Having “saved the world economy” in Act 1, Act 2 appears to be the no less thorny task of saving the world itself.

The Chancellor has forced climate finance to the top of the agenda at breakfast tomorrow. The UK/EU plan is for finance worth $100bn per year from 2020, half of which will be raised from the private sector through carbon market mechanisms.

The controversial bit is the other half. Which governments should pay for carbon abatement, mitigation, and percolation of green technologies to fast-growing economies so that they may prosper and grow using the least carbon possible?

The existing developed countries, AKA ‘the North’, AKA ‘the rich’, are responsible for 75 per cent of historic carbon emissions on this planet.

They are by far the cause of the current climate change challenge.

However, as the Chancellor will point out in a speech tonight, 90 per cent of future emissions will come from the emerging and developing countries, such as Brazil, Russia, India and China. The EU plan calls for some sharing of the burden of this 50 billion per year between historic and future polluters.

But here at St Andrews the Chinese in particular are saying No. There had been an attempt to do the heavy lifting work here in preparation for the Copenhagen summit.

The Danish prime minister will gatecrash this meeting alongside the British one. But tonight, all hope of a climate change finance deal here appears to be disappearing. We’ll know more after breakfast.

* The Chinese know all about breakfasts at these summits. When it was the G7 rich man’s club that ruled the roost, and many were complaining about China’s exchange rate policy, they did invite Chinese officials to attend as an observer.

But they were booted out after breakfast whilst the G7 crafted communique after communique that criticised the Renminbi policy. On climate change and elsewhere the BRIC countries are making their voice heard loud.

Brazil’s current policy of taxing capital flows would have been laughed out of a G7 meeting, but will politely accepted tomorrow.

The other major agenda item is building a sustainable world economic system.

Mervyn King has called the global imbalances, which I reported on from China using a dim sum table, the fuel behind the fire of the credit crunch.

The hope from G20 leaders is that the next leg of world growth will be sustainable and balanced, that North American won’t consume 30 per cent of the world’s output and will stop borrowing so much.

And that surplus countries like China will start spending more and stop accumulating three trillion dollar mountains of Forex reserves.

Very very interesting, but slightly academic.

A cynic might say that having “abolished boom and bust” in Britain, this is a rather lofty attempt to abolish boom and bust across the world. But it is heartening that one of the key geoeconomic lessons of this crisis is being learnt at the highest levels.

The Bank has just voted to increase its money creation exercise to £200 billion. A £25 billion increase is a little less than had been expected.

The Monetary Policy Committee is marginally less worried than thought about last month’s shock news that the economy is still in recession. It may be marginally more worried about the prospective inflationary consequences of its epic money creation scheme than the City believed.

What we can say now is that Britain is the undisputed QE world champion, that this policy has been pushed further than any developed country in modern history.

So ‘is QE working?’ is now a £200 billion pound question.

Passing judgement on quantitative easing (QE) is a bit like divining the impact of water fluoridation on Britain’s dental standards. You can see some sparklier teeth in Britain’s credit markets, but is all of that really down to the Bank’s extraordinary experiment?

The most tangible impact has been on the market for government debt, where the Bank of England has gobbled up the extra government debt, lowering the price the Treasury pays by over a full percentage point.

Today’s news saw a sell-off in that market, with that interest rate increasing by 0.1 per cent. The markets clearly see the fact that there will be “just 25 billion” of QE in the next three months, as a high watermark for the policy (QE to date has been running at £25bn every month).

David Cameron warned in his Tory party conference speech that QE had to stop at some point, and only then would we see the true demand for British government debt. We are now close to that point.

So what’s it achieved? Well there has been a flurry of larger companies that have bypassed the stodgy banks, by raising money from capital markets to reduce bank debt. Typically they issue corporate bonds sold to the likes of pensions and insurance companies. This is part of the story of how QE has helped the economy.

But it is impossible to say what proportion of this extra lending has come as a result of the Bank’s experimental policies and what has come from a general improvement in sentiment.

So QE has disproportionately helped larger companies rather than smaller companies. It has helped banks too. It may have helped pump up asset prices around the world. And, indirectly it has clearly contributed to a helpful fall in the value of sterling. Not quite a devaluation, but not a million miles away from it either.

The donkey has been kicking a little in the past few days. There have been some strong manufacturing and services sector survey numbers earlier in the week. But there were more bad numbers out today.

So the question remains about when this policy gets unwound. When does quantitative tightening begin? Well it’s never been done before. And the Bank will want to be completely certain that the donkey is alive and kicking, before they remove its tail.

As part of the QE arrangements the Chancellor and the Bank of England Governor Mervyn King swap letters. Normally it is an eminently forgettable spot of legalese.

Not this time.

The Chancellor chose to use the letter to issue what can only be termed ‘a gentle prod’ aimed at the Bank of England. Mr Darling appears to want the Bank to use QE to lend to companies directly by buying so-called commercial paper. This hasn’t happened so far.

Then, in January, came Bailout 2.0, which we were told would be a bailout not of the banks, but of the economy. That bailout was to enable the banks to continue lending to prospective homeowners and to businesses.

And now we have Bailout 3.0.* Incredibly, the extent of actual taxpayer funding into these two banking giants will be larger than the first bailout, which rescued them from collapse. £40bn more.
This will be spent on banking shares that have fallen in price since the last tranche was bought. RBS, two years ago the sixth biggest bank in the world on some measures, will now be 84 per cent owned by the state.

To be fair to the Treasury, this outcome was indicated back in January, though it had not been expected that all the £25.5bn would be needed up front. There’s also an incredible tax break, worth billions for RBS, which reflects their ability to charge losses against future tax bills. It must have caused the government accountants a headache.

What really has changed is that the extent of the guarantees: the so-called contingent liabilities have been reduced markedly. Lloyds have sidestepped the government’s toxic waste guarantee scheme, so £260bn of HBOS’s rotting commercial property and mortgage assets will now be dealt with by the private sector. The process of due diligence has also shrunk the RBS guarantee from £325bn to £282bn.

I had previously pointed out that the APS was seen internally as the biggest government contract signed since the Lend Lease arrangements with US forces during world war two. As Lloyds exits, this may no longer be the case. Indeed having gained £2.5bn for a nine-month insurance policy that did not pay out a penny, Lord Myners may wish to start up shop as an insurer if he leaves government next year.

So arguably the situation is better than the worst-case scenario envisaged by Bailout 2.0. The taxpayer no longer has to worry about HBOS’s toxic waste dump. But more money more quickly appears to be seeping into RBS.

The crucial difference is that this happening at a time when we are told there is no money for anything else. No money for public sector pay. No money for other industrial or consumer stimuli. Small wonder that the government shot George Osborne’s fox by banning cash bonuses to anyone at these two banks earning above £39,000.

*The biggest hedge fund in Britain, is how Robert Peston referred to this deal. The government is borrowing money at 3 per cent to buy shares in banks. It’s the classic story of leverage that funded the champagne lifestyle in Mayfair.

Of course, the next leg of this analogy is to point out that the Treasury’s deficits are actually being funded by the Bank of England, which in turn is creating the money out of thin air. No hedge fund has those powers.

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So why doesn’t the home secretary appoint a panel of independent economists to advise on drugs policy instead? At the moment drugs policy seems to be authored by a coalition of tabloid headline writers and frightened politicians.

An economic take would be a forensic and brutal assessment of some unpalatable trade-offs.

Despite illegality in almost every nation, the UN estimates 8 per cent of world trade is illegal drugs. It’s a massive number. It is as yet unclear how that held up during the post-Lehman collapse in world trade.

So the first point is that, despite the tens of billions spent on the “war on drugs” around the world, there’s little evidence that it is effective. According to the UNODC, between 1994 and 2008 opium production has surged from 5,000 to 8,000 metric tonnes per year (due to Afghanistan), and global cocaine production has stayed pretty constant at around 900 metric tonnes.

However much is being seized, there is a much greater capacity to produce. So the legitimate question here is whether or not the war on drugs is cost effective.

Drugs can ruin healthy lives. The UN estimates that there are between 18 and 38 million problem drug users in the world. Interestingly though, that is a small proportion of the 250 million who have used in the past year without it becoming a problem, according to the UN.

The big unknown is how much a more liberal drugs policy would increase usage and therefore health costs. If illegal drugs were legalised and then taxed – as argued by economists like William Buiter – there is a chance that the exchequer might not lose out. There’d be at least £1bn in VAT.

That is not to say that there would be no pain for families and some communities where use goes up. But this brings us to the elephant in the room: crime.

Home Office figures show that the UK illicit drugs market is worth between £4bn and £6.6bn. Class A drug use generates an estimated £15.4bn in crime and health costs. Crucially, between a third and a half of all “acquisitive crime” – that’s mugging, burglary, stealing – is drug related. That is an awful lot of pain.

I’ve seen it for myself in my hometown. No-one would want to be behind policies that led to an increase in the zombied frenzy of crack addiction. Nonetheless, by far the most painful manifestation of the drugs trade are the pensioners, young mothers and families who are harrassed, robbed and knifed by drug addicts looking for the money for their next fix.

So it is conceivable that there exists a drugs policy that minimises the costs of this type of crime, or even wipes it out altogether.

Economics is about trade-offs, about cost-benefit analyses. It is possible that different approaches to drugs policy could lead to less pain in communities afflicted by problem drug use, than the current approach.

But any move in this direction would require some mental dexterity currently absent in our politics, an ability to see beyond the binary world of being “soft” or “hard” on drugs. I can’t imagine a policy area where the frank assessment of independent experts, whether scientists or economists, is more necessary. But I’m not holding my breath.

So on an internationally comparable definition of recession (multiple consecutive quarters of contraction) the US has exited recession. It’s worth noting that within the US itself the NBER defines recessions in a different way, and is yet to pass judgement on this matter. What we can definitively say is that growth has returned to America, in a way that it hasn’t returned, for example, to Britain.

Breaking down the numbers there was some impressive growth in consumer spending and residential investment. Businesses seem to be successfully clearing out their inventories, which also added to growth. The question is whether businesses can lick themselves back into shape quick enough to offset the severe pressure on consumer spending that will arise from near 10 per cent unemployment – the worst set of figures for nearly three decades.

This also underlines the role of America’s massive stimulus programmes. I visited a few of them in August. One a newly-laid airport runway at a municipal airport in Elkhart, Indiana. Unashamed Keynesianism in the backyard of the University of Chicago. In Baltimore, land of The Wire, stimulus dollars paid for a new ferry taxi service across the bay where McNulty and Bunk can often be seen clueless and drunk. There is a remarkable map of US Keynesianism at Recovery.org.

So for those that crow that the US is out of recession and Britain is not. Well the logical next step in that argument is for Britain to have had a stimulus on the US scale. It is absolutely no coincidence that, as predicted here on Friday, George Osborne markedly piped down his rhetoric on cutting the deficit this year, during his speech on Monday.

Today’s figures from the US are an argument against too hasty a fiscal contraction, even given our admittedly parlous budget deficits.

This takes the loan that had gone down to £15bn back up to £27bn, which will take “around a decade to pay off”, says the Rock’s chief executive.

My initial read on this is that the government is providing the funding for the Rock that it would otherwise raise from the dreaded wholesale markets that brought its downfall.

In fact Mr Hoffman told me that “in due course” the Rock would be returning to those same securitisation markets, “but in a simpler form”. So not quite Adam Applegarth Redux.

More concerned City voices will suggest that this massive loan is to deal with some horrible mortgage delinquencies amongst Northern Rock’s high loan-to-value borrowers. We will find out the figures next week.

All this raises a huge issue about the proper role of government. I had already pointed out that much of the bizarre mini-housing boom we appear to be enjoying in the middle of a record recession is the direct result of government sponsorship. Today’s extra loan is a more direct manifestation of that than even I had expected.

Northern Rock is now a tool of government pump priming. That may well be a good thing, and a fattened balance sheet might get a higher price from Tesco, or Virgin, or JC Flowers. But is it definitively the best use of scarce government resources?

And why on earth did the government spend the best part of last year pursuing precisely the opposite strategy with Northern Rock, destroying credit to cut the taxpayer loans to the Rock.

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In the US, the economic situation is now commonly referred to as “The Great Recession”. I think on that basis, following today’s third quarter GDP numbers our own quagnmire can confidently be termed “The Greatest Recession”.

Indeed leading economist John Philpott refloated the D-word – depression. We are not there yet. But today’s number, showing that between June and September the economy shrunk by 0.4 per cent thus making this recession the joint longest on record, is a significant moment.

First, this recession is dreadful even given the unprecedented stimulus actions mainly from the Bank of England but also the Treasury. Where do the critics of quantitative easing, for example, believe the economy would be in the absence of these supports?

Second, this is bad news for the government. The days of “No more return to boom and bust” are long gone of course. A small bust could have been written off as a small accident in a world financial collapse. The most enduring economic recession in the major European nations asks serious questions about how the economy was run over the past decade.

But don’t think that this offers a free pass to the Conservatives. George Osborne’s betting the farm on becoming Britain’s Big Cutter is beginning to look a little perilous.

If the economy continues like this for another quarter, it is perfectly possible that the economic argument will be aeons away from a competition over cuts. Expect the Conservatives to start to tone down the rhetoric on cuts.

Thirdly, when not one of the City economists polled by Reuters or Bloomberg expected today’s GDP number, we know we are in strange times indeed. The conventional relationships, formula and equations that describe an economy are not working. Those with the best magnifying glass on our economy are troublingly blind.

The data may be bad, but even given that the diagnosis is difficult, and the medicine as unproven and experimental as it’s ever been. The English patient is back in intensive care.

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I’m holidaying here, but there’s much to remind of home.

All the banks are nationalised too, and there’s a state-run healthcare system that seems to bring out a certain type of American in a peculiar rash, whilst being wildly appreciated in the country itself.

Of course there is a more robust approach to bankers’ pay in Havana. They’re all paid the same.

At the one of the arts centres displaying 50 years of kitsch revolutionary design, there are pamphlets about how the world financial crisis will lead to the inevitable return of socialism in the United States.

Fidel Castro has long predicted that socialism would return to the US before his Cuban revolution was defeated.

When a shadow chancellor is trying to prove his credibility and judgement to the nation, it’s no surprise that the chief of the fiscal watchdog the IFS, is directly lobbied by Tory hierarchy.

The £13bn number for the move to raise in the state pension age to 66 is in Mr Chote’s view ‘debatable’.

Originally that number was attributed to the National Institute of Economic and Social Research.

On Conservative plans, it won’t reach that level of saving until 2020. In the short term, it’s fair to take all women out of the equation, and they are more than half the age group at 65, so the savings are more like £6bn.

Then there’s the impact on pension benefits, particularly the Minimum Income Guarantee, which kicks in at 60.

Niesr itself now says that “until the Minimum Income Guarantee is changed the effect of the policy may well not be very great”.

So the mystery of the £13bn is becoming a little clearer. The savings only get to that level if pensions benefits are also adjusted sharply.

There is little mention of this in the Conservative costings. It was a difficult distraction for a shadow chancellor already trying to take the public on a long journey of painful cuts.