Is England the next Iceland? The way cable is trading it certainly feels that way. The decline of GBP has been nothing short of stunning. Just 7 months ago the unit was holding the 2.000 handle, but this week it broke the 1.50 level. Back in 2006 and 2007 when Kathy and I would do road show presentations I would flippantly refer to the UK as the “hedge fund” economy. Watch global equity markets I would say. As they go so sterling will follow. Back in those halcyon real estate mania days I had little idea at just how accurate that analysis would turn out to be.

It appears that the whole UK economy was based on one single business premise - take petro-dollars from Middle East and Russia and invest them into capital markets in the West. Once that gig was up the Brits had no fallback position. From 2002 onward fully 50% of all new jobs in UK were finance related. We have certainly reached interesting times. The BoE, which in its 500-year history has never taken short-term rates below 2% (not even in WW2), is now projected to run a near ZIRP like policy by end of the year with rates likely dropping to a mere 100 basis points.

England of course is not the only Anglo Saxon economy in trouble. US is hardly in better shape. This week the jobless claims exceeded the very disturbing 500K mark suggesting that massive unemployment may be in store in the next few months. Furthermore, the saga of the automakers could quickly unravel into yet another calamity as the government continues to fiddle while their cashflow burns.

Throw away your ideology for a second and understand this -- a bankruptcy of GM or Ford would be the equivalent of a neutron bomb for the US economy. The Midwest as an economy would simply cease to exit. Unemployment would skyrocket to 12% and all those guns people have been buying lately would turn swaths of US into a much harsher version of Mad Max as the only law of the land will become kill or be killed.

Am I being overly dramatic? Perhaps, but I certainly do not want to risk that scenario. The US auto industry is a dinosaur. No argument here. But it cannot be allowed to fail right now. The system is just too fragile. In an ideal world where we have an intelligent pro-active government, it would force GM and Ford and Chrysler to merge, creating economies of scale to make the companies more competitive on the global stage. The reduction in labor force would be substantial, but gradual as industry shrinks capacity to accommodate the smaller consumer demand. Furthermore the merger would avoid bankruptcy and stop the domino chain of defaults in the auto parts sector. Instead we have bumbling idiots in both the executive and the legislative branches who would rather extend credit to AIG whose business consisted of an off track betting parlor, while millions of real Americans stand in harms way.

There is little doubt that the economic crisis is spinning out of policymakers hands. President elect Obama may not even have the time to wait until inauguration to deal with the problems at hand. All of the gambling losses by world’s financial institutions are finally coming due and only way to confront the problem is to inflate or die. Criticize them all you want, but the Japanese were able to escape the worst after effects of their bubble burst with only a 6% unemployment rate and no homeless in the streets. True they’ve had decade of economic stagnation but isn’t that better than 25% unemployment and Hoovervilles in the city streets? There are no good choices facing us now. There are only bad or horrid policy decisions to be made. Let’s hope our leaders choose the former and not the later.

Boris Schlossberg serves as director of currency research at GFT, and runs bktraderfx.com.