Hard to imagine with financial markets still buoyant and newspapers full of tales of bonus greed, but there is still the possibility that captialism will end.  At least there is according to prestigious investment consultants Watson Wyatt in their latest study called "Extreme Risks".

The firm listed the demise of the system of private ownership as one of 15 threats to investors and the global economy that probably won't happen but which it reckons are worth worrying about anyway. The idea behind the report is that such things as climate change, the break up of the euro zone and war are always worth being included in an investment risk management process.

As for the future of capitalism:

In our view, the most likely scenario is moving along from one end of a spectrum where market is king (minimum regulation) towards the other end, where we could see more onerous regulations and government intervention in, and control of, the economy. The extreme risk, however, is the demise of the capitalist system and the end of the market as the primary means of resource allocation.

And the impact:

The economy would be likely to run a higher risk of failure and economic growth would be sluggish in the long run due to lower productivity.  Centrally controlled economies tend to be characterised by shortages, which are inherently inflationary. Private investment activities would collapse or even be terminated. The end of capitalism is simply the ultimate extreme risk. The economy is likely to be associated with extreme uncertainty and a large amount of wealth destruction during the transition period.

Watson Wyatt does try to give its free market clients some hope, suggesting that buying gold may be one way to hedge against the propect of capitalism's demise. But it admitted that in such a circumstance investors would probably be more concerned about the return of their investments rather that the return on them.

(Illustration called The Communist Party, from Threadless)

The title of this post is taken from two sources. One was a headline in British tabloid, The Sun, in January 1979, when then-prime minister James Callaghan denied that strike-torn Britain was in chaos. The second was the title of a 1975 album by prog rock band Supertramp that famously showed someone sunbathing amidst the grey awfulness of the declining industrial landscape.

Are we now getting blasé about the latest crisis? Not so long ago, perfectly respectable economists and financial analysts were talking about a new Great Depression. The world was on the brink, it was said. Now, though, consensus appears to be that it is all over bar the shouting. The world is safe.

Wealth managers at Barclays have gone as far as telling their clients to get over it.

Move past the crisis .... The past year's events were deeply traumatic for most investors, but now is the time to move on, and take a more "business as usual" approach ...."

Such bullishness may not be comforting to the record numbers of jobless in parts of the world, but it is bordering on consensus. It is left to the likes of perma-bears such as  Nouriel Roubini to try to burst the bubble of optimism on which many are floating. The economist began one of his latest articles bluntly:

Think the worst is over? Wrong.

Roubini's main point is that unemployment is likely to get worse rather than better and that many U.S. jobs that have been lost will not come back.

Now, there can obviously be a disconnect between markets and economics, but the former tends to be based on assumptions about the latter. So which is right? Are we out of the woods? Or should Supertramp be firing up their keyboards again?

In July, Stella Dawson, Reuters' global treasury editor, posted some thoughts on what she called the Summer of LUV, a description of a three-pronged global economic recovery based on the idea of different patterns in the United States, Europe and Asia. Since then her LUV thesis has been picked up widely. Here is her update (as originally published in The Times newspaper).

Financial policymakers won round one. Their $5 trillion, shock-and-awe campaign of tax cuts, spending programmes and super-cheap official money has wrested the global economy from the jaws of a deep and damaging depression. Now the real test begins: withdrawing this massive monetary and fiscal support without letting their economies slide back into recession.

The outlines for the withdrawal strategy started to take shape this week from major central banks. Many analysts this summer were looking for a LUV-shaped global recovery. That's LUV as in a long, slow and L-shaped recovery in Europe (steep drop, flat-lining); a U-shaped rebound in the United States (the same but an earlier recover); and a V in Asia, namely a steep downdraft, then off to the races again.

But in recent weeks it started to feel more like a V-shaped one. China is powering ahead and set to deliver 8 percent growth this year. The United States posted a robust 3.5 percent upswing in the third quarter. Australia, Norway and Israel are sufficiently confident that they have started raising interest rates again. Manufacturing and services indices worldwide for October turned upward.

But the underlying factor remains that this economic recovery, whatever shape it might be, is a drug-induced one. It is kept alive by the unprecedented injection of money into banks coffers and citizens pockets. Only when the extraordinary measures are withdrawn will it become clear whether economies truly have regained resiliency.

Central bankers have tip-toed into those waters. The Federal Reserve last Wednesday said it will trim the amount of mortgage agency debt it buys to $175 billion from $200 billion, a minor adjustment in a $3 trillion market and one it described as technical in nature. Nevertheless, it marks its second baby step toward weaning the U.S. housing market, the epicentre of the credit crisis, off  life support.

The European Central Bank on Thursday joined in. President Jean-Claude Trichet said markets did not expect the ECB in December to renew its special programme of lending unlimited funds to banks for one year at very low rates. Decoding central bank speak, that means it is getting ready to withdraw support. Only the Bank of England on Thursday cranked up the machine. Yet its 25 billion pound expansion of asset purchases from banks to 200 billion pounds was half the increase expected. Little surprise it decided on more support when U.K. output has fallen by 6 percent since the start of 2008 and the country remains in the grip of its worst recession in at least 50 years.

But LUVers needn't worry. Inventory rebuilding lies behind much of the stronger-than-expected growth countries have enjoyed in the past six months. Real, sustainable demand is shaky. In the U.S. for example, factory inventories grew in October but new orders, exports and delivery times all fell, suggesting a one-off boost. GDP numbers also were driven by government home purchase incentives and the cash-for-clunkers car buying programme, which is expiring. The consumer cannot pick up the slack when personal debt remains high, unemployment rising and home foreclosures continue at the rate of one filing per 13 seconds.

So little wonder stock markets after rocketing ahead for seven months have slipped and the VIX index, or fear gauge, is rising. The second phase of the rebuilding from the credit crisis has only just begun. LUV hurts.

Thirty-first U.S. President Herbert Clark Hoover once said: "Blessed are the young, for they shall inherit the national debt."

Governments around the world are borrowing heavily to finance their fiscal expansion – unprecedented in size and scale – to prevent severe economic downturn.

However, outspoken independent economist Roger Nightingale thinks fiscal stimulus will not work.

He predicts a severe, Japanese-style recession to hit major and developing markets.

"There is no way out of this problem. Fiscal policy won’t help it at all," he told a conference in London.

"It’s taking from one type of people and giving it to another… It’s net zero. It’s taking from non-banks and giving to banks. It’s taking from the innocent and giving to the guilty. It’s Robin Hood in reverse."