By Ambrose Evans-Pritchard

LONDON, England - August 7, 2011 - The Great Reprieve is exhausted. The world has used up the three years' grace gained by extreme stimulus after the debt bubble burst in 2008.

This time we face the risk of double-dip recession without shock absorbers. Interest rates are already at or near zero in much of the OECD club. Fiscal deficits are stretched to the limits of safety.

Far from loosening, the U.S. is on track to tighten by 2% of GDP next year, and Europe by 1%-2%, into the slowdown.

China has already pushed credit to 200% of GDP. It cannot repeat the trick.

The Anglo-Saxons can print more money, but the gains in asset prices for the rich are offset by losses from fuel and food inflation for the poor. This is a destructive trade-off.

The decision to throw everything we had at the crisis after Lehman-AIG was a legitimate gamble at the time, given the near certainty of depression if shock therapy had been tried - as in 1931.

It is too early to say the policy has failed, and failure is a false term when leaders confront cruel choices. Yet last week's drama has brought home the truth that suffocating debt has not gone away; it has merely hopped on to the shoulders of sovereign states, threatening just as much damage.

Standard & Poor's downgrade of the United States to AA+ is a detail in this greater drama, albeit of poignant symbolism.

S&P should have acted six years ago when the rot was setting in. To do so now is fatuous.

The U.S. Treasury is right to disregard the verdict and keep risk weightings unchanged to avoid a cascade of forced debt sales. Note how quickly Japan, Korea, France, and even Russia, have closed ranks behind Washington.

As for China's bluster, it is chutzpah and self-delusion. We all agree that the U.S. needs to "cure its addiction to debts", but so will China soon.