The eyes of the world have rightly been fixed on bloody turmoil in the suburbs of Beirut, and on related terrorist threats. Meanwhile, back home in the suburbs of London, the edginess caused by this far-off unrest, by the threat of terrorist retaliation and by unsettling airport security arrangements, is softened by good news: London's property owners are basking contentedly in a warm, if wet, summer because house prices rose by 7.7% this last year.

The nation as a whole is following Blair's lead, shaking off the nay sayers and taking war in the Middle East and oil price rises in its stride. The weather, the health of the economy and the general air of imperturbability were celebrated in July by a 6.1% increase in the sales of food and drink. The rise in the Bank of England's rate to 4.75% caused a ripple among those able to buy a newspaper as they basked on beaches or barbecued on caravan sites, but the nation as a whole took little notice of the quarter-point increase.

This may be a little unwise, as in another corner of the global economic forest, many thousands of miles from Beirut, an upheaval is looming, in the suburbs of Los Angeles and Florida - one that will directly impact on Britain's economy.

I refer, of course, to what some are suggesting may be the biggest housing slump in 40 years - the fall in US house-building programmes and house prices. The evidence is irrefutable: an increase in vacancies in newly built properties in the US, a rise in rents as people who cannot afford to buy a home move instead into rented property, and a recent (August 2 2006) Bloomberg report by Daniel Taub that defaults on California homes were "up by 67.2% from a year earlier, and up 10.5% from the first quarter".

Falling prices are making debts loom larger, making it harder to sell homes and pay off mortgages, and so homeowners are defaulting on loans. While these losses are personal, they could pretty soon mount up and help precipitate the US and therefore the global economy into recession. Some commentators believe there is a 70% chance of such a recession.

News of this grave threat to British homeowners has yet to reach the suburbs. Over the summer hols, only a small coterie of FT and Observer readers was alerted. Sunday Times readers were assured by Irwin Seltzer that the slump in US house prices was limited to some suburbs (of South Florida, for example); that other suburbs were booming; and that a fall in prices would help lower US inflation, providing a boost for the presidential elections of 2008. Such complacency is perhaps unwise, but not unexpected from a consultant to one of the US's biggest mortgage providers, Freddie Mac.

The US government and Federal Reserve, egged on by government-backed companies such as Freddie Mac, have fuelled the property bubble for more than three decades now. They have done this by deregulating and privatising the costless creation of credit; by giving up public powers to set and determine the whole range of interest rates (both short and long, safe and risky); by encouraging subsidised, but largely unregulated housing finance (Freddie Mac and Freddie Mae); and by forcing down interest rates to deal with, among other things, the recession caused by the dotcom bubble of 2001.

The growth of the US economy, and through it the global economy (including our own small corner of the forest) has been driven by this unregulated and privatised, credit-fuelled consumption, backed in turn by the ephemeral and illusory promises of an ever-expanding housing bubble.

It is belatedly dawning on US politicians, officials and regulators that unregulated, easy credit may have hit the buffers of high, real interest rates, set effectively by the invisible hand of the market; that the housing bubble may be bursting, and that the chances of controlling the rate of its deflation to guarantee a "soft landing" for the rest of us is highly unlikely.

Panicked Americans - those I have dubbed "debtor-spenders" - recognise this, too, and so may be easing their borrowing, shutting their purses, binning their credit cards and tipping the US into recession. The probability of recession, as Nouriel Roubini notes, has finally dawned on governors of the Federal Reserve and all those who suffer from a tunnel-vision fixation with inflation.

In August, the Fed was forced to "pause" on raising interest rates - an event of great significance. Why? Because of the threat of a recession caused by - get your heads around this - not just an end to borrowing and spending, but mere declines in the rate of increases in borrowing. (See Professor Wynne Godley on this.)

The Fed faces two challenges, one domestic the other international. Inflation is not one of them. Oil and other commodity price increases are being offset by falls in prices in goods from China, which is once again (after rises in the prices of her exports in 2004 and 2005) exporting deflation. (See The Invisible Hand's Impressive Work.)

The domestic challenge facing the governor of the Fed is to keep the interest rates the Fed controls (the rest are fixed by the market) low and to hope that this encourages other lenders to lower rates to help the debtor-spenders, those heroic souls who have so successfully driven the engine of the US economy (and thus the global economy) by borrowing, buying, selling and refinancing their homes and by endless trips to shopping malls using a trillion credit cards. These Atlases of the global economy are about to be severely punished for their pains.

While the domestic economic challenge requires low interest rates, rates have to be high enough to deal with the international challenge: attracting foreign capital to continue financing the massive US foreign deficit. By raising rates in the UK in August, the Bank of England demonstrated just how serious this international challenge could be.

The UK interest rate rise diverted large flows of capital into the UK (to finance its foreign deficit), and as a result, sterling rose. Simultaneously the dollar fell. A falling dollar is inflationary, raising the cost of imports into the US. Above all, a falling dollar will exacerbate international currency instability - and with it trade and political tensions.

As the Fed's governor, Bernard Bernanke, remarked in a speech on August 25 2006: "Tthe natural reaction of those so affected is to resist change, for example by seeking the passage of protectionist measures." His remarks were aimed at Senator Schumer, who on September 29 reintroduces a bill to increase tariffs on Chinese imports into the US, a proposal not unlike the notorious Smoot-Hawley legislation of 1930, which so exacerbated international tensions.

Of course, a falling dollar conveniently cuts the US's debt bill. For unlike low-income countries, the US is able to borrow in its own currency. However, a falling dollar will also cut the value of debts owed to the US's creditors, both public and private, including the central banks of countries with large numbers of poor people that have generously financed the US consumption boom. As the value of their debts fall, they will begin to lose confidence in their US debtors - including the US Federal Reserve - and probably shift their funds elsewhere. This will lead to a further downward spiral in the value of the dollar; which, coupled with a fall in consumption by the US's debtor-spenders, could plunge us all into a very nasty recession.

Which is why homeowners in London's suburbs should cast their eyes westwards - and beware the threat posed by the growing parsimony of those heroic homeowners in the suburbs of South Florida and California.



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