News from the World Economic Forum in Davos:

The past five quarters have seen 40% of the world’s wealth destroyed. An “almost incomprehensible” amount of cash has evaporated since the financial crisis took hold. Business leaders expect that the global economic crisis can only get worse.

The efficient market theory was officially declared dead.

2/1: UPDATE FROM DAVOS: Germany and Britain, saying that the 1994 Bretton Woods framework is no longer working, are calling for a new global economic watchdog – a “preventative facility which deals with crisis prevention rather than crisis resolution.” The IMF, which is dominated by the U.S., presumably would be scrapped.

Putin said the days of dollar hegemony are (or at least should be) over:

“The one reserve currency has become a danger to the world economy: that is now obvious to everybody.”

Putin called for an “irreversible” move towards a system of multiple reserve currencies, questioning the “reliability” of the US dollar as a safe store of value.

The U.S. didn’t have a representative attending the conference.

The problem underlying the global financial crisis is hugely inflated private sector indebtedness in the U.S. – a credit bubble – created over the last 30-odd years.

Debt isn’t so bad as long as your income is increasing – you can pay it back, and still have an increasing amount of money left over as income rises over time. But if your income unexpectedly begins to decrease rather than increase, debt quickly becomes a crushing burden. Peak oil in the U.S. destabilized the U.S. balance of trade. U.S. dollar hegemony enabled the U.S. to put off its day of reckoning for more than 35 years. A consequence of the global peak in oil production is that it becomes increasingly difficult to maintain global economic growth. Peak energy implies peak income.

Debt is just the other side of the coin of financial instruments. Somebody held all that debt. What has popped is a bubble in financial instruments. Like houses, they’re worth a lot less than people thought they were. Our economy has been exposed as a house of cards.

Reuters columnist John Kemp says the solution must be some combination of policies to reduce the level of debt or raise nominal GDP. “Reducing the level of debt” can be accomplished either by bankruptcy or inflation. “Raising nominal GDP” can be accomplished either by real growth or, again, by inflation.

The Obama administration is focusing on the second approach, seeking to stimulate the economy to get it back on the real growth track, taking on huge amounts of public debt in the process. Today’s bogeyman is deflation, not inflation. Deflation would make the crisis horribly worse as it results in the nominal value of debt increasing rather than decreasing. Bernanke, Geithner, Summers & Company are trying desperately to reflate the economy, and sooner rather than later.

What if we are bumping up against limits to growth – source and sink constraints – that make further growth difficult if not impossible? Peak oil and global warming are prime examples of limits to growth. We may find it not possible to resume the growth path that would ease our way out of our debt crisis. If that is the situation, taking on more debt would make our predicament worse rather than better.

The U.S. economy is both structurally and ecologically unsound. The solutions put forth so far directly address neither of these concerns.

Dave Cohen asks the hard question: how much sense does it make to reflate it if there is no solid plan for putting our economy on a sound basis?

Efforts to fix our economic problems won’t work if we don’t (1) get rid of the debt and (2) start to make sound investments in things of real lasting value instead of “unproductive works”, and (3) design an economy that doesn’t depend on growth.