly consider a third round of quantitative easing.

Money printing has proven a powerful, but mixed, force in markets. QE3 would weaken the dollar and give still more upside to safe havens. A renewed commodity price spiral would be a big risk, exacerbating inflation in emerging economies and the West. Money printing's support for genuine growth is less clear.

This is not the route the Fed would like to take. Policymakers will hope data reassures. For now, patience is its best policy. Global growth should come through. But the markets need to start believing that.