One of the great assumptions of the calls to invest large amounts of GDP into actions to reduce emissions, protect our natural capital, and become more resource efficient was that by saving the planet we could save the global economy.

This was one of the central themes of the work by Lord Stern on carbon reduction plans, and from the UN Environmental Program on the Green Economy, taken up by HSBC in a report we wrote about earlier this week: Essentially, a dollar spent now could save nine in time, or something to that effect. But the global economy wasn’t supposed to collapse first.

The extraordinary ructions experienced by global financial markets over the last two weeks are centred around the sudden realisation that debt — the other commodity that was assumed to be inexhaustible — may in fact be finite. This has scared the daylights out of the markets. But these ructions may reflect a deeper malaise. Consider this quote from Jim Reid, the global credit strategist for Deutsche Bank, from after Wednesday’s violent falls:

“It’s possible that markets are starting to slowly share a similar view to ours that the Western World financial system built over the last two to three decades might be totally unsustainable. Such a realisation could be cataclysmic for markets and would challenge everything the vast majority of financial market participants have come to take for granted over the course of their careers.”

That “everything” that has been taken for granted is based around the assumption that economic growth would continue unabated. But now that is in question. “It is clear that we have moved from a debt crisis in the euro zone and a debt ceiling crisis in the US, to an economic growth crisis,” said Lloyds Bank Corporate Markets in a separate comment.

These are bleak assessments, and they have great implications for politicians as well as market traders. It is not as though they are new ideas, but few people thought that it would happen so soon, and the presumption had been that we had time to slowly gain the political consensus and economic imperative to act differently. If a cataclysm is upon us, we know how traders will react: they will simply panic, as they have always done. But what if the politicians did the same?

In the US, this is already occurring. The conservative parties (because there seems to be at least two of them) have decided that the problem is way too complex to explain on Fox News and folded back on a simplistic view of the world: slash spending to solve the debt crisis, and dig deeper and faster to address the resources issue. In a bloody-minded attempt to protect the past and their industry supporters, they are fighting environmental initiatives and measures to encourage energy efficiency. They are even preventing government departments from assessing how they might respond to the challenges of climate change. It fits with the rhetoric about small government. It’s a simple message and a fearful one. And it sells well.

The Coalition in Australia is gaining traction for piping a similar tune, and for the Labor government, the market ructions and global economic uncertainty adds to the white knuckle ride it is experiencing in the polls. Left to its own devices, Labor would clearly have chosen a different timeline to introduce a carbon price and put it in the too-hard basket. But, as Alan Kohler points out, it is in no position to change course now because it would face electoral oblivion for yet another broken promise, even if doing so on a carbon price was considered by some to be the “sensible” move.

But given the course of the global economy, it may be that Australia will never be better placed to introduce such a measure, and there maybe even a clearer imperative for it to do so. Delay, it seems pretty clear through any credible economic analysis, is merely to create an increasing cost and liability. And delay until what? Till the good times roll again and Doris Day returns on black and white TV?

In Europe, the political elite will be tested by the debt crisis. Its greatest threat may not come in the austerity measures that are planned to reduce the loan book — although a recent survey for the Centre for Economic Policy Research linking expenditure cuts with the historical increase in demonstrations, riots, assassination and strikes may make uncomfortable reading — but it may come in the erosion of the political unity that has underpinned its leadership role in addressing such complex problems such as climate change, investing in renewable technologies and developing carbon markets.

It’s not that these countries will wind back their commitment to a low-carbon economy, because many of them depend on it. But what could be diminished is the appetite to invest more political capital to push for progress at an international level. And any fracturing of the Euro could be disastrous for the world’s largest carbon market. Well, at least there’s Asia.

The bleak outlook painted by Deutsche Bank’s Reid, and the prospect that this is a mighty complex problem that will likely have a messy solution was the underlying theme of Paul Gilding’s book, The Great Disruption. It’s a scary scenario but one that cannot be ruled out. Gilding assumed what others now fear, the global economy will collapse first, and it will only be the sense of crisis that will finally drive the scale of transformation that is required to address the problem.

As Gilding wrote on this website in June, his view had been largely dismissed for many years, but is now gaining greater currency. He noted at the time that legendary contrarian and fund manager Jeremy Grantham, as well as Stephen King, group chief economist at HSBC, had begun to see the warning signs.

Now, given the events of the past week, and the reflections of economists and strategists at Lloyds and Deutsche, just to name two, the mood is clearly spreading.

*This article first appeared on Climate Spectator