It is far from an everyday occurrence for the Treasurer of Australia to have a chat on the phone with his United States counterpart. When they do contact each other you can be sure it is not just a social call. One of them is telling the other something of importance and US Treasury Secretary Henry Paulson last week would hardly have been asking Wayne Swan for advice on how to handle the American banking crisis.

This call from Secretary Paulson to Minister Swan was surely part of an international effort to have governments ensure that the people in the world’s major economies do not panic and cause a major disruption to the financial system.

It’s a phone call that should make sensible people more than a little apprehensive about what lies ahead. When Mr Swan thought he should reveal that Mr Paulson did not think the US was about to enter into recession I heard alarm bells, I began to understand why the markets now put the probability of a US recession above 60%. Politicians are hard to trust at the best of times and difficult indeed to trust when we are approaching bad times.

The chart below is from the Intrade prediction market where the latest assessment of a US recession this year is put at 63%:

If you happen to think that Wolfgang Münchau writing in The Financial Times is correct then your assessment would be even gloomier. This economic pundit has the cheery news that if the problem in the US was a mere subprime crisis, it would now be over:

But it is not, and nor will it be over soon. The reason is that several other pockets of the credit market are also vulnerable. Credit cards are one such segment, similar in size to the subprime market. Another is credit default swaps, relatively modern financial instruments that allow bondholders to insure against default. Those who such sell such protection receive a quarterly premium, based on a percentage of the amount insured.

The CDS market is worth about $45,000bn (€30,500bn, £23,000bn). This is not an easy figure to imagine. It is more than three times the annual gross domestic product of the US. Economically, credit default swaps are insurance. But legally, they are not, which is why this market is largely unregulated.

…It is not difficult at all to see how the CDS market has the potential to cause serious financial contagion. The subprime crisis came fairly close to destabilising the global financial system. A CDS crisis, under a pessimistic scenario, could produce a global financial meltdown.

This is not a prediction of what will happen, merely a contingent scenario. But it is contingent on an event – a nasty and long recession – that is not entirely improbable.

In Australia the popular wisdom of the economic pundits, most of whom are nothing more than the paid public relations hacks of the banks which pay them to peddle views that are in the best interests of the bank, is that our country can escape relatively unscathed from a US recession. The wonder economies of China and India, it is argued, will protect us.

Yet the news from China suggests that the wonder economy is not without a few problems of its own in coping with the rapid growth that is supposed to be Australia’s saviour. The People’s Daily online recently told how a Chinese State Council executive meeting had decided to “a range of temporary price-intervention measures in a bid to stabilize the cost of daily necessities.”

The State Council has not yet specified what the products are, or when the measures will be introduced but China’s Price Law stipulates that the State Council can temporarily freeze prices or centralize the price-setting power on part of or the whole market if the prices undergo strong fluctuations.

The People’s Daily report said the prices of the country’s major foods, including grain, pork and cooking oil, surged last year, lifting the consumer price index to an 11-year high of 6.9 percent in November, well above the government’s target of 3 percent.