The latest slump in the Australian sharemarket is far more serious than the gymnastics we saw a week ago. As I pointed out at the time, that fall was driven by an avalanche of short-selling and followed quickly by dramatic buy-backs from the shorters. 
This time, there is a deeper underlying fear we are looking at a serious situation in China. And if the market is right, then Australia will go into recession in the next six months. Some regions, such as Western Australia and north Queensland, are already experiencing a recession, while Sydney and Melbourne are being held up by huge injections of Chinese-funded apartments.
The fall in mining investment is set to accelerate and there is no sign it will be matched by business investment. And the politicians can't seem to get their act together on infrastructure.
Normally, recessions are associated with big rises in unemployment, and while that may take place this time around, most employers are adopting a strategy of reducing hours rather than retrenching workers. This, in turn, lowers spending in the community. The only people doing well are public servants, who seem oblivious to all that is happening to the people funding them - taxpayers.
There is no doubt that as a result of low interest rates, the sharemarket rose to levels corporations could not justify given their profit outlooks.
Around the world, cost-cutting has been huge, and has boosted profits. But many enterprises are finding they have picked the low-hanging fruit and further savings are becoming tougher without huge investment. In Australia, companies - particularly the big banks, but also BHP Billiton and Rio Tinto - have increased their dividend beyond what is "normal" for companies of their sort. In turn, at least for the banks, it took their share prices higher than their global peers.
The regulators have determined our banks boosted profits too much by overleveraging and are forcing them to raise capital. Given the banks have been the main drivers of our market, this adds to the reluctance of share buyers to match the selling pressure.
If a recession occurs it will have a staggered impact.
First, the immediate concern will be lower interest rates. Unlike central banks elsewhere, the RBA still has some firepower left to lower rates, but not much.
Second, the fall in China being matched by a fall in our currency will lift the costs of a vast array of consumer goods. And that will eventually drive inflation higher. (I must point out the falling currency will help exporters.)Third, if the Abbott government doesn't take the hard decisions to reduce our huge structural deficits, our overseas lenders will force us to sharply increase interest rates, taking any recession to much lower depths.