UNTIL early summer, the global economy was going so well. Inflation was stable in most countries. Employment was steady. Gross domestic product was rising in UK and most of Europe, albeit more slowly than previously. Interest rates were low, if a little shaky.

And wealth was spreading. A whole new wave of millionaires, even billionaires, was emerging from India, China and the rest of the Asia-Pacific region. Even better, they were spenders, buying Western-made, prestige goods such as aged Scotch whisky. They flew business class and stayed in five-star hotels.

True, there were concerns about Americans' wild borrowing and spending mainly because it was largely funded by raising money abroad. The long-term but accelerating decline of the dollar worried those nations like Britain doing business with the US because it reduced Americans' spending power. (It did not, however, seem to worry Americans who, like many Western nations, have lost the habit of saving.) About the only cloud in this bright economic sky was the quality and quantity of new debt - certain kinds of asset-backed paper - being issued by the big, international banks. However, few outside banking's inner world of "quants" - mainly US-based mathematicians and physicists crunching the numbers - knew much, if anything, about asset-backed paper. It was an alien word of collateralised debt obligations (CDOs), sub-prime, vanilla and mezzanine debt, structured investment vehicles (SIVs) or, heaven forbid, near neighbours SIV-lites. And if they did know something, it hardly mattered. Although central bankers fully realised the acronyms added up to a lot more debt washing around, the watchdogs of the financial industry were confident this was a good thing. Neatly wrapped up and sold over a global counter at fixed, seemingly rational prices, these packages were considered by central bankers to serve the purpose of dispersing debt. They made for stability in the world money markets.

Then it all blew up, like thousands of land mines going off at random and triggering rolling shockwaves. Still unnamed banks in France made panicky calls to the European Central Bank (ECB)appealing for emergency funds and suddenly the summer of ECB president Jean-Claude Trichet, holidaying on the beach at St Malo on the Brittany coast, was over. From his beachside villa, he immediately ordered £69 billion to be pumped into the money markets. He did not even have time to consult with other central bankers around the world.

But not even £69bn was enough. The tidal wave now threatened to shut down the European banking system. Within days, the unthinkable happened. The routine business of the inter-bank markets, in which financial institutions trade money to stay liquid, dried up practically solid overnight.

Central bankers like Trichet, Bank of England governor Mervyn King and the Federal Reserve's Ben Bernanke now took centre stage. Normally paid to be dull and unobtrusive, they took over the headlines in a way not seen since the disintegration of the gold standard 75 years before. A perfect financial storm had swept in, practically unannounced, to batter the world money markets that fundamentally keep all commerce moving. It would be the defining moment of the 2007 business year.

It is a safe bet that before August only a handful of money-market participants knew of the ViX, the "gauge of fear" that measures volatility in the Chicago money markets. But within a few weeks, the ViX had become almost a household acronym in America.

By late August, many big private-equity deals were off the table as credit dried up or became prohibitively expensive. In Britain, the £11.7bn takeover of Alliance Boots just got under the wire, although the funding banks are still trying to offload some of the debt, while a US-based consortium managed to buy most of an ailing Chrysler Corporation from Mercedes-Benz before the money ran out. However, the Qatari-based £10.6bn play for J Sainsbury became a victim of the credit crunch which also rolled into Australia to unravel a private equity-led takeover of national flag carrier Qantas.

Although the biggest private-equity funds are still raising money in the hope of buying up distressed assets in the wake of the market turmoil, the industry fears its glory days are past. Certainly, nobody is talking about the fabled $100bn deal any more.

One bid that did survive the squeeze is the Carlsberg-Heineken grab for Scottish & Newcastle. New chief executive John Dunsmore has surprised the markets by fighting back and appears determined to keep the business independent in spite of a trend towards consolidation in brewing.

Another one that made it was the Royal Bank of Scotland-led consortium's giant £49bn takeover of ABN Amro. The victors, which include Dutch bank Fortis and Spain's Banco Santander, are dividing up the spoils.

By September, it was becoming clear that sub-prime was the main culprit for the credit squeeze. The money markets were drying up because of reckless lending by American mortgage salespeople working on generous bonuses. Rewarded by the quantity of money loaned rather than by the quality of the borrower, they had written mortgages for people in places like Detroit and Tampa who, it was now turning out, could not pay it back. And trillions of dollars were involved. The loans had been packaged up into heavily leveraged CDOs and other exotic bits of paper and sold around the world. As the mortgagees fell behind in their instalments, the CDOs stopped working. The quants' calculations were backfiring and the banks that had originated the packages in the first place were being forced to take them back at huge losses.

Somebody had to pay the piper and it was the chief executives of New York's giant financial institutions, starting with the sacking of Merrill Lynch chief executive Stan O'Neal, albeit with a $161.5m compensation package. The market turmoil spread into "Main Street" credit. Soon lenders, especially in America, began to worry about the debt on their customers' credit cards. Car salesmen fretted about whether buyers were good for repayments. Insurance salesmen became more cautious. Meantime, the sub-prime-triggered cataclysm did nothing for the dollar, whose decline accelerated during 2007. It dropped to a record low against the euro in mid-September, and the dollar index fell to a 15-year low.

But there is no cloud without a silver lining. The fall in the dollar softens the blow of oil prices, at least for countries paying in pounds and euros, that have blown through the $90 per barrel barrier and could be heading for $100.

So far, the booming Asian economies on which we are rapidly coming to depend seem to have escaped the credit crunch. That is something to take into the new year.