³ÉÈË¿ìÊÖ

The ratings agency S&P has to "negative". It's still triple-A, but with the distinct possibility that it will not be so forever.

That's because, basically, the people who will buy that debt - the bond traders on the global financial markets - are not convinced by the numbers Alistair Darling produced in the Budget. Then, April's were immediately worse than expected, heightening the gap between prediction and reality.

What does it mean? Well Iceland and Ireland have also had their sovereign debt put on negative. So the UK is now technically in the same league. All those jokes about Canary Wharf becoming Rekyavik-on-Thames now look a bit unfunny.

It is still very very unlikely that the UK would default on its debt: but it will now cost the government more to borrow it. As far as I can make out from my current vantage point of a hotel in Inner Mongolia (where I am working on a report on the Chinese economy) Britain is the first major country to have its AAA rating called into question. It's likely it will not be the last - but what that says about the record of the UK government in managing the public finances is best left for the politicians to slug out on Newsnight, if there are any of them left standing after the seismic events of "Snoutgate".

Incidentally - while it is a massive reputational hit for the Labour government - it is not great news for David Cameron either. S&P's note on the downgrade implies they are not convinced any post election government will be tough enough on public spending (or on raising taxes) to get the public finances back to their gold-plated former status. As I write the pound has taken a hammering.

More on Newsnight tonight - but not from me. By the time the programme goes on air it will be 5am here and I am 800 miles from the nearest TV studio.

I am in a Chinese city once described in Der Spiegel as the best place to make a film about the end of the world. It makes Sheffield at the height of the industrial revolution look look like a sleepy rural idyll.

That the city's power plants are no longer belching total pollution into this city's air - and, if scientists are right **your** city's air - is because four years ago they were blacklisted by the Chinese government and told to shut down the worst polluting plants. The scale of it is amazing: one giant coking plant or petroleum refinery or steelworks after another, while - nestling in the lee of an escarpment overlooking the Yellow River - an ancient looking brick and pottery kiln area gives a worthy impression of 18th century Stoke on Trent.

This city is where the economic crisis meets the environmental crisis that I have become all to familiar with today. Western China is the one place on earth where that cute bit of mental silo-ing we do - "economy" versus "environment" - is impossible. Drought is the over-arching factor in the lives of sheep farmers. They're not allowed to graze and must feed their livestock on corn. Meanwhile corn farmers are under pressure because the price of water is so high. Wierd, I know, a few miles from one of the world's great rivers but this is Capitalist Communist China. Meanwhile steelworks are closed to stop people who live next to them dying of cancer and the water table was last seen headed towards the earth's core.

What it's made me realise is that there are absolute limits to China's growth story - independent of the economic downturn I am here primarily to report on.

There'll be a lot more about this in my reports on Newsnight, to be broadcast in June, in the week of the Tiananmen Square anniversary. Meanwhile, for those of you obsessed with the UK expenses story, you'll be pleased to know I am staying in an officially "No Star" hotel where I have just noticed it is possible to hire out rooms at an "O'clock Rate" - that is, by the hour.

I'm reporting from Ningxia Province, China. It's 1,000 miles west of the coast, has a big ethnic minority called the and is strongly Muslim. Oh, and the Great Wall runs through here, snaking casually alongside to you as you drift in and out of sleep on a deserted motorway.

It slinks around mile-wide coal processing plants and then leaps out at you in the low sunlight. It is quite unlike the brick-built Great Wall in all those "shouting dramas" you see on Chinese TV. It is in fact made of clay. Every 500m or so there are the remains of a bastion which was also clay. There are no signs, no tour guides, not much physical protection (sheep grazing is banned here for reasons of ecology, not archaeology).

On the hilltops surrounding there is always a clay fortress to overlook the walls. People are farming sheep in the shadow of the wall, swallows live in it and in one case, right by the motorway, shepherds are living inside the wall. In one city I saw shacks had been built right up against the wall itself.

The real Great Wall is craggy: a Nicaraguan might mistake it for the side of an arroyo - a natural serration of the earth. If you ever squeezed damp sand at Blackpool between the palms of your hands and made a wall, that's what this looks like, only about 20 ft high.

It is eerie and beautiful, having been sculpted by the forced labour of hundreds of thousands of peasants and overrun by tens of thousands of nomadic horsemen, then allowed to decay under the Cultural Revolution. The Wall defeated all comers.

The plains on either side are empty, desertified despite the attempts of the local environmentalists to replant them, and gauntly beautiful. I was thinking, God this farmland looks poor, and then realised I was looking at the margins of a desert.

Anyway the results of today's reporting will be conveyed in later blogs and reports on Newsnight. It will be about a halal slaughterhouse and the aspirations of its Chinese workforce.

But: sometimes a mental image is so strong it just tells its own story. For the Great Wall the story is half a millennium long. That crumbling, caramel coloured dragon is going to haunt my dreams.

I am in the West of China, in Nangxia Province, on the Yellow River, to try and get my head around the "other half" of China's economic story. It is a long way from the glamour of the port cities but in a way those cities exist in order to pull China out of the kind of life they lived here, in the interior, for decades. I'll be finding out where the migrant workers have gone back to, and tracing some of China's export routes - atrophied as they are by the year-on-year decline of 22%; and asking the $2 trillion question: can China rebalance its economy to leave behind its dependence on export led growth, boosting the spending power of the working and peasant classes. Avid readers of Idle Scrawl know that its Chinese name is Xian Ren San Ji - "freestyle writing by a leisure author". Well, for now, Xian Ren San Ji rides again...maybe literally: this is the home of China's cowboy class. Giddyup!

The Bank of England has extended its from £75bn to £125bn. This is because it is a) working but b) not enough. However I will bring keen eyed readers of Idle Scrawl back to the issue discussed here in the aftermath of the : the reliance of Alistair Darling's economic forecast on the impact of .

Basically, Darling's projections for a "trampoline recovery" were predicated on the £75bn taking its full impact over time on GDP growth. Here's the quote - from a box right at the back of the (my emphasis):

"For the purpose of the economic forecast, it has been necessary to make judgements on the impact of quantitative easing on nominal GDP growth. The MPC stated in the minutes of its March 2009 meeting that the February Inflation Report projections 'suggested a shortfall in nominal GDP of at least 5 per cent'. The Budget 2009 forecast adopts the forecasting assumption that the MPC's decision to purchase £75 billion of assets, just over 5 per cent of money GDP in 2008, is successful in raising nominal GDP by approximately that amount over the normal horizon over which monetary policy affects inflation and GDP growth."

It is not clear over what timescale the 5% kicks in but bear in mind, as I have pointed out on Newsnight, if there was no quantitative easing you would have to strip back growth by a cumulative 5 percentage points over X years (let's say to be generous, five).

So, now, to the impact of the extra 50bn. Clearly it is a signal that the Bank, having torpedoed any attempt at boosting demand through fiscal policy, is trying to make up for that through aggressive monetary easing. The experts I talk to have predicted this, indeed that the full £150bn will have to be printed at the very least.

The aim of classic quantitative easing is to get the interest rate on government debt down (the so called gilt yield), and following on from that, to push the real rate of interest paid by companies down too. Thus, in its classic form, QE requires a stated target interest rate (or at least a signal of intent). Players in the UK bond market have told me this needs to be about 2% on a 10 year gilt (right now it is 3.67%).

We are in completely uncharted territory here but I think there are two things you could impute from the Bank's actions today.

1) That it has an unofficial target and has realised it needs to print more money to get to that target and;

2) The Bank realises that it will need to print more than £75bn just to make the economy grow at the rate projected by HM Treasury in the Budget

Gilt geeks, please pile in and enlighten us...

It's turning into "Kick Gordon Day". What you are seeing on the airwaves from David Blunkett, Charles Clarke and Bob-Marshall Andrews is just the tip of an iceberg that is mainly composed of good old text messages as Labour folks go back to their constituencies for the long weekend, (which kicks off tonight with a resounding call by Harriet Harman for party unity).

Let me expand on what I am hearing about the situation: as reported on Newsnight last night, Alan Johnson and Jack Straw are being quietly canvassed to see if they are prepared to be caretaker leaders. But there is no enthusiasm coming from their bag-carriers, unlike last summer. The centre-left front-runner Jon Cruddas seems to have a strategy of concentrating on policy rather than party infighting. An interesting flag has been flown by former Newsnight journalist Allegra Stratton in the Guardian, for a , but this would only make sense in a post-defeat situation.

All this you can glean from the political blogs but I will add my two-pennyworth of fairly well briefed observations, naming no sources. The big obstacle to any leadership challenge on Brown this year are the unions. Unlike a year ago, they now have something clearly to gain from the Labour government - above all the imminent bailout of Jaguar and the called-for rescue of LDV. The PM, via lieutenants in the PLP and the unions, has more or less shored-up the union movement, and some unions - especially Unite - feel they have actually moved government policy during the credit crunch.

However, fast-forward to the morning of 5 June and it may be a different story. The nightmare scenario Labour strategists fear is not a wipe out by the Conservatives or Libdems, but a drubbing in certain Labour heartlands by the BNP. That is the essence of the by senior backbenchers Peter Hain and Ian Austin. Obviously, an election is an election and there is no predicting what will happen.

What is most telling at present, as somebody who has to speak to policy advisers, is the absence of debate or engagement by the rising generation of Labour politicians on the "Fourth Term Agenda". This was in full swing in the early summer of 08, if you remember: community politics, localism, social entrepreneurialism, a "Beveridge Mk2" etc. Though they were advancing different solutions, you saw politicians as diverse as Cruddas and Hazel Blears engage on this terrain.

Then, in the aftermath of Lehman Brothers, you saw the debate swing into the territory of crisis management. Huge actions by the state, dwarfing anything a left-wing think tank would have dreamt of, were decided in the space of 48 hours.

What many Labour thinkers assumed was that the party's policy agenda would now veer back towards centralising, top-down initiatives - for example the centre-left pushed hard for a fiscal stimulus until Mervyn King torpedoed the idea. There has certainly been a "feelgood" factor generated among Labour activists about the 50% tax rate: but it is overwhelmed by the fact that - because of the fiscal crisis revealed in Alistair Darling's Budget - the state will have to shrink, spending plans will be slashed, etc, for a generation.

Though much of the Labour angst aimed at Gordon Brown is fuelled by the recent run of missteps - Youtube, McBride, Gurkhas - I cannot help thinking some of it is "displacement anger" at the overall fiscal dilemma.

The essential deal at the heart of New Labour, and the Third Way in general, was to use tax receipts from a rip-roaring, deregulated financial sector to fund a quiet redistribution and longterm public spending increase. Now the tax take from the finance sector has collapsed, and the next generation is faced with a strategic rethink. The only comfort they can draw is that for reasons the Conservatives are also at a policy turning point.

In summary: above all because of the union stance, I predict there will be no leadership issue for Labour until the results of the June elections are known and even then it will probably take electoral catastrophe to change the balance of forces I've described here.