There was fear this week – real fear. There was fear eliminating $2.5tn from the value of global shares in a mere five days. There was fear provoking the dumping of Italian government bonds at rock-bottom prices. And there was fear taking the yield on short-dated US treasury bills to below zero: investors were so anxious to park their cash somewhere safe that they were, in effect, paying the US government money to steward their savings – something not seen since the second world war.

Yet the credit ratings agency Standard & Poor's ended the week by casting a shadow over the creditworthiness of American government debt, unprecedentedly downgrading it from its AAA status, a monumental blow to the standing of the richest country on Earth and its political system. S&P's held its ground despite intense lobbying from the US treasury. Without tax increases, it said, the US could never recover its fiscal position – but tax increases, given the implacable opposition of congressional Republicans, have become impossible. The markets lurched downward.

Meanwhile in Europe, France's president, Nicolas Sarkozy, chair of the G20, finally managed to disturb German chancellor Angela Merkel's holiday and, with Spain's prime minister José Zapatero, discussed in a conference call how best to react. It was long overdue. Even the president of the European Commission, José Manuel Barroso, described a week in which individual governors of the European Central Bank, and the German government, were openly saying different things about whether the ECB would support the Italian and Spanish stricken bond markets as "undisciplined communication". The ECB said it was "constructive ambiguity". To panicking markets, it looked what it was: hesitation and indecision that could only fan the flames.

What we have witnessed is a mass global flight from risk and an accompanying hoarding of cash on a huge scale. It was the worst week in the financial markets since the dark days of autumn 2008 at the height of the implosion of the western banking system – itself one of the worst periods since the early 1930s. But in important respects this week was worse. At least in 2008, governments could put their national balance sheets behind their respective banking systems to restore confidence. Now the fears are more deep-seated and far harder to counter.

The markets have lost confidence that western governments can successfully manage the legacy of vast private debt and broken-backed banks without imposing huge and nameless costs. They don't know what the costs will be – perhaps a series of chain defaults on government debt starting in Europe, perhaps worldwide debt deflation, or even helplessly printing money to pay off public and private debts, so generating unmanaged and volatile inflation. But they know the costs will be huge. And unpredictable.

After all, Greece's eurozone creditors, who were part of the EU deal two weeks ago, accepted that Greece might not be able to pay its public debts in full. What about other countries in the eurozone, such as Italy and Spain, with even bigger public debts? Will their creditors be similarly hammered if the contagion spreads? And if individuals,