Perhaps you've heard of the PIIGS, Euro zone countries at risk of default on their debt, Portugal, Italy, Ireland, Greece, and Spain. Everyone is worried about the effects of these countries defaulting. The main worry seems to be over the very idea of soveriegn default, that governments should not be able to honor their debt.
There is here, however, and more down to earth reason to be concerned over these defaults, and it goes beyond the PIIGS, it goes to the U.S. where there is a strong public sentiment growing against debt, and it goes to Japan which is carrying a large load of public debt. The issue is this that a inevitable roll back of public spending will cause ecomies to shrink again.
Some may say that if you shrink government spending then you can shrink taxes and so there will actually be an uptick in economic activity. This might be true except that the spending isn't paid for, which means if you subtract it you aren't freeing funds, you are just reducing the accumulation of debt. So what happens the government spends less and taxes remain the same, or if you are really interested in taking care of the debt taxes go up.
There are two other arguments around this which may be brought up pointing to recent history, one is the conservative argument which goes something like this, the 90s when the budget was balanced were due to economic activity generated from the Reagan tax cuts, the liberal argument will tell you that even though Clinton raised taxes and balanced the budget the economy improved. Both of these arguments are flawed for this reason. The 90s were the beneficiary of at least two things that were almost once in a lifetime events. The first of these was the IT revolution, this caused the economy on a whole to invest in completely new technologies, the economic activity surrounding that accounted for most of the growth in GDP through the 90s. The second of these was the peace dividend, the possible reduction in military spending due to the end of the cold war.
So what we have now is an equation similar to this, reduced public spending globally equals reduced consumption, this combined with over capacity leads to deflationary pressures, the two of these mean that investment capital sees ever shrinking returns on funds put forward.
And there isn't any way that regular economic activity is going to make up for this. The reason being that productivity has reached a point where manufacturing cannot provide enough jobs to inject enough disposable income out there to suck up the amount of goods produced. And while it is perfectly lovely that services have boomed so you still need a lot of wealth to be produced to afford those services, econmic trends though will strangle that flow of wealth, that will come from reduced returns on investments and stagnant wages.
All this would be manageable if we could get over our mania for growth and start preparing for lower standards of living, but more than likely desperate times will cause people to follow someone offering lies as dreams.