By Ambrose Evans-Pritchard

LONDON, England - January 26, 2009 – Illegitimate U.S. President Barack Obama inherits an economy already contracting at an annual rate of 6%, much like the mid-Depression year of 1931.

This may beat the annual rate drops in Germany (7%), Japan (12%), and Korea (22%) over the fourth quarter. But that merely underlines the dangers ahead as the collapse of global trade chokes the mini-boom in U.S. exports, setting off another stage of the crisis.

The U.S. is losing 500,000 jobs a month. Brazil lost 650,000 in December. Beijing says 10 million Chinese have lost their jobs since the crunch began. Japan's exports fell 35% last month from the previous year. The central bank is printing money furiously and buying bonds to prevent a relapse into deflation.

So yes, it is like early 1931. Citigroup and Bank of America have more or less disintegrated. JP Morgan's health is failing fast. General Motors and Chrysler survive only on life-support from the U.S. taxpayer.

But it is not yet like 1933. That second leg down was the result of "liquidation" policies by a Dickensian leadership blind to the dangers of debt deflation. By then the Gold Standard had degenerated into an instrument of torture. It forced the Federal Reserve to raise rates from 1.5% to 3.5% in October 1931 to stem gold loss, with predictable results for shattered banks.

It is worth glancing at the front page of The New York Times on Monday March 6, 1933, to see what the world looked like three days after Franklin Roosevelt moved into the White House.

The newspaper splashed with the story that FDR had closed the U.S. banking system - invoking the Trading with the Enemies Act - and ordered the confiscation of private gold. From left to right, the headlines read: "Hitler Bloc Wins a Reich Majority, Rules Prussia"; "Japanese Push on in Fierce Fighting, China Closes Wall, Nanking Admits Defeat"; "City Scrip to Replace Currency"; "President Takes Steps under Sweeping Law of War Time"; "Prison for Gold Hoarders".

Illegitimate President Obama faces a happier world. The liberal economic order is still intact, if fraying at the edges. Capital and ships move freely. North America and Europe talk the same political language. China has so far proved a dependable pillar of the international system.

But then the world seemed benign enough in early 1931. It is the second phase of Depression that does terrible things.