My warning to Gordon and his friend Alistair

Eight days on and the numbers are still getting worse. Net mortgage advances in October were down by two-thirds from October 2007 and manufacturing shows "extreme weakness wherever you look", according to Howard Archer of Global Insight. The Chancellor himself admits he may have to put more capital into the banks.

Nobody doubts that the position is bleak; the really worrying thought is that the self-contained coterie at the top of this administration has no idea of just how close to the edge we really are.

Alistair Darling is in the Geoffrey Howe class for deadpan delivery of shocking news. If only he showed some of Howe's grasp of the reality of our crumbling economy. The £12 billion cut in VAT grabbed the headlines but this tax cut is a really dumb way to treat the British disease of too much spending and too little saving.

Such has been the scale and speed of the collapse of the Government's finances that it now needs to borrow £300 billion in the next three years, or £5,000 for every man, woman and child in Britain. There is no possibility that we can find it ourselves, so where on earth will it come from? Only from the countries, corporations and rich individuals who have already lent billions to Britain to finance our decade of borrow and spend.

They will provide it only if they feel confident that they will not be repaid in devalued pounds. This is the real and present danger: the 20 per cent devaluation of the past six months and the virtual wipeout of some smaller currencies are reminders of how far and fast a currency can slide. The likely further cut in interest rates this week will make sterling a little bit more unattractive to our creditors.

A slide could easily turn into a rout which our puny foreign exchange reserves would be powerless to stop. Raising interest rates again to defend the currency would surely produce riots on the streets.

Currencies are a zero-sum game. They cannot all fall at the same time. The economic malaise is worldwide, so for the controllers of capital today, it's a question of the currency with the least worst prospects. The US has many of our problems, but the dollar remains the world's currency, its economy is more dynamic and flexible than any other and is most likely to be first out of recession.

If the Treasury's Pollyanna forecasts for the years beyond 2010 are to have any chance of coming true, we'd better hope that America turns soon. There's little sign of it, and as we saw yesterday, we're still going down.

The banks may need yet more capital to add to the £37 billion we've all just subscribed. Having been force-fed expensive preference shares, they are hoarding money to repay them as soon as possible. The next slug of public capital should be on easier terms, so they can lend to business and hope to make a profit.

The continuing problem is that much of the banks' lending has been based, directly or indirectly, on property, and the banks' existing provisions against commercial property, car loans and credit cards still look too low. Professor Robert Shiller, the Yale economist who forecasted America's property crash, believes that British house prices could halve from their 2007 peak. The forward indices of house prices agree with him.

At least those who have been unable to get mortgage finance have been saved from buying an asset which has quickly become worth less than the debt. If Shiller is right, today's homebuyers will have plenty of time to repent of their purchase. Only those who really cannot wait should contemplate buying. Putting pressure on the banks to tempt reluctant homebuyers under these conditions is economic madness.

Prices may be low by recent standards but unemployment is the biggest depressant on this market, and many homeowners will find that the job that looked secure last year is anything but. We are already seeing the start of the great shedding of labour, as companies struggle to conserve cash. Three million out of work next year is all too likely, a figure which would do further damage to the public finances.

It would have been far better to cut National Insurance than to snip a barely visible slice off VAT. NI is the income tax that dare not speak its name but it raises £100 billion a year and is levied on the employee at 11 per cent, with the employer contributing a further 12.8 per cent of headline salary. Waiving both contributions until the end of the financial year would be an adrenalin shot into the economy, at almost zero administrative cost. Employers would find it cheaper to keep people on, while pay packets are bigger. If we saved the money, or paid off the credit cards (as we surely should) rather than spent it, the holiday could be extended. It is flexible, cheap to implement and highly effective - but it doesn't make for dramatic headlines.

So just how bad could things get? A halving of house prices would be painful but bearable, since it would take them back only to the levels of 2002. Worse would be a sustained assault on sterling, taking it down through parity with the euro, and testing the $1.04 low reached at the nadir in 1985. Such a slump would stop deflation all right: we are a trading nation, and there is only so much cost that the importer can absorb. Unemployment would soar as companies tried to stay in business.

If enough of our foreign creditors think this is a possibility, they will take their money elsewhere, sending Britain back begging from the International Monetary Fund. The IMF would demand credible cuts in public spending, instead of merely the planned slowdown, as well as tax rises as the price of its support.

Yet there is not even a hint that anyone at the top of the Treasury, or the boss next door, has recognised this terrible possibility. The Prime Minister is happy to be bashing the rich, pretending that we are well placed to cope with the downturn. We're not.

On the Treasury's own optimistic figures, the cost of servicing his Government's borrowing will exceed the spending on education and defence by 2011, and a balanced Budget is out there in la-la land.

There is widespread agreement that we need that adrenalin shot. What we don't need is another fix of the spending habit we need to kick, but that's exactly what we've got.