Something seems to have gone seriously wrong with the world economy. Could any one have imagined say even in December 2007 that the IMF would be asking governments to spend more even at the cost of increasing budget deficit which the agency normally considers a cardinal sin to stimulate their economies.

But that is exactly what IMF managing director Dominique Strauss-Kahn advised at the just concluded Davos World Economic Forum.

As recently as a few months ago, the IMF was urging continued fiscal restraint in the United States and other countries faced with large deficits. In recent days, however, the agency has welcomed a nascent US proposal for some $150 billion in deficit spending as necessary to stimulate the economy and ward off a recession.

Strauss-Kahn said, he did not think the world would get rid of the crisis with just monetary tools, “A new fiscal policy is probably today an accurate way to answer the crisis.”

Some called the new IMF advice as recognition of the gravity of the situation the world economy is facing.

At some sessions it was conceded that the disaster in the sub-prime area was due to a very bad innovation process. New products were created by very smart people but they weren’t prototyped. They weren’t tested out in the real world. Th financial products were based on sophisticated mathematical formulas that seemed to work out alright in theory.

The rating agencies gave many of them triple A ratings on the basis of these formulas plus past histories of mortgage deliquencies. But most of these products were not tested out for a reasonable period of time to see if they worked. The incentive system worked so that each layer of the financial system profited by selling the products, not for their performance. So they spread like wildfire.

In other sessions it was argued that the food, energy and water problems all touched on each other. America’s pursuit of alternatives to oil has led to massive investment in biofuels made from maize. That in turn has cut the amount of maize being used for food production and so contributed to rising food prices. The production of biofuels is also very water-intensive. Meanwhile, increased demand for agricultural land to grow more food is leading to the clearing of forest in Brazil - which could worsen global warming - leading to further stress on the world’s water supplies.

At one session the potential for political conflicts increasing along with the rise in food, energy and water prices was discussed threadbare as Ban Ki-Moon, the United Nations secretary-general, told one Davos meeting that water shortages had helped to cause the conflict in Darfur.

Some less dramatic series of events were also mentioned in the debate which highlighted the political strains caused by rising food and energy prices: riots in Mexico last summer, after sharp increases in the price of maize flour; mass protests in Indonesia this month, provoked by the rising price of soyabeans; a deadly stampede in western China last November, caused by a rush for subsidised cooking oil; a food-price freeze in Russia, introduced just ahead of the parliamentary elections in December; gas and petrol rationing in Iran; blackouts in Argentina and South Africa.

Some said competition for food, water and energy could also provoke conflict between countries. One session at Davos was devoted to the prospect of drilling for oil and gas in the Arctic. It heard that military activity in the area is increasing, as eight rival countries - including Russia, the US, Canada and Norway - gear up to assert their claims over the fossil fuels that lie beneath the melting Arctic ice.

Sovereign wealth funds, with their deep pockets and government backing as they invest worldwide came under severe crticisim as they are said to offer little transparency and could flex their political power by taking key stakes in foreign defence companies, major banks and other companies

One critic said these funds conceal the element of cross border nationalisation. Others said the concern was exaggerated, however.”There is a lot of worry about sovereign wealth funds, but all of them are assumptions, they are not about real cases,” Bader al-Saad, who heads the Kuwait Investment Authority was quoted as saying.

Found mostly in the oil-rich Middle East and Asia, but also in Russia and Norway, government-owned sovereign wealth funds control an estimated $2.5 trillion in assets, with analysts predicting the value of their holdings could reach $12 trillion by 2015.Singapore’s state-run Temasek Holdings and government of Singapore Investment Corporation, or GIC, with assets of more than $100 billion apiece, according to their Web sites, are among the world’s biggest such funds.

Meanwhile, British Prime Minister Gordon Brown, Microsoft Chairman Bill Gates, Irish musician Bono, H.M. Queen Rania Al Abdullah of the Hashemite Kingdom of Jordan, United Nations Secretary-General Ban Ki-Moon, World Economic Forum Founder and Executive Chairman Klaus Schwab, Nigerian President Umaru Musa Yar’Adua, and Cisco Systems Chairman and Chief Executive Officer John T. Chambers issued a joint statement vowing to make 2008 a turning point in the fight against poverty.

The world is facing a “development emergency”, they said, pledging to “work together to help the world get back on track to meet the Millennium Development Goals.”. The Bill & Melinda Gates Foundation announced a $306 million package of agricultural development grants “designed to boost the yields and incomes of millions of small farmers in Africa and other parts of the developing world so they can lift themselves and their families out of hunger and poverty.

Rwanda was designated as the launch country for a pilot programme for the Forum’s Global Education Initiative (GEI). In partnership with the Education For All Fast-Track Initiative (FTI) under the banner of the Global Education Alliance (GEA), the Forum will provide the platform to combine the strengths of the private sector and foundations to achieve education for all in low-income countries.

They, like funds from the Middle East and China, have been investing in major Western financial institutions that have lost billions of dollars on bad bets in the US mortgage market. Rising delinquencies and defaults among mortgages have forced banks to write down the value of bonds and debt backed by the troubled loans. Hard-hit US banks welcomed the needed capital.

The flow of the funds from overseas could, ideally, bolster the dollar, which fell 11 per cent against the euro in 2007, reaching a high of $1.4968 in November — and help jittery markets because the funds tend to look at the long-term environment.