Is the global economy about to repeat the 1973-4 collapse?

In 1973 global stock markets suffered a once-in-a-generation collapse due to a mammoth overheating of prices followed by an oil price shock. This crisis rolled over into a property collapse the following year.

I remember it happening, and my poor father nearly lost his shirt on a property deal. This was the only time, he said, that he ever lost sleep over business. Even in 1981 when I went for an unsuccessful interview at a London stockbroker, they were still talking about it.

The $63 million question is whether we are now back in that situation? The omens are not good, with stock markets still overvalued by many measures and oil prices facing a nasty spike in the event of war in the Middle East.

Moreover, the condition of the world's major economies leaves considerable room for concern. Japan is stuck in a depression. The USA is feeling a corporate credit crunch. Consumer debt is out of control in both the UK and USA. Corporate profitability is chronically low in both countries and expectations for 2003 are too high.

There has also been a wave of corporate and personal bankruptcies. In addition, there is an obvious property bubble in UK and US housing, and in the UK an imminent surge in taxes and public spending. For manufacturing China is an unbeatable low-cost producer knocking on every door. And the euro-zone looks like an accident waiting to happen.

To say that financial markets have become unstable is a bit of an understatement. Volatility is the order of the day and that compounds the problems of insurance companies and fund managers who find it impossible to deliver promised returns. Is this not setting the scene for something of a dramatic collapse?

The obvious trigger might be a US led attack on Iraq. Such a conflict would be costly and lead to rising taxes and deficits. It would also scare investors stiff, and in an already volatile market this could tip things well and truly over the edge.

In 1973 the UK stock market lost 90% of its market capitalization although it clawed back much of that loss by the end of the year. That was enough to wipe out the whizz-kids of the time and many a City fortune, while the UK house price collapse of 1974 finished off the survivors.

It could all happen again. The only good news would be for the Middle East. The mid to late 1970s were a period of unprecedented boom times in the region. Higher oil prices, economic reform and regime change could do the same again in the mid-2000s.