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How much has the financial crisis changed the global economy? The answer might be: "less than you think".

You probably think that sounds mad. Surely the crisis has turned the world on its head? And of course it has. But you can turn something on its head - even plunge it into freezing water - but still leave its basic features intact.

Many respected economists think the same is true of the global economy. It's been given a cold bath. But when it dries off we may find it has the same basic flaws as before. (I think that's enough with the analogies.)

That is the fear that will be looming over US Treasury Secretary Tim Geithner's discussions in China this weekend.

I've banged on about the structural imbalances in the global economy going into this crisis several times before. Martin Wolf has been doing it in the pages of the Financial Times for years.

The basic idea is that it wasn't just any old boom that preceded this bust. It was a particularly lopsided one.

One way of looking at it was that there was a glut of savings in surplus countries like China and Germany, which helped prop up the borrowing of Britain, America and others. Another way would be that an ocean of spending in those borrower countries helped to prop up the excessive export habits of China et al. Either way, it was a co-dependent relationship and a not entirely healthy one.

If you buy some version of this "savings glut" story, then you probably also think the basic imbalance between borrower countries and savers helped fuel the boom, and some of the financial market excesses which came with it.

Why? Because, by keeping interest rates low, all those savings helped to underwrite a massive lending boom and asset price bubble in the West. Investors were eager to turn cheap borrowed money into capital gains - whether in buy-to-let housing, or CDOs.

There was no natural check on all that lending, because the market cost of money remained historically low, even once central banks had started (belatedly) to raise short-term rates.

I'm grossly parodying the argument. But that's the basic idea. The point is we don't really want global growth to be quite so distorted next time around. After all, even without the CDOs and other financial wizardry, we know that imbalanced growth is inherently unstable, because borrower countries can't increase borrowing forever.

Economists at Goldman Sachs - on the optimistic side of the spectrum these days - think we are seeing a rebalancing of the global economy. They think it's too soon to say for sure, but in their latest Global Economics Analyst they say that growth in countries like China appears to be rebalancing the global economy "away from its previous reliance on the US (and British) consumer".

Is that happening? And if so, will it last? It's a subject of much debate.

It's true that current account surpluses and deficits - or net saving and net borrowing - between countries are falling. By that measure, America's net borrowing from the rest of the world has fallen by more than a third from its peak in 2007.

US personal saving is also going up from its record low, with government making up some of the lost demand. Something similar has happened in the UK, though we have less timely ways to track the rise in savings.

You could call that higher private saving and public borrowing a re-balancing. You could also call it a re-cession. In this climate we're clearly not seeing the kind of rise in exports that a true rebalancing would require.

The big problem for the rebalancing optimists, as is that the big surplus countries like China and Germany do not seem to be basing their plans for a recovery on higher domestic spending. By and large, they are simply making up for the loss in foreign demand by cranking up government borrowing - in the hope of returning to the same export-led growth in a couple of years.

Given the choice, I'd go with Martin Wolf. But both sides would agree that the recession makes it hard to read the data either way. They would also probably agree that this issue will have a big impact on the pace and longevity of any global recovery.

Without a change of approach in the surplus countries, the only way that the borrower nations can sustain global demand is through ever higher government borrowing. (Assuming the indebted consumer in those countries has to take a rest.) That's not sustainable, or desirable.

The trouble is that if the excess savers do return to their old habits, the international financial system doesn't have a good way to make them change course, even though an imbalanced. It's the kind of issue the G20 needs to grapple with. Though I don't see them solving it any time soon.

We know that interest rates are going to go up eventually. But no-one wants the cost of borrowing to go up right now - least of all the world's overextended governments.

That's why the ructions in the US government bond market this week has people nervous. The interest rate - yield - on a 10 year US treasury bond is now about half a percentage point higher than it was a week ago, and higher than it's been in six months. UK bond yields have risen as well.

There's no point over-analysing a few days' moves in bond markets. Just as you perfect your explanation, investors have a way of turning around to do something different. What matters is the long-term trend.

But the rise in bond yields in the US does flag up two core features of today's misty landscape that will be with us for some time.

The first is that central banks need to handle optimism with care. If you are Ben Bernanke - or Mervyn King - you want to sound confident that policy is on the right track. But you can't sound so confident that people start to expect rates to go up.

This week's rise in bond yields, by itself, doesn't "threaten to stifle the US economic recovery", as one FT headline writer suggested this morning. We don't even know there's a US recovery to stifle yet. But this is certainly an inconvenient time for a sustained rise in long-term borrowing costs.

If yields rise further - and stay there - you can bet that the Federal Reserve will be thinking of ways to push them back down again, perhaps by sending more concrete signals about how long they expect to keep official rates near zero. In the past, Mervyn King has been less keen on that approach because he thinks it limits your room for manoeuvre. (Also, the Bank of England has an inflation target to focus expectations, which the US does not.) But he, too, will want to make sure that higher long-term rates don't get in the way of recovery.

But the second lesson is more fundamental: we all have higher interest rates in our future. And when I say higher, I don't just mean higher than the record lows they are at today, I mean higher than they were before the crunch. An era of cheap money partly got us into this mess. Thanks to the mountain of public debt now sitting on government balance sheets, it's a fair bet that money is going to more expensive when we come out the other side.

Christian Broda at has run the numbers. As he reminds us, the financial crisis has generated a "scrambling for public funds of war-like proportions".

This chart (from Barclays Capital's ) shows the expected cumulative change in the level of public debt as a share of GDP in the US, UK and Eurozone just since 2007. The rise is stunning and, as Broda notes, quite likely optimistic.

Other things equal, basic economic theory suggests that a rise in government borrowing on that scale will push up the long-term cost of borrowing once the recovery gets going. Of course, that might not happen overnight, especially with so much slack in the big economies due to the recession. But even sceptics about the effect of borrowing on rates would probably accept that this kind of rise in government debt will have an effect on the cost of debt.

Looking at a range of studies and different ways to measure the impact, Broda concludes that the rise in government debt, by itself, could raise the yield on 10 year government bonds by 1.5-2.5 percentage points. That could push UK 10 year rates to more than 6% by 2011, solely due to the rise in government debt.

These are very rough estimates, and they're open to debate. In the US, especially, the link between higher borrowing and higher rates has been shaky, at best. Indeed, it was the "conundrum" of low bond yields, despite high public and private borrowing, that partly got us into this mess in the first place. Bond yields stayed low in the lead-up to this crisis, even when standard economic theory would have suggested they should rise.

We could face that conundrum again if global growth is as imbalanced as it was in the past. I'll have more on that tomorrow. But the Barclays Capital study is right about one thing. When the advanced economies pull out of this crisis, the level of public debt is going to be the central fact of economic and political life for years to come.

George Osborne, the shadow chancellor, says that is another reason to call a general election.

No surprise there - an opposition party, ahead in the polls, tends to find a lot of good reasons to go to the country. But from the standpoint of the financial markets, there will be a large question mark hanging over the public finances until the result of that election is known.

As Robert Peston has pointed out, we shouldn't get carried away with the news that Standard & Poor's has revised down its outlook for the UK. We are not about to lose our triple-A rating yet. And none of the other big ratings agencies has changed its view.

Also, agency ratings are just one of the factors that investors use in pricing UK debt, and they are re-pricing it all the time. In fact, the government's borrowing costs have already risen in recent months, without any help from Standard & Poor's.

Still, this is the first time since the UK acquired its AAA rating in 1978 that the agency has given it a negative outlook. That's not nothing.

There are two reasons why Standard & Poor's has put the British government on notice. One is that it expects the UK's net debt burden to rise to 100% of GDP by 2013. If sustained, that would be incompatible with a AAA rating and is considerably worse than when the agency last affirmed the UK's rating in January.

The second is that the agency can't judge whether the UK is going to take action to prevent that outcome, until it sees the result of the next general election.

Here are the key quotes from the Standard & Poor's report:

"We note that there is support across the political spectrum for additional fiscal tightening. However, the parties' intentions will likely remain unclear until the next administration is formed after the general election, due by mid-2010."

"The rating could be lowered if we conclude that, following the election, the next government's fiscal consolidation plans are unlikely to put the UK debt burden on a secure downward trajectory over the medium term. Conversely, the outlook could be revised back to stable if comprehensive measures are implemented to place the public finances on a sustainable footing, or if fiscal outturns are more benign than we currently anticipate."

You might say that general elections shouldn't be called for the convenience of the financial markets. And you might be right.

You might also say that international investors are grown-ups. They know that countries hold elections. And neither Standard & Poor's, nor the other ratings agencies, nor the IMF () thinks that the UK will fall off a cliff if further fiscal tightening isn't announced until next year.

This is all about long-term plans - and showing you are serious about getting debt back down again over a reasonable time-frame. Alistair Darling announced a significant tightening in the Budget. But the IFS, the IMF and many others believe that we will end up needing more.

It's not clear that any of the major parties are ready to spell out to the British public exactly what that would entail - still less implement it. But with the government needing to borrow more than 12% of GDP from the markets this year and next, the road to the next general election could be even bumpier than we thought.

confirm that it's not time to start worrying about inflation yet. But the subtext of was that fears of deflation are not what they were.

At one level, that suggests that the Bank's policies are working. But it also underscores how challenging the next few years will be for our central bank.

As , the word "deflation" doesn't feature once in this latest Inflation Report. Looking back to , I can find around half a dozen references, and a detailed explanation of what deflation could mean for the economy.

Of course, it was precisely that fear which led the Monetary Policy Committee to start its policy of quantitative easing (QE) the following month.

As , the Bank thinks that it's too soon to judge the impact of that policy. But it clearly thinks that the combination of rate cuts and QE has helped to lower the risk of a sustained period of falling prices.

According to the latest Report, the MPC now thinks "there are significant risks to the inflation outlook in each direction". In February, it thought the the balance of risks "were slightly on the downside".

You can overdo the shift in the Bank's thinking. Remember how the governor went on (and on) about the degree of uncertainty.

Still, three months ago, it thought there was a less than 10% chance that CPI inflation would be above target in two years' time. Now (see Chart 5.7, p48) it thinks there's a roughly 20% chance of that happening, while the risk that inflation will be negative in two years' time has fallen, from about 1 in 4, to 1 in 10.

As I said when I first raised this point a few weeks ago, it's a long way from here to worrying about inflation. But, at the very least, the new forecasts suggest that there's less room for the economy to grow rapidly after 2010, without raising inflation, than we might have hoped.

It's also a reminder of the very fine line the Bank will be walking, if and when a self-sustaining recovery does arrive.

Mervyn King's fairly downbeat assessment of the economy last week helped to douse city speculation about how and when QE would be put into reverse.

However, the implication of the Bank's own report is that even with a fairly weak recovery, the MPC will be grappling with those questions sooner than you might think.

This is particularly important when one considers the UK's somewhat mixed standing in international markets.

reminded us that the UK has a big advantage in this crisis which those countries lack - the ability to print our own money (or to create it electronically, as we must learn to say).

As long as it doesn't cause inflation, QE should help boost demand and lessen the cost of the recession. But, as Mervyn King admitted last week, one of its direct - indeed, less intended - effects ought to be to push down the currency.

That is bad news for any foreigner sitting on British assets. The Bank can't afford to scare investors even more with the suggestion that it is relaxed about the government inflating away its debt.

Now, as it happens, sterling has gone up since QE began (). It just shows that the currency markets never do what they're supposed to do - though the pound is still far below where it was last summer.

The Bank's policy is only one factor affecting sterling. And if it's bringing the recovery closer, a lot of investors will consider that a plus for the pound.

Be in no doubt - if there is now a smaller risk of a long period of falling prices, that is extremely good news. With our high level of public and private debt, deflation would be a worse disaster for the UK than for almost any other major economy.

But we might pay a heavy price if investors start to think that the Bank is taking us too far the other way.

You don't get many plays about goats. Or economics. So when they asked me to star in a radio play about a giant speculative goat bubble, how could I say no? The only catch was that I had to play myself.

You can listen to the result, The Great Hargeisa Goat Bubble, below.

Most of the action happens in Somaliland in the mid-'80s, but trust me, it's a tale for our times. The play started life as .

Poor regulation, perverse incentive structures, securitised debt, and the manic pursuit of wealth - you'll find it all here. Just don't expect things to end well for the goats.

You can also .

Economists have one simple idea to contribute to the . You never know, it might change the way you think about the whole thing.

The idea is this: money is fungible. Put simply, that means one £50 note is the same as any other. They all have the same value and they will all buy the same amount of stuff.

Put it even more simply, if you give someone £100 to buy a chair, you can't say for sure that he bought a chair with your money - even if he shows you the chair, and a receipt. All you can say for sure is that you made him £100 better off, and he has bought a new chair.

This might sound completely obvious. Or completely stupid. Maybe both. It depends on how much time you spend with economists (or lawyers). But this idea of fungibility gives someone with an economist's frame of mind a slightly different perspective on the revelations of the past week.

Voters are understandably angry at the thought that MPs might have been "playing the system" - and even more angry when they appear to have claimed taxpayers' money on false pretences.

But the focus, at least until recently, has mainly been on who claimed for what, and whether it was an "appropriate use of taxpayers' money" - the moats, the dog food, the fancy furniture.

You can see why those claims would catch the eye. I'm pretty fascinated by them too. But the less prurient, economist, side of my brain is less interested in the details of the MPs' claims than in how much they got.

If, like so many MPs, your MP has claimed the full amount - around £24,000 in the most recent year, then the point to note is that he or she has had £24,000 a year more to spend. Full stop.

The stories tend to focus on what the MPs say the money was spent on - and the receipts. But you might just as well ask what they did with the chunk of their salary that was no longer taken up with everyday bills - or how much of that money they would have spent, even if they weren't MPs.

Of course, all these questions overlap, and people have been interested all of them, even if the iffy expense details have grabbed the headlines.

For example, some have said it was unfair that MPs such as David Cameron have escaped criticism for claiming the maximum allowance each year, because their claims were almost entirely made up of mortgage interest and utility bills. Whereas other MPs, possibly with similar necessary expenses, have made much smaller claims, yet faced criticism for the details.

David Cameron could be spending his allowance on underground swimming pools and platinum cycle helmets. All we know is that he has utility bills and mortgage interest to pay of more than £20,000 a year.

Experts in overseas aid know the problem of old. When the World Bank or an official development agency gives money to a developing country it usually says it wants the money to go to particular priority areas - like women's education or primary healthcare. But, as they've learned to their cost, the recipient government often has other ideas.

"When you give $1bn to a developing country", a World Bank economist once said to me, "you may think you're giving $1bn to your pet project, but the reality is you're giving it to the president's."

Because money is fungible, the $1bn might appear to go into the education budget, but it frees up $1bn of domestic revenue that could just as easily turn into a new presidential jet.

On the basis of the past week, you might say the same about the expense allowance of some MPs.

It's a very old problem in development aid - and, over time, the likes of the World Bank have come up with ever more complex arrangements to solve it. They'll probably come up with an elaborate solution for MPs as well.

But you still have the basic problem that money is fungible. You never really know what people would have spent if the allowance didn't exist - or if they weren't, in fact, MPs. Though in the case of some of them, we may be about to find out.

We agree that things are getting better. But we don't know what happens next - and nor does anyone else.

That was Mervyn King's mantra this morning as .

More than usual, the governor was at pains to stress the uncertainties involved in any forecast for the economy right now - whether the Bank's or anyone else's.

On balance, the Bank now thinks the economy will grow more slowly over the next two years than it did in February. It thinks inflation will be slightly higher as well. No surprises there.

The elephant in the room, if there was one, was the chancellor. Or at least, his forecasts for the economy after this year and the comparison with the Bank's.

In the press conference the governor went out of his way to commend the Budget for being so "open" and "honest" about the weakness of Britain's budget position. He said the Bank had no reason to believe the forecasts for borrowing were especially optimistic -indeed, they might well turn out to be too high.

And yet, looking at the Bank's much misunderstood fan chart showing possible growth outcomes, it is fairly clear that the chancellor's forecast of 3.5% growth from 2011 is not considered the most likely outcome by the Bank.

I tried to draw the governor on this point, but he would not be drawn.

Sensibly, perhaps, he did not want to engage in a battle over precise forecasts, when the entire thrust of his remarks is that where the economy is concerned, policy makers today can barely see beyond the end of their noses - let alone 2011.

As I discussed yesterday, this is not like a typical post-war recession. Even if we see quite a strong pickup in the next six to nine months - and King said there were many reasons to think we would - it is very difficult to judge whether that forward momentum will be sustained.

It's a cautious message the Bank has sent us today. After the excitements of the past six months, some might even consider it dull. Then again, if Bank of England press conferences are beginning to be dull again, that could be the most promising green shoot of the lot.

Things are getting better. A clutch of encouraging numbers this morning confirm what many have been saying for several weeks: the worst of this stage of the economic crisis is over.

Things may even improve quite quickly over the rest of this year. What we don't know is what happens next.

Here's the key nugget from : the ONS thinks that manufacturing production fell just 0.1% between February and March. That's the smallest fall in more than a year. This comes alongside other encouraging news from the productive side of the economy, including the slight narrowing in Britain's trade gap in March which was also announced today.

It's not time to bring out the brass bands. (The trade figures are particularly unreliable month to month.) But, it is looking more likely that that awful 1.9% estimated fall in GDP in the first three months of the year will be revised upwards slightly when the ONS produces a new estimate next week.

As I noted when that first figure came out, the sheer scale of that decline early in the year makes a sharp improvement over the next few months more likely.

Think about it: if you have stopped production altogether, as many industrial firms have done, there's nowhere to go but up.

Even if you're still producing nothing in the second quarter, that's a recipe for 0.0% growth in the second quarter not a further decline.

Of course, that's the extreme case, but you can see how the sheer pace of de-stocking and layoffs in the past six months limits the scope for further sharp declines.

So, assume things do get better over the next few quarters - maybe dramatically so. What happens next?

That's when things get sticky. Because even the most bullish of real economy bulls, when pushed, have a difficult time explaining where a full throttled, private sector-led recovery is going to come from, especially in the US or UK.

You will be bored of my repeating it but I will do it again, banks and companies may have shed a lot of debt in the past year or so but for consumers, that "deleveraging" has barely got started, especially here in Britain.

Unless something very strange happens, the rise in Britain's personal savings rate in the last few months of 2008 is only the beginning. At a time when the government also has to retrench, it is difficult to see how that amounts to rapid growth.

So what could this recovery look like? It's not a "V". But it's not quite an "L". In the absence of another global financial meltdown, a "W" shaped recession looks a bit less likely as well - the dreaded double-dipper.

That could happen: the world is still a fragile place. But if the banking crisis is over, as Robert Peston has said, there's a search on for the appropriate symbol, and it's left the standard keyboard behind.

Enter the "square root" scenario. Microsoft doesn't do justice to it, but the square root allows for the possibility of a fairly rapid early recovery, with slow or stagnant growth after that.

Or, if you think that's too gloomy, economists from Moody's, the ratings agency, have a less subtle alternative: the "hook". That's a steep downturn followed by a recovery that's neither one thing nor the other.

You might say that economists should have better things to do with their time than trawl their "symbols" menus. But the shape of the recovery is the multi-billion dollar question and it will be some time before we have an answer.

If you know you're going to do something soon, you might as well . I suspect that's the reason the Bank of England's Monetary Policy Committee chose to extend its quantitative easing (QE) programme today, even though they didn't strictly need to make a decision until next month.

also maximises continuity. The market has been told that the programme will continue, before it had started asking itself whether it would.

As of this morning, the Bank was around £52bn of the way through the initial £75bn it set out to spend in March, so it has been spending at a steady rate of roughly £25bn a month. Under the original terms laid out by the chancellor, the MPC has another £75bn available to spend. But given the timing, if it had announced it was going to spend the full amount over the next three months, that would have been considered an acceleration. So the £50bn decision (over three months) enhances continuity in that sense as well.

The evidence on QE to date has been mixed. We won't get a clear steer on how the Bank itself thinks things are going until next week's Inflation Report. But the message of today's decision is that the MPC thinks there's more to do.

Though they fell sharply when the QE programme was first announced, and they have fallen again today, yields on government bonds are now around a tenth of a percentage point above where they were when QE started.

You can read the data a number of ways. Bank officials will no doubt point to signs of increased liquidity in key markets for corporate debt. And, as I've discussed before, UK bond yields are determined by a lot more than QE.

I may have more on that later on. But whatever the reason, it's fair to say that QE's impact on long-term borrowing rates to date has been less than many of its proponents had hoped.

That suggests the programme has a while to run. Of course, the MPC can stop the programme any time, but it would take some pretty exceptional data for them to risk unsettling the markets. As of today, it's a safe bet that QE will be operating for at least another three months, probably longer.

There is nothing especially surprising in , though note that the MPC has now joined those who see "promising signs that the pace of decline [in the UK] has begun to moderate". That said, "the timing and strength [of] recovery is highly uncertain". No news there.

There are no good options for cutting government debt, but extending all of our working lives could be the best of a bad lot.

That's the basic argument in a [pdf link] on the back of today's NIESR report.

To recap, the institute's economists think that debt will rise to nearly 100% of GDP by 2015, not 78% as the Treasury forecast in the budget. It will start to fall by then, but only to about 90% by 2023.

By then, the NIESR economists say the government ought to be looking to get debt back below Gordon Brown's old ceiling of 40% of GDP. Helpfully, they provide a menu of unpalatable ways to get there.

It could cut all public spending by 10% in real terms over the next decade; it could raise taxes by the equivalent of an extra 15p on the basic rate of income tax over the same period; or it could raise the retirement age by five years by 2023.

These are the extreme, "either-or" scenarios. You could obviously do a diluted version of all three.

But if you thought a five year extension of all our working lives was a desperate measure to cut government debt, that's a list that could start to change your mind. Especially when I tell you that the 15p on income tax would be on top of the 8p rise from today's level that is already built into the NIESR forecasts.

As the authors point out, the beauty of raising the retirement age, from a budget standpoint, is that it raises revenues and cuts spending at the same time. Income tax receipts go up, and spending on pensions goes down.

By cutting the average time in retirement, you also reduce the gap between what we currently save, and what we would need to save for the comfortable retirement we expect.

That's a big plus in an economy that was saving far too little, even before the credit crunch slashed the amount that those savings could plausibly earn.

Other things equal, the authors reckon that adding one year to our effective working lives would reduce public borrowing by 1% of GDP after 10 years, and reduce the national debt by 20% of GDP over 30 years.

Because most people tend to retire a little before the state retirement age, you need to raise the pension age by about 1.5 years for every one year you want to extend the average working life. That's why the authors say you would need to raise the state pension age to 70 to bring debt down to 40% by 2023.

It all sounds pretty extreme. And it is. Right now, none of the major parties have suggested that a debt stock of 40% of GDP is a reasonable target for less than 15 years' time. Even if all of the chancellor's forecasts come true, the Treasury doesn't expect debt to fall back to that level until 2032.

As the NIESR economists admit, there is also a huge amount of uncertainty around all of these forecasts. Other things are not equal. And anything could happen. There is even a possibility that debt will come back down to 40% on its own.

Finally, you could quibble with the 40% number itself. The Treasury expects debt to be just over 50% of GDP in 2023, which would be pretty low by international standards. (Today at least - who knows what those standards will be in 2023.)

Most economists think that for that to happen, the government will need to do more to rein in borrowing than has been announced to date. But should we take even more drastic steps to reach the arbitrary target of 40%? Many would say no.

But even if you reject the 40% target, it's hard to argue with the basic idea of radically reducing the public debt over the next 15 years.

As Martin Weale points out in the main report, if you assume that major recessions happen, on average, one in every 20 years, and raise national debt by 30% of GDP, then to handle such crises in a sustainable way you need to more or less balance the budget in normal times.

If the Conservatives still want to do it, that is what "mending the roof while the sun is shining" would look like.

By 2023 we will be nearly 15 years on from this crisis, and that much closer to the next one. Assuming that a future government has not put an end to boom and bust, by then it needs to have mended a lot of roof.

Raising the retirement age further, and earlier, than already planned has not featured so far in the doom-laden discussions of future budget cuts. But after reading this study, I think it will.

UPDATE, 11:30, Thursday 7 May: A quick update to respond to some comments.

Raising the retirement age is not a soft option, as many of you have pointed out.

For one thing, as some have noted (eg 7), it's not fair. Middle class professionals will find the prospect of five more years of work a lot more palatable than someone who's worked in heavy industry all their life. That's one reason why any government proposing this change might make it voluntary to start off with.

It might start by offering incentives to delay retirement for those in a good position to do so, rather than directly penalising those that retire at 65. Existing state pension rules already go some way along this road.

I've also been struck by how many have you want to know what would happen to public service workers in all this (eg 8, 14, 25). Already they are already widely perceived to get a cushy retirement deal relative to the private sector. If the comments on this blog are any indication, there would be enormous pressure to reform public sector pension arrangements in the event of any plan to make everyone work longer.

All of these are huge issues we will inevitably come back to. But for those of you who say, understandably, that you don't fancy working five years longer just to clean up a mess made by a lot of banks, remember that we were talking about having to work longer, long before the credit crunch. And for good reason.

Fifty years ago anyone retiring at 65 could expect to live another 13 years. Now it's about 20 years, and that number is rising remarkably fast. "Healthy" life expectancy is not rising as quickly, but it is rising - on average you can expect around 14 years without serious illness. That's a lot more than when the 65 retirement age was set. How much you've benefited depends a lot on class - the poorest in society have not benefited from these advances nearly as much as those higher up the income scale, which makes the unfairness I mentioned a serious issue which would need to be addressed.

But the reality is the vast majority are looking at a much longer healthy life than our parents and grandparents did. It is not clear to me why we shouldn't spend a few of those extra years at work. Nor, at current savings rates, is it sustainable.

As I mentioned yesterday, one of the attractive features of this plan would be that it would narrow the gap between what we save now, and what we would need to save to live well for all the years of retirement we can now expect. Right now, as the NIESR economist emphasize, the numbers simply do not add up.

Many of you wonder where the jobs will come from (eg 30). From where we stand today, it's a reasonable question. But remember we had a big rise in the working population since 2001, for various reasons, and a large rise in the number of jobs as well. There isn't a fixed amount of work out there, and if we extend working lives that ought to mean faster economic growth as well.

There are plenty of important questions to be resolved - as I said before, this is no soft option. But at a time when we hear a lot about spending cuts or tax rises as the solutions to Britain's budget woes, it's helpful to be reminded that there is a third option to throw into the mix.

Britain's oldest economic think tank believes that the economy could shrink by more this year than it did in 1931.

That's not good. But it's not as bad as you might think.

We've all heard so much about the Great Depression in the US, we forget that for Britain, the Great Depression wasn't that Great.

In the worst year of the Depression, our national income shrank by 4.6%. That's the figure that has in mind when it makes the comparison with 2009.

In its latest Economic Review, it forecasts a decline in GDP this year of 4.3%, but, as the authors demonstrate, the pace of the downturn to date has been on a par with 1930-1931.

The Chancellor, Alistair Darling, will not relish the historical comparison. No-one in the Labour party likes to be linked to anything that happened in 1931.

For those that don't know, that was when the Labour Prime Minister, Ramsay MacDonald, was forced out of office by the economic crisis, but then agreed to be part of a national government with Labour's enemies. For Labour, it's an act of party betrayal that has been handed down the generations.

Still, economically speaking, 1931 was not half as bad for the UK as it was for other parts of the world - notably the US, which shrank by more than 10% that year, and by around 30% between 1929 and 1933.

Where the UK is concerned, the year you really don't want to replicate is 1921, when the economy shrank by nearly 10%.

Thankfully the NIESR doesn't think that we're approaching that territory right now. Although you might imagine so, given the carnage afflicting the public finances.

Like many others, the institute thinks that the chancellor's being optimistic about the strength of the recovery from 2010.

To remind you, Mr Darling is forecasting growth of 3.5% from 2011 onwards (though he's using a more conservative forecast of 3.25% in his predictions for the public finances).

As I noted on Budget day, that's not unheard of. We often have rapid growth of that kind after a recession, especially a deep one.

But, as I also remarked, it's not what economies have tended to see after major financial crises.

Nor, as the authors of this report point out, is it necessarily what you would expect to see in a year when the government is expecting to subtract 0.7 percentage points from overall growth in GDP.

For the economy to grow 3.5% against that backdrop, the rest of the economy would have to grow by 4.25%.

Again, that has happened before. But not since 1988, which was itself the peak of an unsustainable boom.

Many economists I talk to are starting to sound much more optimistic about the next year. After the kinds of declines we've seen over the past six months, there's a sense that there is only one way the numbers can go.

But even if we were to see growth on the order of 1% next year, I haven't found many who expect several years of rapid growth from 2011.

Maybe the Budget forecast will be right, and the Treasury will get the last laugh. Where the growth forecasts are concerned, it's happened quite a few times in the last few years.

But the same cannot be said of the Treasury's borrowing predictions. If the NIESR is even slightly right on those, net debt is going to approach 100% of GDP by 2015-16, and things could be a lot stickier than the markets now expect.

We've had a bust, but did we ever have a boom? The Treasury says we did not.

You might think that was a little, er, counter-intuitive. Can you really have a bust this big, without having a previous boom? Yet a good chunk of the economic analysis in its 2009 Budget book is devoted to proving exactly that.

In case you were wondering, it matters whether the Treasury economists are right on this one. If they are, Britain was hit by financial lightning toward the end of 2007, and now all we need to do is clean up the damage and carry on much as before.

But if they are wrong, and the government in fact failed to spot a massive boom in the years before this bust, there could be some important lessons for future governments - and for how fast they can safely allow the British economy to grow.

Before the Budget that the Treasury had decided to write off 4% of GDP as the permanent cost of the credit crunch, but they might just as well have said there had been a temporary windfall of 4% in the boom years, which had now gone away.

Now the Treasury has raised that permanent cost to 5% of GDP. And Robert Chote, the Director of the Institute for Fiscal Studies, has turned that basic idea into two very nifty charts.

They take some explanation, but I think it's worth it.

The first chart shows how the Treasury's view of our recent economic history has changed since Budget 2008. The line in the middle represents the "trend" growth in Britain's potential output - think of it as what economic growth would be, if the government really did put an end to booms and busts, and the economy grew simply in line with potential. Roughly speaking, if the economy is well above that line it's operating above capacity - something you associate with a boom. If it's well below, then that is a recession, and there's a lot of productive capacity going unused.

As you can see, the Treasury version shows the UK trundling along close to the "safe" rate of growth from 2002 onwards, then plunging by 5% when the credit crunch struck (that's the "permanent loss in trend output"). Then it has a recession, which is forecast to bring another 5% loss in output, relative to potential, by early 2010.

The result is what you might call the "immaculate recession". The economy ends up 10% smaller at the end of 2009 than it would have been if it had simply grown at its trend rate. But this happens without any preceding period of operating above capacity.

Of course, : "that the productive potential of the economy did not go into sudden and unpredictable decline in mid-2007, but rather that the government - among many others - consistently overestimated the potential of the economy in the good years, lulled into a false sense of security by global disinflation."

This is shown in the second chart, which simply assumes that Britain's potential growth rate grew by 2.6% a year since 1997, or roughly its long-term trend. That's in contrast to the Treasury's more complicated story, which has it growing by 3.5% a year in Labour's first term, then by 2.75% a year until the crisis hit, then by only 1% a year for 3 years, before going back to 2.75%.

Miraculously, the economy at the end of 2009 ends up exactly the same place as the Treasury now predicts, with the economy running 5% below its potential. The only difference is that the period from 2000 onwards shows up as a massive boom, with output running 3-4% above potential.

On this view, in the lead-up to this crisis the government did what nearly every post-war British government has done, and simply mistook a boom for a long-term increase in Britain's potential growth.

It's a neat talking point for the government's critics. But does it matter? Well, yes and no. If the second version of history is true, it suggests that Britain's fiscal policy should have been much tighter than it was from 2000 onwards, even according to the government's own fiscal rules.

But that is 20/20 hindsight. If (then) Chancellor Brown had known that we were heading for this kind of bust, he would presumably have wanted to do something to stop things getting out of hand. The interesting question is what.

After all, inflation wasn't showing any sign of an unsustainable boom, and that was all the Bank of England was supposed to be worried about. Tightening fiscal policy might have eased demand a little, but it's hard to believe it would have been politically possible to tighten by 4% of GDP. Even the IFS was only talking of a "hole" in the budget of about 1% of GDP.

You could say it all underlines the case for "macro-prudential" tools to support financial stability, and all the other additions to the authorities' armoury that are now being discussed. But that is not where the debate was in, say, 2003.

Back then, there was extensive debate about whether central bank should or could intervene to prevent booms in housing and other asset markets. The consensus then was that it was better to wait, and clean up after the bust. On this view, any effort to prick such a bubble before then would simply bring on the recession you were hoping to avoid. As Lord George, the former governor of the Bank of England used to say, better to have imbalanced growth than no growth at all.

Now we are supposed to know better. But, as I've discussed before, even with elaborate new tools and targets to counter excess exuberance, the authorities are going to have to be much more determined than they have ever been in the past if they are not, eventually, to make the same mistake again. There's a reason they say you can't abolish the economic cycle.

Still, if they can't bring an end to boom and bust, governments can at least build a war chest during the boom years, to help in the inevitable clean-up when it all goes wrong.

The government thought they had done that with the budget surpluses of 1998-2001. Those surpluses did help to reduce our net debt by about 10% of GDP in Labour's first term. But whether you believe the credit crunch was a natural progression or a bolt from the blue, knowing what we know now, even the Treasury must wish it had squirreled away a lot more.