Can more debt fix too much debt? World outlook

This guy has said this better than I could, so I'll let him say it. He is a UK finance expert who writes a blog.

“The world economy is being kept alive by the constant infusion of massive doses liquidity by the central banks at abnormally low costs alongwith stimulus packages aimed at revival of certain selective industries like housing, auto etc. The effects of these are being seen in the form of huge fiscal deficits in most of the countries or drawdown on reserves in some countries like China. The effects of these actions on Governments, Banks, Businesses and Consumers are discussed below and an attempt is made to outline the future path of the world economy.

The Governments around the world this year have given unprecedented stimulus packages to try to stabilize their economies and capital markets from the effects of bursting of the Biggest Credit Bubble worldwide in 2008. Their main aim appears to be postponing the effects of the same without initiating any cure for the root cause of the problem i.e. excessive debt and leverage which led the whole world to the brink of failure of the financial markets. They are experimenting with the idea that a problem of excessive debt in comparison to the earning potential of a household / business / government can be solved by taking up more debt and leverage…

The costs of maintaining and running the governments have gone up substantially worldwide due to their increase in size and the tax revenue collections have fallen sharply due to the recession or deflation in the asset prices. This has resulted in a loop whereby the government has to increase its borrowing or money printing in order to sustain itself or in other words living beyond its means to a great extent something that the consumers were doing for last so many years. The government has picked up the baton of living the life of financial irresponsibility from the consumers which had landed them in such a mess in the first place…

The world governments are basically running a Ponzi Scheme whereby they take up new debt and pay back the old debt with it, something that Madoff did but on a much larger scale. As long as they are able to raise new debt or get investors to invest in their sovereign bonds things will keep on rolling, the moment the ability to raise new debt goes below the amount of old debt and the interest on the same, a domino effect of defaults gets unleashed.

Problems of countries like Dubai, Greece, Iceland, Ireland and some other countries in the Baltic states are now very much discussed in the media. There are other countries in queue who are living way beyond their means like Ukraine, Venezuela, Argentina, Spain, U.K., Japan to name a few. The problem is that if one country defaults on its debt it triggers off a chain of defaults across the world sending ripple waves all around the financial markets and currencies because of the linkages in global finances. The problems so far have been contained but its only a question of time when a default occurs, which is unavoidable and all hell will break loose...”

Akhil Khanna

I could add about ten more countries to this list, mainly in Europe. Many are teetering on the brink.