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Even if Chancellor Merkel wished to take this course – and even if the Bundestag approved it – the scheme would still be torn to pieces by the German constitutional court unless legitimised by radical EU treaty changes, which would in turn take years, require referenda, and face populist revolt in half Europe.

What the German people are being asked to do is to surrender fiscal sovereignty and pay open-ended transfers to Southern Europe, taking on a burden up to six times reunification with East Germany.

“If we pool the debts of the countries in the south-west periphery of Europe, we are blighting our children’s future: the debt levels are astronomic,” said Hans-Werner Sinn, head of Germany IFO institute.

Any attempt to prop up the status quo will cement the current account imbalances of EMU’s North and South, to the detriment of both sides.

“I doubt that the current leaders of Europe fully understand the economic implications of their decisions. They are repeating the mistakes that Germany made over reunification,” he told the Handelsblatt.

Transfers to the East are still running at €60bn a year two decades after the fall of the Berlin Wall. There has been no meaningful East-West convergence for the last 15 years.

To those who blithely argue that EMU is a good racket for German exporters because it locks in Germany’s competitive advantage, he retorts that a trade surplus is the flip side of a capital deficit. Germany has seen €1 trillion – or two thirds of its entire savings since 2002 – leak out to fund the EMU party, gutting investment at home. This is toxic for Germany too.

It is no surprise to eurosceptics that Europe should have reached this fateful point where leaders must choose between the twin traumas of EMU break-up or giving up their countries. Nor is it a surprise to an inner-core of schemers within the EU system, who have always calculated that they could exploit such a crisis to catalyse political union.

However, it is a big surprise to Europe’s leaders, and they do not know what to do about it.

Chancellor Merkel and President Sarkozy seem unwilling even to boost the firepower of the European Financial Stability Facility, though in this they may be right.

The drama has moved beyond the point where headline "shock and awe" pledges can achieve anything. Markets are already looking beyond the debt-stricken periphery to the creditor core, fearing that bail-out costs will themselves create a chain of contamination. Credit default swaps on France have risen above 100 basis points, where they linger stubbornly.

A Fitch report on the European Stability Mechanism (ESM) said the new rescue fund “could result in lower ratings” on the risky sovereigns because the EU would have instant debt seniority, leaving private bondholders exposed to the risk of bigger haircuts. To make matters worse, debt restructuring would depend on the whim of politicians. The incoherence of the rescue machinery itself is feeding the debt crisis.

So as EU leaders flounder, the task of saving monetary union falls to the ECB. Yet it too has declined the burden, refusing to go nuclear with bond purchases. “Each country needs to be held responsible for its own debt," said Germany’s monetary avenger at the ECB, Jurgen Stark.

He was joined last week by Mario Draghi, Italy’s governor and candidate for ECB chief, who said it was not the job of a central bank to carry out fiscal rescues. “We could easily cross the line and lose everything we have, lose independence, and basically violate the Treaty," he said.

Indeed. Maastricht forbids the ECB from buying the debt of eurozone states except for specific purposes of liquidity management. But this saga no longer has anything to do with liquidity. Southern Europe faces a solvency crisis.

The ECB has postponed its threat to pull away the lending props beneath the banking systems of the PIGS. Beyond that it has limited itself to tactical strikes in the small illiquid debt markets of Ireland and Portugal, buying enough bonds to ram down yields and burn a few hedge funds.

The effect has faded within days. It had little impact on Spanish and Italian bonds in any case. Spanish 10-year yields reached 5.45pc last week, far above 5pc level where compound arithmetic comes into play.

At the end of the day, debtor governments still have to persuade Japanese life insurers, Mideast wealth funds, or French and German banks, to put up real money to buy their bonds at a bearable interest rate.

Credit Agricole said last week that it would hold back at next week’s auction of Spanish debt because it is not yet clear whether the ECB will back-stop the country. “The risk is simply too large for our appetite,” it said.

So we drift on with rising yields into 2011, when Portugal must raise €38bn, Belgium €85bn, Spain €210bn, and Italy €374bn – according to Goldman Sachs.

Europe’s leaders still seem to hope that brisk global growth will lift everybody off the reefs. That too is wishful thinking. Recovery brings its own set of problems, and will make intra-EMU tensions even worse.

Germany will hit the inflation buffers and force the ECB to raise interest rates before the trickle down benefits of trade have begun to make any difference in the closed economies of the South. Floating Euribor rates that determine 98pc of mortgages in Spain have been shooting up already, even as wages fall. The vice is still tightening on Spain.

The reflex of the EU elites is to blame this structural mess on lack of statesmanship.

“There is something surreal about the unfolding financial crisis,” said Stefano Micossi from the College of Europe, the sanctum sanctorum of the European Project.

“Leaders grudgingly do what is needed to prevent disaster at the last minute before it is too late, and the next minute they go back to the behaviour that brought them against the wall in the first place. The eurozone is in bad need of a psychiatrist,” he wrote at VoxEU

“If the eurozone follows this path, either all of the sovereign debts become German public debt, or the euro will collapse,” he said.This is admirably candid in one sense, but is today’s crisis really just a failure of leadership? Was EMU not dysfunctional from the first day? Did it not inflict negative real interest rates on Club Med and Ireland in the boom years, driving them into distastrously pro-cyclical policies?

Did it not lock in chronic imbalances between North and South? Has it not left victim states trapped in debt deflation or slumps which have gone too far to respond an austerity cure, and from which there seems to be no escape on terms acceptable to Germany?

Should we blame the current hapless leaders, or the guilty men of Maastricht who created this doomsday machine? If the project itself is rotten, surely what the eurozone needs most is an undertaker.

The Monetary Policy Committee's nine members kept the base rate at 0.5pc for another month and held off from further quantitative easing - buying assets to pump money into the economy - to leave the programme at the £200bn level.

Their decision to maintain the status quo, widely expected after policymakers have stuck to a tactic of "wait and see" over the recovery's strength, came as hopes fell that a better balance of imports and exports will keep boosting growth.

The trade deficit in goods grew to £8.5bn in October from the previous month’s revised figure of £8.4bn, according to the Office for National Statistics, rather than shrinking to £8.1bn as analysts expected.

The gap widened as imports increased 3.4pc on the previous month to reach £31.6bn, a record high driven by UK businesses buying in more chemicals from Europe.

Exports could not keep up with the size of the rise, even though they grew 4.1pc to £23.1bn, the most since May 2006 and in line with encouraging data from manufacturers in recent weeks which shows demand picking up.

“The widening of the trade deficit in October is an early blow to hopes that net trade can make another healthy positive contribution to GDP growth in the fourth quarter,” said Howard Archer, economist at IHS Global Insight.

Net trade made up half of the UK’s 0.8pc gross domestic product (GDP) growth in the previous quarter, its biggest contribution since the end of 2008. (The balance of trade can make a positive contribution even if exports still outstrip imports, so long as the deficit, or gap, between the two improves.)

The latest increase in imports could be seen as good news about demand picking up at home, economists said, while some suggested it was a temporary phenomenon due to firms rebuilding the stocks depleted during the recession.

Chris Williamson, chief economist at Markit, said: “Once stocks have returned to normal, manufacturers will be on a better footing to sustain rising output and exports, helping net trade to contribute positively to economic growth.”

However, Stuart Green, economist at HSBC, warned that the figures flagged up “the tendency for both imports and exports to rise in tandem … constraining the degree to which net trade can directly contribute”.

There were also concerns that October's improvement in exports was driven by a sharp swing from September's £1bn oil trade deficit to a £250m surplus, partly because summer maintenance work on the North Sea oil fields ended.

Recent data on exports has been strong, with factories reporting that December saw the strongest overseas demand for years, according to a monthly survey from the Confederation of British Industry (CBI).

The weak pound is supporting exports, although possible threats loom ahead, such as the debt crisis in the eurozone and slower global growth.

The total trade deficit, which includes the more volatiles services figures as well as goods, was £3.9bn, compared to September’s three-month low of £3.8bn. The UK's exports of services normally outstrip imports.

The Bank of England's base rate has now been at just 0.5pc since March 2009, while the quantitative easing programme has been at the £200bn level since November last year.

A combination of rising optimism about the US economy, including over a proposed extension of tax cuts, and concerns about the deficit that those measures would worsen, prompted a sharp spike in Treasury yields on Wednesday as investors dumped the bonds.

Thursday, however, saw a cooling of the sell-off ardour.

"My hunch is that we are near a selling climax in US Treasuries. Such a feeling is also in the market, dampening the dollar now," said Koichi Yoshikawa, head of forex trading at BNP Paribas in Tokyo.

The yield on 10-year U.S. Treasuries was around 3.25pc in European trading, down around 2 basis points but still around 90 basis points above this year's low hit in late September.

At the Reuters 2011 Investment Outlook Summit held in New York and London this week, leading investors indicated they wanted to avoid benchmark government bonds because their low yields were unsustainable.

"We are going to have to get used to rising long-term yields. How else are you going to get the long-term savings returns you need?" Andreas Utermann, chief investment officer of fund firm RCM, said at the summit.

The dollar, which has risen on prospects of higher yields from US assets, was down a quarter of a percent against a basket of major currencies on Thursday, essentially tracking the recovery-from-Wednesday mood.

The euro was down a third of a percent at $1.3214.

Eurozone debt also gained slightly and tension surrounding peripheral eurozone debt was muted, despite the Irish downgrade.

The ratings agency downgraded Ireland to BBB+, but with a stable outlook.

Investors, by contrast, have become more bullish about equities, driving world stocks as measured by MSCI up nearly 3pc this month.

The all-country world index was up 0.2pc on Thursday, with its emerging market counterpart gaining around a third of a percent.

December's rally is setting some equity indexes up for reasonable 2010 gains. The MSCI all-country, for example, is up around 8pc for the year to date, while the emerging market benchmark has risen more than 13pc.

"Bonds outflows are negative for the first time since 2009, while equity inflows are their highest since 2006 and money market inflows have turned positive again," Credit Suisse said in a note.

"This pattern of funds flow suggests that investors want to be cautious, but realise that bonds carry a risk and that, at the margin, some types of equities are safer than bonds."

George Osborne confirmed to the TSC that potential Government sales have not been costed and are not included in official forecasts Photo: AFP

Proceeds from asset sales and privatisations have not been included in the Coalition's austerity measures, but may amount to several billion pounds. High Speed 1, the rail link between London and the Channel Tunnel, has already been sold for £2.1bn, while the Government's interests in NATS, the air traffic control service, and The Tote may raise as much as £700m.

Stakes in the student loan book, the Royal Mail and property assets may also be sold, as the Treasury revealed in the Budget. A planned auction of the spectrum for the next generation of mobile broadband could raise a further £4bn, analysts estimate. Andrew Tyrie, chairman of the Treasury Select Committee (TSC), said the proceeds could amount to "tens of billions of pounds".

He added: "That's quite a lot to have in your back pocket as the years go by, in order to improve the public finances."

George Osborne confirmed to the TSC that the potential sales have not been costed and are not included in official forecasts. He added: "There may opportunities to reduce the national debt from large asset disposals or privatisations, but I'm not wholly rigid about that."

Ministers might be able to argue that some of the proceeds from asset sales could be used to finance new departmental spending plans, he said, but added: "They would have to present a very strong case for that ... rather than to reduce the debt."

John Thurso, Liberal Democrat MP, suggested the proceeds should be used to increase infrastructure investment, a proposal with which the Chancellor agreed, he added: "I am not wedded to all proceeds from asset sales simply going into deficit reduction."

Tax cuts or increased spending would be unlikely, though, as asset sales would be one-offs not affecting the Chancellor's central mandate of eliminating the structural deficit.

Mr Osborne also refuted suggestions that Mervyn King, Governor of the Bank of England, has become too political and there had been a "high degree of co-ordination" between the Treasury and the Bank. "I don't think I am pulling him into political debate. He was appointed by Gordon Brown and reappointed by Alistair Darling. It is not as if he is a Conservative or Liberal Democrat appointment to the Bank, so the idea that he is partisan is wrong," he said.

"He didn't say anything in private that he wasn't also saying in public."

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The Chinese Academy of Social Sciences (CASS) said in its annual Economic Blue Paper that a typical Chinese property now costs 8.8 years of average earnings.

In addition, CASS said that house prices are still rising far in excess of wages, putting property more and more beyond the reach of average Chinese.

CASS estimated that Chinese property prices had risen by 15pc this year, although the rises in some cities have been far steeper.

By contrast, the UK's typical house costs five years of wages to buy, according to the Nationwide Building Society, and the UK's long-term average is four years of earnings.

"House prices have risen steadily for years," said Zhou Linhua, the co-author of the CASS report. "This has inflated investor expectations of a high return, which has brought more money flooding into the market, and fed the bubble."

The Chinese government has repeatedly tried to cool the soaring property market this year, raising deposit requirements, increasing mortgage costs and curbing loans for second homes.

The People's Bank of China, the country's central bank, told lenders to raise the minimum reserves they hold in proportion to deposits by half a percentage point, in an attempt to rein in lending and cool inflationary pressures.

Official statistics showed on Friday that prices in 70 major cities had recorded their third straight month-on-month rise in November, rising 0.3pc on the previous month and at an annual rate of 7.7pc.

"Property prices are likely to remain high for a while," predicted Matthew Fang, an analyst at Guosen Securities, adding that demand was still strong and that inflation was rising.

Negative real interest rates have helped to persuade many Chinese to invest in bricks and mortar rather than leaving their money in the bank, and there is a continuing requirement for Chinese men to own their own property before they can get married.

Attempting to quantify the size of the property bubble, CASS calculated what it believed was a "real" house price in 35 large and medium-sized cities in September, using an index of eleven statistics, including per capita disposable income, saving deposits, number of doctors and university students, retail sales volumes and local capital investment levels.

According to its figures, new homes in seven out of the 35 cities were more than 50pc over their fair value. Property prices in Fuzhou are 70pc too expensive, while those in Hangzhou are 66pc overpriced. New homes in Shanghai are 37pc overpriced and those in Beijing are almost 50pc overpriced.

However, the CASS report attracted instant criticism. Ren Zhiqiang, the chairman of Beijing Huayuan, one of China's largest property developers, saying that China has one of the world's highest rates of private property ownership, with almost 80pc, or 500 million Chinese, owning their homes. "A reasonable conclusion would be that 85pc of Chinese cannot afford to buy a second house," he said.

Joseph Stiglitz believes banks in America will invest money provided under the Fed's program in Asian and other emerging markets Photo: Justin Thomas

“All this liquidity that they’re creating is not going back to grow the American economy and is going to Asia and other emerging markets where it’s not wanted,” Mr Stiglitz said. “Most of the countries around the world have begun to react. They put in capital controls, exchange rate interventions, taxes on these capital flows - a variety of interventions.”

The Federal Reserve is set to buy an additional $600bn of Treasuries - dubbed QE2 - until June 2011 in an attempt to boost economic growth, according to the central bank's chairman Ben Bernanke.

However, Mr Stiglitz maintains that banks in America will invest money provided under the Fed’s program in Asian and other emerging markets, which have recovered faster from the recession.

An increased rate of capital into such markets could cause currencies to appreciate and create asset bubbles, he warned.

Net private capital flows to emerging market economies will rise 42pc to $825bn in 2010 compared with $581bn in 2009, according to trade group the Institute of International Finance.

Brazil's real has gained 1.5pc against the dollar so far this year, and Chile’s peso has appreciated 6.6pc against the greenback.

“Unintentionally, QE2 is leading to a fragmentation of global financial markets because each country takes actions to protect itself,” Mr Stiglitz said. “As more and more do that, it puts more and more pressure on those that don’t, and they will eventually be forced to take some form of action.”

Meanwhile, confidence among US consumers increased in December to a six-month high. The Thomson Reuters/University of Michigan preliminary index of consumer sentiment rose to 74.2 from 71.6 at the end of November. A Commerce Department report showed the US trade deficit shrank more than forecast in October to $38.7bn as growing economies overseas propelled exports to a two-year high.

German Chancellor Angela Merkel and French President Nicolas Sarkozy presented a common front against eurobonds as a way out of the eurozone crisis, a week before an EU summit. Photo: AFP

Earlier on Friday, European central bankers indicated that eurozone governments could not count on the ECB alone to solve a debt crisis which has forced bailouts of Greece and Ireland, and put pressure on Portugal and Spain.

Chancellor Angela Merkel and French President Nicolas Sarkozy presented a united front ahead of a crucial summit next week where EU leaders are expected to agree the terms of a permanent rescue mechanism for the bloc.

Berlin has opposed calls by Spain and other countries to move towards a full-fledged "fiscal union" in the 16-nation bloc but appeared on Friday to have agreed to a limited form of policy coordination, although little detail was offered.

"We have agreed to the convergence of German and French tax policies," said Mr Sarkozy.

Ms Merkel said it was up to Germany and France to set an example on questions of competitiveness, showing partners how far the bloc's biggest economies could co-operate in areas "beyond pure budget policy".

"We are talking about labour law, about tax law and if we are to improve the coherence of the economic aspects of the eurozone, then we should target these issues step by step and propose solutions," she said.

The two leaders said they would present "structural" proposals next year in the area of economic coordination, but declined to elaborate.

"We will defend the euro, because the euro is Europe," Mr Sarkozy said. "Our determination, both German and French, is total."

The euro, which has fallen all week, slid below $1.32 in late afternoon trading in London. The risk premiums investors demand to hold Portuguese, Spanish and Irish debt instead of German benchmarks also edged higher on the day.

Bank of Italy Governor and ECB Governing Council member Mario Draghi told the Financial Times that responsibility for dealing with the crisis ultimately lay with euro governments and the ECB could go only so far in helping weaker members by buying their bonds.

"I'm only too aware that we could easily cross the line and lose everything we have, lose independence, and basically violate the (EU) treaty," said Mr Draghi, a leading candidate to replace Jean-Claude Trichet as ECB president.

Next week's EU summit is expected to finalise plans to introduce a permanent rescue mechanism for the eurozone to replace the €750bn European Financial Stability Facility (EFSF) that it set up in May after bailing out Greece.

German demands that the new mechanism include the possibility of so-called "haircuts" for holders of eurozone sovereign debt have been blamed for exacerbating the crisis by scaring bond investors with the prospect of not getting all their money back.

European Central Bank Governing Council member Yves Mersch said expanding Europe's financial stability fund would be preferable to issuing euro area bonds in the short term to tackle any debt problems.

Ms Merkel rejected calls to increase the stability fund. "I'd say for us in Germany that the question of expanding the rescue mechanism is not now on the table," she said on Friday. "Less than 10pc of the rescue mechanism has been used for Ireland. It is not on the agenda."

Spain kicked off an €83bn five-year plan to make its flagging industries more competitive on Friday, the government's latest effort to drag the country out of economic stagnation and rebuild investor confidence to reduce ballooning financing costs.

Markets remain sceptical. "I don't think this will have any impact on the public finances because they have already said these plans are consistent with the 2011 budget," said one analyst who asked to remain anonymous.

More fiscal stimulus is being piled on to ever more monetary stimulus in a manner which is ultimately bound to be strongly inflationary and will test international appetite for dollar assets close to destruction. No wonder bond yields have leapt so vigorously. America's ability to borrow from the rest of the world is by no means limitless. If more deficit spending leads to tighter monetary conditions, then the two will cancel each other out. There's no point in tax giveaways when countered by higher interest rates.

Even so, the positives of Obama's actions broadly outweigh the evident risks. At last, there is movement on the Hill, and that's got to do some good for poleaxed business confidence. In the first two years of his presidency, Mr Obama pursued a narrow social agenda which alienated America's naturally conservative majority and ended in political gridlock. The resulting economic paralysis is as palpable as the political one.

Obama utterly failed to provide business and finance with the certainty it needs to start investing and hiring again. The mid-terms have provided the wake-up call needed for the Administration to start focusing on the main cause of his unpopularity – failure to tackle the economic crisis.

Reaching some kind of accommodation with the Republicans is evidence of a more pliable, pro-business attitude. The attack on the better off seems to be easing. Just as Bill Clinton was forced in his first term to move towards the centre ground to secure his chances of a second term, the same now applies to Obama.

Confidence is one of the most important ingredients in any economic recovery, and after a banking crisis, perhaps the most important. Despite the grudging rhetoric of his climbdown on the tax cuts, Obama seems finally to have recognised that saving the economy must come before pursuit of a partisan liberal/left agenda.

Here in Britain, the Coalition government has understood the need to build private sector confidence much better than its US counterpart. After the disaster of Gordon Brown's reign, the current government is doing most of the right things in terms of economic policy, and even more remarkably, has so far managed to maintain a common front on it all.

Yet there is one glaring exception to this – a persistent tendency to beat up, run down, and otherwise punish Britain's most successful industry; banking and finance. OK, so don't laugh.

To describe an industry that brings the world to the edge of economic catastrophe and requires hundreds of billions of pounds in public support as "successful" is quite a leap. The politics of hacking the banking sector back to size are easy enough to understand. The Prime Minister and his Chancellor have thought it necessary as part of their "all in it together" approach to economic repair to compete with Vince Cable and Ed Miliband for the position of bank-basher in chief.

Attacking the egregious bankers may or may not make sound politics. Unfortunately, it is much harder to argue it makes good economics, for it runs counter to two of the Government's key economic objectives.

Like it or not, the UK desperately needs both a thriving City and domestic banking sector to achieve the robust private sector recovery and rapid fiscal consolidation it aspires to.

Crucially, the bankers are relied on both to fund this recovery and for the revenue to support public debt reduction. The present stand-off gets nobody anywhere.

Hence the until recently hush-hush "Project Merlin" – the initiative to bring the two sides together to sort out their differences. The go-between for the Government is the former banker Oliver Letwin, supported by George Osborne's economic adviser, Rupert Harrison. From the banking side the initiative is led by John Varley, the outgoing Barclays chief executive.

If these talks were aimed at achieving big gestures, then they were always likely to fail. Competing banks of widely different strategies and international mix would always struggle to sign up to a common agenda for meaningful pay restraint and increased lending, or even support for David Cameron's Big Society Bank, whatever that is.

So it has proved. The talks wouldn't even have been widely known about but for the fact that Standard Chartered decided to out them by publicly withdrawing from the initiative, citing the fact that all its operations are overseas and shouldn't therefore be ruled by politically motivated demands for pay restraint here in the UK.

Likewise, HSBC and Santander are most unhappy about being lumped in with the part-nationalised Royal Bank of Scotland and Lloyds Banking Group. In fact, all bankers are hated in equal measure, but that doesn't seem to stop the banks that didn't require taxpayer recapitalisation from thinking they fall into a different category of reputational damage to the ones that did. In any case, it is looking ever less likely that any kind of a statement on bonuses will be agreed this side of Christmas.

In the meantime, the Coalition ploughs ahead with a crackdown on banks which is much harsher than anything attempted in other advanced economies. The latest example of this approach is the banking levy, final details of which are to be announced in the next few days.

Again, there's plenty of political and fiscal justification for this proposed tax on uninsured deposits, yet the fact is that nobody else is imposing it and it runs counter to the parallel objective of increased lending to the small business sector.

The Government's approach is a mess. There's not much that the impotence of Obama's administration can teach these islands, except perhaps this; economic improvement requires private sector recovery, and in Britain that includes – swallow hard – rehabilitation through policy support of the hated City.

The prediction came as Barcap, the securities arm of the retail bank, also used its 2011 outlook to predict that stock markets will outperform government bonds and that the US economy will stage a stronger recovery than it has managed in 2010.

The pound, which has been hard hit since the financial crisis, will end next year at $1.82 against the dollar and 78p versus the euro, it was estimated. The currency closed on Thursday in London at $1.5728 and 84p.

The UK currency's performance will be matched by a strong showing for the FTSE 100, according to Barcap, which expects the index to rise by about 18pc next year and offer a further 4pc return in dividends. The bank's hopes for the London market come from performance in the rest of the world, rather than the UK.

"The FTSE is a major play on global demand," said Edmund Shing, head of European equity strategy at Barcap in London. "You don't have to look very far to find exposure, whether directly through miners and food producers, or indirectly through the oil companies."

He pointed to miners including Rio Tinto and Xstrata, food producers such Unilever and oil companies such as Royal Dutch Shell. The FTSE closed on Thursday up 0.2pc at 5,807.96.

David Cameron's coalition Government has pledged tax increases and spending cuts in an effort to eliminate a structural deficit estimated at £109bn. If the Governmnent can begin to deliver on the promise then it should help both the currency and stock markets, Barcap predicts.

"The Coalition is enacting deep structural reform in order to take a lump out of the deficit, which is a risk," said Mr Shing. " It could ultimately be good for the structural growth story in the UK."

The ONS said it was "reluctantly" postponing the publication of input prices until Monday, to ensure the figures are up to scratch.

The admission was embarrassing for the statistical agency, coming just months after it put off a key release.

Back in June, the ONS said it was delaying its final estimate of gross domestic product (GDP) in the first quarter after likewise discovering potential errors.

At the time, Stephen Penneck, its director general, said: "We will learn from this to prevent it happening again."

Economists have also raised eyebrows over the apparent strength of construction in past months, given that the ONS recently changed its method of gathering data.

Last month, the figure for the sector's output in the second quarter was revised heavily downwards, which could shave 0.2 percentage points off the economy's supposed 1.2pc growth in the period.

Although the dramatic alteration was classed as a revision rather than being blamed on errors, "in market eyes it's much the same thing", said Philip Shaw, economist at Investec.

He said of the latest delay: "It's disappointing but markets would rather not have a number, than have a release which is going to be wrong in a month or two."

Howard Archer, economist at IHS Insight, said: "I don't remember it happening before and now it's happened twice in the space of months."

The ONS declined to comment beyond a statement that said: "To allow time to ensure the statistics fully meet National Statistics standards, ONS has decided reluctantly to postpone publication."

What the published data did show was that the inflation faced by the wider economy is sticking well above target, analysts said.

Output or "factory gate" prices – those charged by manufacturers for their products – rose 3.9pc in the past 12 months, after spiking 4pc in the year to October.

Annual inflation was driven by petrol products, which accounted for one percentage point of the 3.9pc. However, the petrol price increase was weaker than in the previous month, so slowed the overall rate slightly.

In the shorter term, prices rose 0.3pc month-on-month, a drop on October's 0.6pc rise but "clearly inconsistent" with the Bank of England's 2pc target for the annual rate, said Samuel Tombs, an analyst at Capital Economics.

The UK's official measure of annual inflation reached 3.2pc in October.

When the input costs are released, they are expected to show a marked increase due to higher commodity and oil prices, squeezing factories' margins, Mr Archer said.

At least that's the conclusion you could draw if you believe the bean counters at KPMG.

Despite the billions of rand spent building stadiums and staging last summer's extravaganza, there was actually little economic benefit for the country, according to a recent report by KPMG.

Visitor numbers were well short of the predicted 450,000; economic growth actually slowed during the competition; and only 22 of KPMG's 100 largest clients reported any benefit.

Some consolation for losing out to Russia, I suppose. But not much.

'A fall in food inflation to 4pc shows the highly competitive grocery market is keeping costs down for customers in the run-up to Christmas' Photo: Andrew Crowley

Overall shop price inflation dropped to 2pc in November from 2.2pc in October. Meanwhile, food inflation eased back to 4pc in October from 4.4pc in September, according to the British Retail Consortium (BRC)-Nielsen Shop Price Index.

Stephen Robertson, director-general of the BRC, said: "A fall in food inflation to 4pc shows the highly competitive grocery market is keeping costs down for customers in the run-up to Christmas.

"There's been no fundamental change in the upward pressure coming from higher costs for wheat and other commodities but stores are holding back the full force of these rises."

Clive Black, analyst at broker Shore Capital, said he expected food price inflation to remain "within the system" for much of next year.

He said that the next major event is the outcome of the southern hemisphere harvest.

Referring to Wednesday's figures, Mr Black said: "Food price rises are well documented now following the harvest pressure in the summer of 2010 alongside the impact of some financial speculation, which drove up wheat, oil and fat prices in particular.

"The retailers and the supply chain are, in the main, using promotions and offers to deliver 'value' to consumers; consumers that have considerable 'RPI' constraints at present that are leading to lower living standards."

Mike Watkins, senior manager of retailer services at Nielsen, said: "We remain concerned about the underlying inflationary pressures."

Output prices – the price tags manufacturers put on their products – rose 3.9pc in the last 12 months, after spiking 4pc in the year to October.

The annual inflation was driven by petrol prices, which accounted for 1 percentage point of the 3.9pc rise, the Office for National Statistics (ONS) reported.

However, the rate of inflation in petrol products, while still high at 9.8pc, was weaker than the previous month's 11.1pc figure and so slowed the overall rate slightly.

In the shorter term, prices rose 0.3pc month-on-month, a drop on October’s alarming 0.6pc rise but remaining "clearly inconsistent" with the Bank of England’s 2pc target for the annual rate, Samuel Tombs at Capital Economics said.

The official measure of annual inflation, the consumer prices index (CPI), climbed to 3.2pc in October.

However Bank policymakers on Thursday held off from raising interest rates to combat inflation, keeping the base rate kept at its record low of 0.5pc for a 21st month.

While their latest forecasts see inflation hitting 3.5pc in the first half of next year, Mervyn King, the Bank’s Governor, thinks spare capacity in the economy will rein in price rises in the longer-term.

The ONS postponed the planned release of the figures for input prices until Monday, citing “potential errors”, but economists expect the data to show another monthly rise.

“The likelihood is that there was a marked increase in input prices in November due to higher commodity and oil prices, so manufacturers' margins were squeezed increasingly in November,” said Howard Archer, economist at IHS Global Insight.

Separately, the Council of Mortgage Lenders (CML) reported double digit declines for house purchase and remortgaging in October.

Lending for house purchases fell 12pc year-on-year to £6.7bn, which was attributed to slumping house prices and a rush to take advantage of a stamp duty holiday a year ago.

A Chinese shop assistant arranges the price cards at a supermarket in Hefei, east China  Photo: AFP/Getty Images

The 5.1pc annualised inflation rate, up from 4.4pc in October, was driven by a 11.7pc jump in food prices, the Chinese National Statistics Bureau (NSB) said.

Economists said the higher-than-expected rate, which they expected to result in an “aggressive tightening” of China’s money supply, would weigh on investor sentiment when global stock markets re-open on Monday.

The inflation figures follow stronger-than-expected Chinese trade data last Friday that showed exports rose 34.9pc year-on-year in November and imports jumped by 37.7pc. The People’s Bank of China, China’s central bank, reacted to the rise by increasing the Reserve Requirement Ratio for banks by 50 basis points.

Fred Neumann, co-head of Asian Economic Research at HSBC in Hong Kong, said he expected markets to react to the inflation rate. “It raises the risk of more aggressive tightening and that will weigh on global market sentiment in the near term,” he said.

“The risk for the rest of the world and the UK is that [Chinese] growth could slow, which could knock financial confidence around the world as China is seen as the last locomotive to drive it out of the mess it finds itself in.”

Mr Neumann said that higher Chinese inflation would feed through to higher prices for manufactured goods in UK shops “in the next year or two”, just as this year Chinese demand for raw materials, like cotton, had already increased the cost of clothing.

Official trade statistics for October, released last week, showed China is the country’s second biggest source of imports.

“If China does raise prices in manufactured goods that means higher prices for Western economies,” said Mr Neumann. “China is already singularly pushing up global commodity prices and that will be felt in the pockets of UK consumers.”

Economists expect China’s central bank to raise lending and deposit rates, as it did in October, to counter inflation. However, Wu Xiaoling, a former deputy governor of the bank, said yesterday this was not possible because of the risk of attracting inflows of cash that would fuel inflation.

Mr Neumann said one alternative tool was for China to lower its domestic bank lending target for 2011, which is estimated to be seven trillion renminbi. “It could now be lower than that,” he said.

But Mr Neumann added there was “a silver lining” from higher Chinese inflation. “It will ultimately mean that China is going to lose some competitiveness and that means there is some light in the end of the tunnel for Western manufacturers as they can compete on a more level turf. It’s a few years away but I would argue higher Chinese inflation is part of the global rebalancing.”

The State Council, China’s cabinet, is trying to rein in food prices by launching efforts to increase production of vegetables and other basic goods. Authorities are cracking down on hoarding and speculation they say are partly to blame for the price rises.

The NSB also said industrial output, an indicator of economic health, was up by 13.3pc in November from a year earlier, while retail sales were up 18.7pc, important to the government’s effort to build up domestic consumption to drive growth.

In contrast, UK consumer price inflation is expected to have remained flat at 3.2pc in November, when official figures are released on Tuesday.

Howard Archer, chief UK economist from IHS Global Insight, said he expected CPI to edge up to 3.5pc over the next few months “due to higher oil and commodity prices”.

Saudi Arabian oil minister Ali al- Naimi said there was no need for an oil production increase at a meeting of the Organisation of Petroleum Exporting Countries (Opec) in Quito, Ecuador.

Opec, which supplies about 40pc of the world’s oil, has not changed quotas since late 2008, when it announced the biggest-ever reduction in output as global demand collapsed. Crude oil rose exceeded $90 a barrel last week for the first time in more than two years.

Prices in November were 0.7pc lower on an annual basis as measured by the average for the latest three months against the same period a year earlier. Photo: ALAMY

Mortgage lender Halifax said house prices fell 0.1pc last month, meaning prices in the three months to November fell 0.7pc compared with a year ago - the first decline on this measure since November 2009.

That compared with gains of 1.8pc on the month and a three-month annual rise of 1.2pc in October.

Analysts said the figures reinforced the view that house prices would remain soft in 2011, as tight credit and worries about the economic outlook weigh on people's ability to buy.

"Latest housing market data and surveys remain consistently weak, and the housing market really does not seem to have got much going for it at the moment," said Howard Archer, economist at IHS Global Insight.

"There are some signs that the number of properties coming on to the market are starting to dip, which could provide support to house prices. At the moment though, buyer enquires are slowing more than new houses coming on to the market," he said.

Rival mortgage lender Nationwide reported a 0.3pc fall in house prices in November, while official data showing mortgage approvals fell to an 8-month low in October suggest the housing market will remain muted for some time yet.

Halifax said the average price of a home stood at £164,708 in November.

"Higher numbers of properties for sale, combined with reduced demand, have caused the recent decrease in prices," said Halifax economist Martin Ellis.

"There are, however, some tentative signs that homeowners are becoming more reluctant to put their properties on the market which, if continued, will help to relieve the current downward pressure on prices," he said, adding that he did not expect to see a significant fall in house prices further out.

Mohamed El-Erian said he sees the US economy growing 3pc to 3.5pc in the fourth quarter of next year Photo: Bloomberg News

The chief executive of Pimco, which manages the world’s biggest bond fund, said on Thursday that he sees the US economy growing 3pc to 3.5pc in the fourth quarter of next year from the same period of this year.

“The US is using fiscal and monetary policy to try to attain escape velocity for the economy,” El-Erian told Bloomberg. “What we don’t know yet is whether that will be enough not just to change the economy’s trajectory for one year but to place it on a medium-term sustainable path. What the policy makers are doing is kicking the can down the road in response to the symptoms of the new normal [the changed state of the world economy after the recession], but they’re not yet changing the medium-term dynamics.”

Turning his attention to the EU, and expecting the euro area’s economy to grow by 0.5pc to 0.75pc next year, he said: “Europe is on a completely different track than the US. It is trying to achieve sustainable growth by getting its economic house in order through fiscal austerity.”

The European Central Bank (ECB) has stepped up buying bonds from the region’s most-indebted countries to prevent the market rout from spreading.

The ECB is “basically providing liquidity support for a solvency issue,” El-Erian said. “The question is whether the market will cooperate with that,” he added. “If it doesn’t, you will get disorderly restructurings in some peripheral countries and even more economic contraction.”

Meanwhile, US Treasuries rebounded. The 10-year yield fell five basis points to 3.22pc, extending declines after stronger-than-estimated demand at an auction of 30-year debt.

The yield on the 30-year Treasury bond lost five basis points to 4.41pc.

This was exacerbated by the the previous two sessions, which also saw Treasuries sliding. This pushed the 10-year yield to its biggest back-to-back increase since 2008, amid speculation President Barack Obama’s compromise to extend tax cuts will require an increase in government borrowing.

US stocks rose on the government's stimulus efforts. The tech-heavy Nasdaq advanced 7.51 - 0.29pc - to 2,616.67 - its highest close since December 2007. The S&P 500 Index climbed 4.72 - 0.38pc - to 1,233.00.

Elsewhere, a Bloomberg poll showed the majority of Americans are dissatisfied with the Federal Reserve, saying the central bank should either be brought under tighter political control or abolished outright.

One in four manufacturers reported that export order books were above normal in this month’s industrial trends survey from the Confederation of British Industry (CBI), outstripping the roughly one in five who said the flow of work was below par.

The split meant the balance of firms reporting above normal demand from overseas was 4pc, up sharply on November’s minus 7pc and the highest reading since 1995.

The pound edged up on the back of the data, while optimism about the economic recovery also sapped demand for the safe assets of gilts, pushing yields – the returns investors receive – on 10-year UK government bonds above 3.5pc for the first time in more than four months.

Overall order books also kept improving, as they “normalised” – were close enough to zero to be viewed as being at a normal level – for the first time in more than two years.

The relevant balance was up to minus 3pc, up from minus 15pc in November.

Producers of consumer goods saw the most marked improvement on November in both overall and export orders, the survey of more than 400 companies found.

Reflecting the improved demand, more manufacturers now think output will rise in the coming quarter – a balance of 13pc, compared to November’s 4pc, which means sentiment has returned to the levels seen earlier this year.

“These figures show that the recovery in the manufacturing sector is well underway,” said Ian McCafferty, the CBI’s chief economic adviser.

“With total order books getting back to normal levels and overseas demand particularly strong, the outlook for UK manufacturing output growth is encouraging.”

The weak pound should keep underpinning demand for UK exports into next year, he said.

The findings come after official statistics showed that output at UK factories grew at the strongest monthly rate in seven months in October.

Likewise, the recent Markit / CIPS purchasing managers’ index (PMI) showed that in November the expansion of activity in the sector was its strongest in 16 years.

On the downside, the CBI survey showed inflationary pressures stayed strong, with a balance of 16pc of manufacturers planning to raise prices in the next three months, similar to November’s 17pc.

Mr McCafferty said the rising costs of oil and other commodity prices would mean cost pressures remain a concern.

Such a sharp rise in US benchmark market interest rates matters a lot – and it matters way beyond America. The US government is now servicing $13.8 trillion (£8.7 trilion) in declared liabilities – making it, by a long way, the world’s largest debtor. Around $414bn of US taxpayers’ money went on sovereign interest payments last year – around 4.5 times the budget of America’s Department of Education.

Debt service costs have reached such astronomical levels even though, over the past year and more, yields have been kept historically and artificially low by “quantitative easing (QE)” – in other words, Federal Reserve Chairman Ben Bernanke’s virtual printing press. Now borrowing costs are 28pc higher than a month ago, with the 10-year Treasury yield reaching 3.33pc last week, an already eye-watering debt service burden can only go up.

Few on this side of the Atlantic should feel smug. The eurozone’s ongoing sovereign debt debacle has pushed up Germany’s borrowing costs by 27pc over the last month – to 3.03pc. The market has judged that if Europe’s Teutonic powerhouse wants the single currency to survive, it will ultimately need to raise wads of cash to absorb the mess caused by other member states’ fiscal incontinence.

While the UK isn’t ensnared in monetary union, gilt yields have also spiralled 18pc since the start of November – to 3.55pc. British Government debt is officially £1.05 trillion. We are fast approaching a debt-to-GDP ratio of 100pc, compared to 30pc just a decade ago. If you add off-balance-sheet liabilities to Government estimates, including the bank bail-outs which disgracefully remain “off the books”, the UK already owes more than an entire year’s national income. In the medium-term, this is surely incompatible with a Triple AAA credit rating.

Even with gilt yields ultra-low, courtesy of British QE, the UK is still spending £42bn a year servicing sovereign debt – up 50pc since 2008. The Coalition is talking tough about reining-in the annual budget deficit, but our burgeoning debt stock means interest payments are anyway set to reach £70bn – twice the defence budget – by 2015. And those numbers rest on low gilt-yield assumptions that will be blown out of the water if this recent bond market implosion is the start of a trend.

Some say that growing signs of a US economic recovery are positive for stocks, which means money is being diverted out of Treasuries, so lowering their price, which pushes up yields. That’s wishful thinking. Sovereign borrowing costs have just surged in the US – and therefore elsewhere – because a politically-wounded President Obama caved-in and extended the Bush-era tax cuts, combining them with a $120bn payroll tax holiday.

Lower taxes, and the certainty of lower taxes, may bolster business investment and growth. That’s the logic employed by those painting last week’s global yield spike in a positive light. Government borrowing costs rose in America and elsewhere, they say, as a re-bounding US economy is now drawing investors’ cash away from sovereign bonds and towards more productive uses.

The reality is, though, that the market is increasingly alarmed at the rate of increase of the US government’s already massive liabilities. America’s government debt is set to expand by a jaw-dropping 42pc over the next few years, reaching $19.6 trillion by 2015 according to Treasury Department estimates presented (amid very little fanfare) to Congress back in June. Since then, government spending has risen even more. So US debt service costs, like those of many other Western nations, are expanding rapidly in terms of both the volumes of sovereign instruments outstanding, and the yields on each bond.

The new worry in the market is that this latest round of tax cuts could add another $1 trillion to the US deficit, on top of the already horrendous numbers produced in June. With opinion now deeply split about the wisdom of yet another round of QE, bond investors are getting increasingly worried that the Fed will turn off the funny-money and the sugar-rush will fade. Meanwhile, the US has very few plans – and none of them remotely credible – to get to grips with the biggest debt in history.

America has lately been very happy for small eurozone members to endure most of the adverse publicity related to the sovereign bond crisis. But, as of last week, the Western government debt debacle has entered the big league. We’re going to hear a lot more about the US government’s borrowing costs over the coming months – and the related “contagion” of other countries’ treasury bills, as America’s funding issues focus attention on the scale and ratcheting interest costs of sovereign debts in other large economies too.

Until now, market attention has oscillated between the eurozone and the States, with one region’s debt instruments benefiting from the woes of the other. Last week marked a turning point. Western sovereign instruments were hammered across the board – with traders making little distinction between the debts of Germany or Japan. There’s a lot more of this to come.

Investors en masse are parking ever more cash in alternative asset classes, such as commodities, other tangible assets and emerging market sovereign debts. The pool of money available to finance Western government borrowing is, in relative and maybe even in absolute terms, starting to shrink. This is extremely worrying – not least because of the industrialised world’s demography. Our ageing population means that higher future borrowing requirements are practically guaranteed, even if our politicians become paragons of fiscal virtue – which, of course, they won’t. As one economist I admire recently quipped: “Expecting today’s Western leaders to run fiscal surpluses is like expecting dogs to stockpile sausages”.

Just a few months ago, it was only newspaper scribblers like me, and other naturally dissenting voices, who dared to be openly critical of grotesquely irresponsibly policies such as QE. Yet increasing numbers of important voices are now saying that, in fact, the Emperor has no clothes. Last week the patience of many bond traders snapped too. That marked a very important moment.

The US will continue to run a budget deficit of in excess of 10pc of GDP for at least another year. This is in marked contrast to most other advanced economies, where the fiscal axe is now being swung, with consolidation now beginning in earnest. The danger is that the bond markets won’t care – and almost all Western sovereign instruments will become burdened with a big risk premium, even the bonds of those countries which have actually bitten the bullet and started to impose serious fiscal reforms. If ministers in Britain and Germany would like to know in advance what this feels like and the domestic political havoc it can cause, they should talk to their Irish counterparts.

Over the coming months, the world’s appetite for dollar assets will be very severely tested – perhaps very close to destruction. America boasts the world’s reserve currency, of course, but its ability to borrow from the rest of the world is not without limit. Last week’s US tax move poses great dangers. There is little point in a fiscal giveaway that’s cancelled out by higher rates. All you end up with is even more sovereign debt. Upgraded growth forecasts don’t cause yield spike like that we saw last week – and its absurd to suggest that they do. There’s a new mood in the bond markets – a mood of zero tolerance.

Bars come in metric sizes, and are based directly on that day's gold price, plus a premium for manufacture and marketing. The smaller the bar, the bigger the premium.

One popular way to own gold is by buying gold coins, with 22-carat gold sovereigns the favourite with British investors. Sovereigns dating from about 1887 and up to 1982 are currently the best bet.

Another popular option is to buy South African Krugerrands. The smallest is a 0.1oz coin, which might cost £70 and have a resale value of £50. A 1oz coin costs £567 at the time of writing and has a resale value of £512.

Gold ETFs are not technically funds because they follow a single security. ETF gold securities are traded on the London Stock Exchange. They essentially track the gold price and can be traded daily – all you pay is the dealing charge of around 0.4pc. They are also regulated financial products. Visit www.exchangetradedgold.com or www.etfsecurities.com for more information.

These are few and far between, the most popular being BlackRock Gold & General, which invests in the shares of gold mining companies as well as other commodity businesses. Advisers reckon general commodity funds could also do the job for private investors as they dabble in gold-related stocks – JPM Natural Resources and ACDS Australia Natural Resources remain popular. Gold mining equities tend to be more volatile than the gold price.

Gold bullion banks offer two types of gold account – allocated and unallocated. An allocated account is effectively like keeping gold in a safety deposit box and is the most secure form of investment in physical gold. The gold is stored in a vault owned and managed by a recognised bullion dealer or depository.

With an unallocated account, on the other hand, investors do not have specific bars allotted to them. Traditionally, one advantage of unallocated accounts has been the absence of storage or insurance charges, because the bank reserves the right to lease the gold out.

You can of course buy individual shares of companies that either trade or mine gold.

While thousands of items of gold jewellery will change hands this Christmas, they are not considered serious investments.

India devours 800 tonnes of bullion, more than 30pc of annual global gold mine production, mostly as jewellery. But although over the long term these jewels should hold their value and rise in line with inflation, manufacturing costs and the jewellers' markup mean they would sell for a fraction of the purchase price for the first few years of ownership.

Historically, gold certificates were issued by the US Treasury from the Civil War until 1933. Denominated in dollars, the certificates were used as part of the gold standard and could be exchanged for an equal value of gold.

Nowadays, gold certificates offer investors a method of holding gold without taking physical delivery. Issued by individual banks, particularly in countries such as Germany and Switzerland, they confirm an individual's ownership while the bank holds the metal on the client's behalf.

The investor avoids storage and personal security problems, and gains liquidity by being able to sell portions of the holding by simply telephoning the custodian.

The Perth Mint also runs a certificate programme that is guaranteed by the government of Western Australia and is distributed in a number of countries (www.perthmint.com.au/investment_certificate.aspx).

A number of structured products linked to commodities have been launched. They are either baskets of commodities or individual commodities such as sugar, oil, platinum or gold.

Structured products are typically five-year plans that aim to pay you a set return and limit your downside risk. Structured products can be complicated so ensure you read the small print, or preferably get expert advice.

The single currency won’t fail, and the region’s nations are determined to defend it, Mr Schaeuble told German newspaper the Bild am Sonntag in an interview published on Sunday.

"All those responsible in Europe agree: the euro is to all our advantage. And that’s why we will successfully defend it,” Mr Schaeuble was cited as saying.

“Those who bet their money against the euro will have no success,” he added. “The euro won’t fail.”

His comments come ahead of a European Union summit this week that is to focus on establishing a permanent rescue mechanism starting in 2013 for crisis-hit eurozone nations.

The euro has come under pressure since Ireland followed Greece in tapping into the region's €750bn rescue fund.

Separately, John Major on Sunday gave the single currency his vote of confidence.

“What I do not expect is for the eurozone to break up,” the former Prime Minister said in an interview on BBC television’s Andrew Marr Show on Sunday.

The US and International Monetary Fund would step in to help prevent a break-up if such a scenario threatened, he said.

However, he added that the euro area is likely to face "a long period – perhaps a decade – of slow growth."

On Saturday, Jose Socrates, Portugal's prime minister, sought to ease fears that his nation would be the next to seek a bail-out in face of the sovereign debt crisis.

“Our problem is just a budgetary problem that we have to correct, just as other countries have,” Mr Socrates told Diario de Noticias.

“There is no reason for the IMF to enter Portugal, because Portugal does not need that,” he said, according to the daily Portuguese newspaper. “The government does not need that, we know exactly what to do and we do not need someone to come and tell us what we should do."

All European leaders are committed to defending the single currency, Mr Socrates said. “The way we have to defend it is by meeting our budget targets, that’s what we are doing."

Fedderal Reserve chairman Ben Bernanke has stated that the explicit purpose of the policy, which he calls 'credit easing', is to bring down yields Photo: Getty Images

The yield on 10-year Treasuries – the benchmark price of money worldwide and the key driver of US mortgages rates – has rocketed to 3.3pc, up 35 basis points since President Barack Obama agreed on Monday to compromise with Senate Republicans on tax cuts.

The Treasury sell-off has ricocheted through the global system, triggering bond sell-offs in Asia, Europe and Latin America. Japan's finance ministry braced as borrowing costs on seven-year debt jumped by a sixth in one trading session, while German Bunds punched through 3pc.

The White House deal with Congress will renew the Bush tax cuts for rich and poor alike for two years, as well as adding a further a 2pc cut in payroll taxes and an extension of unemployment aid.

David Bloom, currency chief at HSBC, said it is hard to disentangle whether investors are shunning bonds because they expect US stimulus to boost growth next year, or whether they are losing patience with profligacy in Washington.

"If this is all about growth, that's brilliant. But if yields are rising because people think Amirca's fiscal situation is unsustainable, then its armaggedon," he said.

"The US can get away with this only because it is the world's reserve currency. This would be totally unacceptable in any other country. We think these problems will start to crystallise for the US in the second half of 2011, once the European debt crisis has stabilised," he said.

The warnings were echoed by Li Daokui, a rate-setter for China's central bank. "The focus of the market is still in Europe, but we must be aware that the US fiscal situation is much worse than in Europe," he said.

The US tax deal adds $1 trillion of stimulus over two years, according to BNP Paribas. America's budget deficit will remain stuck near 10pc of GDP, not just in 2011 but also in 2012. This will push gross public debt to 110pc of GDP under the IMF definition, near the brink of a debt compound spiral. The contrast with fiscal tightening in Europe has become starkly evident.

Both Moody's and Fitch warned that the US must map out a credible strategy to control spending. "We have long-term concerns about the US rating outlook and they're not yet being addressed," said Stephen Hess, chief US analyst for Moody's.

Stephen Lewis, from Monument Securities, said the bond rout is a sign that Washington can no longer take global markets for granted. "We have reached the limits of tolerance for budget deficits. There is a feeling around the world that nobody in Washington is paying any attention to the implications of what they are doing, but there is a very real risk that this will backfire if it causes mortgage rates to keep going up," he said.

"At the same time we've seen a loss of confidence in Fed strategy. There is a feeling that the Fed doesn't care about inflation – in fact, wants more of it – and that is certainly not in the interest of bondholders," he said.

The standard rate for 30-year mortgages in US has moved up in tandem with Treasury yields. The rate has been creeping up ever since the US Federal Reserve first signalled plans for a fresh blast of quantitative easing, rising 85 basis points in three months.

The housing squeeze raises serious doubts about the Fed's plan to purchase a further $600bn in Treasuries over coming months, or QE2 as it is known. Fed chair Ben Bernanke stated on Sunday that the explicit purpose of the policy – which he calls "credit easing" – is to bring down yields.

"We're not printing money. What we're doing is lowering interest rates by buying Treasury securities. And by lowering interest rates, we hope to stimulate the economy to grow faster," he said.

US data on foreign holdings of Treasuries and agency bonds are published with a delay, but monthly figures show that China sold a net $24bn in September and Russia sold $10bn. The concern is that investor flight from US debt will overpower the monthly purchases of $100bn by the Fed, making it ever harder for Washington to raise the $1.4 trillion needed next year to cover the deficit.

The rise in yields risks becoming a textbook case of a central bank losing control over long-term rates. The danger is that market fears of future bond losses – whether from inflation or higher default premiums – will neutralise the stimulus, or lead to stagflation.

Tom Porcelli, from RBC Capital Markets, said the Fed rates might be nearer 4pc by now if the Fed had not acted. However, he said there was no justification for QE2 at a time when the economy is growing at more than 2pc, and core inflation – though the lowest since the 1960s – is positive at 1pc. "Nobody believes that we're slipping into deflation anymore. That phase has passed," he said.