Judging by the behaviour of world markets last week, investors are now convinced the credit squeeze is harming the real economy. In other words, in terms of a question I posed last week, they think this crisis is more like 1989 than the more benign one of 1998. So let us give the screw one more turn. What price 1973?

Anyone with memories of that time will shudder at the comparison. In the UK, the FTSE All-Share index plunged more than 70 per cent in the space of two years. By 1975 inflation rose to 27 per cent, at which time UK Libor stood at an astonishing minus 16.4 per cent in real terms.

Some investors will find that notion simply irritating. Inflation is subdued in all the main developed economies. Why create a problem where none exists?

But this, it turns out, is the crux of the matter. Wall Street is screaming at the US Federal Reserve to cut rates.

As Merrill Lynch put it rather crossly last week, "the Fed still does not grasp the severity of the real estate deflation and credit crunch". In the futures markets, the probability of the Fed not cutting next month is now put at zero.

But the Fed is genuinely worried about inflation, as is the Bank of England.

If it is forced to cut rates, it will presumably be more worried again. What we have here, as Morgan Stanley remarks, is a disconnect that will not go away soon.

Some would say severe inflation is today impossible, since central bankers have learnt better. That was certainly the view around 1970, after 20 years of non-inflationary growth - rather similar to the so-called Great Moderation of the past two decades.

As a result, investors were continuously behind events. One sign of this was that during 1975 real yields on US Treasuries averaged minus 3 per cent and real gilt yields minus 11 per cent.

As to what might spark inflation this time, there is no shortage of theories.

Perhaps the most weighty is that proposed by Alan Greenspan: that after years of exporting deflation, China and India may now start exporting inflation instead.

But perhaps we should examine parallels with 1973 on a broader front. Ian Harnett of Absolute Strategy Research puts the case as follows.

In the early 1970s, the central problem was that the US was engaged in a costly war that it could not afford. One result was a weakening of the currency which - at a time of fixed exchange rates - chiefly expressed itself in a fall of the dollar versus oil and gold.

As a result, the exchange rate system collapsed. That left countries with a choice: whether to peg their currencies to the dollar and import inflation, or float and import recession. And this, of course, is the choice now facing China and the Arab oil-producing states.

Indeed, Mr Harnett suggests, they may come to face a more perilous choice again - whether to put their surplus reserves into less risky currencies, meaning those with current account surpluses.

In that case, presumably, so much the better for Japan and Switzerland - and so much the more expensive for debtor countries such as the US and UK.

Inflation would make it more expensive again. Here, there is a direct contrast with 1973. Then, savers had no direct experience of inflationary conditions.

The result was a massive shift of wealth from savers to borrowers. The smart move, it turned out, was to buy a house on the biggest mortgage possible - or, for governments, to issue the maximum amount of self-liquidating debt.

Today, those in late middle age will make no such mistake. In 1973, as I can attest, spasms of panic could be induced by the simple act of visiting the supermarket and checking the prices against a few weeks before.

That is not an experience one forgets. Investors of that age, whether amateur or professional, are now in the driving seat. If inflation takes hold - indeed, if it simply becomes more volatile - the result will be an inflationary risk premium. And in a savers' market, it will be the turn of borrowers to suffer.

Of course, we are not there yet and may never be. All that is happening now is a worsening 1989 scenario, with Goldman Sachs - for instance - arguing last week that US house prices have 13 to 14 per cent more to fall, or 35 to 40 per cent in the case of California.

I am not, after all, seeking to propound any vulgar fallacies about history repeating itself. The point of such exercises is rather to expand our conception of the possible.

In that spirit, a seasoned stockbroker of my acquaintance dismisses my 1973 comparison. The true parallel, he says, is 1929.

But that, surely, is going too far.

tony.jackson@ft.com