Welcome to a new financial year and good luck! We may need it.

The financial system is looking shaky again, the props to global economic growth are tumbling, and if it all ends up in shtook once more, the economic custodians will need the prowess of Houdini to get us out of it.

Remember the relief in late 2008 and 2009 when it seemed, for a few short months, as if the combined efforts of central banks and sovereign governments had beaten the GFC?

The theme song for that phase of the crisis: Jefferson Starship's Miracles.

The chorus, for the benefit of those unfamiliar with the 1970s hit is: "If only you believe like I believe, baby, we'd get by. If only you believed in miracles, so would I"

And believe they did - at least for a while.

In April last year, markets rallied and political journalists wrote gushing stories after the leaders of the G20, representing nations that account for 85 per cent of the world's economic output, pledged $US5 trillion dollars to stimulate economic activity and banish the global recession.

The purpose of economic forecasting may be, as the late John Kenneth Galbraith quipped, to make astrology look respectable.

But you didn't need a crystal ball to work out where that bold initiative was heading.

The global financial crisis morphed into the sovereign debt crisis as the world's governments attempted to raise massive amounts of money by issuing bonds on a scale never before attempted.

Many advanced economies were already lumbered with big budget deficits and sovereign debts before the worst downturn since the Great Depression hit and they were lumbered with a mountain more.

And, oh, how quickly the sentiment shifted.

It took less than a year before the financial markets that cheered the uber-Keynesian rescue, announced at the London G20 summit, instead began to jeer at the so-called Club Med economies and fear that their fiscal woes would cause a sovereign debt contagion engulfing Europe.

It's breathtaking, when you think about it, that the Toronto Summit of the G20 this week staged a 180-degree about-face, pledging to halve budget deficits within three years and to stabilise or cut public debt within six.

(Though there were so many loopholes in that pledge you could drive a Mac truck through it).

So where are we now?

The Bank for International Settlements made a thorough assessment in its 80th annual report, released this week.

The theme song for that tome: The Rolling Stones, Paint it Black.

The sombre warning from the central bank for central banks: "A shock of virtually any size risks a replay of the events we saw in late 2008 and early 2009."

Only now there is no room to manoeuvre. The monetary policy bullets are all shot, with real interest rates at zero in most advanced economies and central bank balance sheets "bloated".

The fiscal policy bullets are all fired, too. Fiscal positions, it said, are on an "unsustainable path "in many countries.

"In short," it concluded, macroeconomic policy is in a vastly worse position than it was three years ago, with little capacity to combat a new crisis - it will be difficult to find a source of further treatment should another emergency arise."

The prescription?

The BIS is urging governments to engage in "fiscal consolidation" - the reining in of public debt and measures to eliminate structural budget deficits.

And it wants central banks to consider lifting interest rates. The aim is to give them some ammunition should worst come to worst and to avoid the distortions that come from loose monetary policy (cheap credit, remember, fuelled the debt binge that got us into the mess in the first place).

But what it doesn't exactly state in banner headlines is that this remedy could be as painful as the malady itself.

Like radical chemotherapy, it's guaranteed to make the patient even sicker in the hope of eventually curing the disease.

Growth is the elixir of capitalism and growth in the world economy remains sub-par despite the massive fiscal and monetary policy stimulus.

The Euro zone is stagnant; it recorded next to no economic growth in the last quarter of 2009 and the first quarter of 2010.

Take away the government spending and the extreme low interest rates, and it's hard to see how Europe avoids a deep double dip.

Fiscal austerity measures being put in place in economies such as Greece and Spain will intensify already severe recessions.

America is posting economic growth but the unemployment rate is still alarmingly high at close to 10 per cent and consumer spending remains weak.

The good news? Australia is in a far better position.

Theme song: Kylie Minogue's I should be so lucky.

The economy is in relatively good shape; the Budget deficit and sovereign debt are miniscule by world standards and interest rates are relatively high.

So if worst comes to worst, there is ample scope for the Government to stimulate and the central bank to cut rates in order to cushion the blow.

We're linked via trade ties to the high-growth economies of Asia - China in particular - and that offers some protection from the ills of Europe.

China's exports will be hit by the European downturn and the huge rise in the value of its currency against the Euro.

So unless China's own contradictions cause a bursting of the China bubble in the near-term it should continue to boost Australia's economy - leaving us not immune but with plenty of antibodies.

But the big question is: do the woes of the old world economies of Europe and to a lesser extent in the US manifest mainly as a macro-economic problem or do they infect the banking system once again and play out as a renewed financial crisis that hits credit markets?

Recall that warning from the BIS. "A shock of virtually any size risks a replay of the events we saw in late 2008 and early 2009."

A global financial pandemic, with the stock of vaccine all gone.

Stephen Long is the ABC's Economics correspondent, contributing to a range of ABC News programs, including special reports for ABC News Online.