I've just come in from the paper shop here in the City of London and I've never before passed so many people biting their nails and looking hunted and haunted.

A local investment banker, standing by Snow Hill police station nervously sucking on a cigarette, told me: "It's much wider than Northern Rock. My colleagues in the Square Mile are running scared that the current correction could lead to a full scale liquidity crisis."

I asked him what that meant in plain English and he said: "It's when no one lends anyone any money. Without loans, business dries up. Companies go bust. People are thrown out of work."

The allocation of credit is like pass-the-parcel. It usually amounts to no more than signed notes and bonds guaranteeing cash flow and this works well so long as everyone keeps his nerve. But it only needs a loss of confidence in one section of the market for companies to start withholding funds and before you know what's going on, there's a full scale recession. The problem is caused by what might be described as fictitious money: banks lending money that they haven't got, trusting that, if the worst comes to the worst, they can borrow it back again. As the man said, it's all very well until the music stops and the one caught holding the parcel of debt is declared "Out!"

Bankers have been predicting this crisis for a long time because they have seen government and private debt rising until it is out of control. For almost ten years the Government has massively raised public spending and it has filled the gap between what it spends and what it raises in taxes by borrowing. Extra billions have been poured into the NHS and education. The benefits culture is costing the nation a fortune. And the number of people working directly for the Government has increased by 800,000 over the same period. It stands to reason that this can't continue indefinitely. There has to come a reckoning, and this is what we are seeing now.

So much for government debt. The other problem is personal debt - the amount we all owe on mortgages and the money we have borrowed from finance companies. I'm amazed sometimes when I watch television and the only adverts seem to be from firms offering to lend me money. It's the same every morning when the post comes: glossy leaflets tempting me to borrow for that new car or patio - or anything.

And through all the panic runs a constant stream of lies and confusion. Last Sunday morning for instance, I was listening to the BBC's breakfast news and comment show and a financial expert reassured us: "Of course, people who lose their savings will be compensated." Yes they will. But the maximum compensation payable under the government scheme is £31,500 and that's a lot less than many people have - or think they have - in the bank these days.

Charles Dickens' Mr Pickwick comes to mind: "Annual income £20 per year; annual expenditure £19/19/6 - result happiness. Annual income £20 per year; annual expenditure £20/0/6 - result misery." Dickens offered us his equation in old money of course, but whether you count in pounds, shillings and pence or in decimal currency, the brute economic realities cannot be avoided forever. It's reckoning time.

* Peter Mullen is Rector of St Michael's, Cornhill, in the City of London, and Chaplain to the Stock Exchange.