In a December report, the Organization for Economic Co-operation and Development noted that its member governments "are facing unprecedented challenges in the markets for government securities as a result of continued strong borrowing amid a highly uncertain environment with growing concerns about the pace of recovery, surging borrowing costs, sovereign risk and contagion pressures."

The report projects that industrialized governments' gross borrowing needs will exceed $10 trillion next year, and government deficits are estimated to be 6.6 percent of the income bases of those countries. Private saving is not likely to cover the growth of debt. This leaves a funding scarcity for plants and equipment as well as sustained economic growth — meaning you can finance governments or economic growth, but not both.

The report fails to point out the numerous incentives for private parties to divest themselves of the same securities. The incentives to get out of the bond pool include: bank deleveraging (which results in the selling of government securities); the pending rating downgrades of Euro sovereigns; the questionable value of financial insurance on the Euro sovereign bonds due to counterpart risk; the experience of governments seeking voluntary debt forgiveness; and the regulatory risk that financial institutional "capital shields" for sovereigns will be removed or reduced.

Aside from these incentives to not be swimming in the government securities pool, China's declining trade balance surplus will reduce its accumulation of developed-world government bonds. So the doctrine of "spend now and send the bill to China" is grinding to a halt just when it is really needed.

Euro governments were expected to address the shakiness in government bonds at a recent summit in Prague, perhaps by agreeing to put themselves on a debt budget. However, when push came to shove, the combined governments of the EU were unable to strengthen the fiscal responsibility provisions of the Maastricht Treaty. They settled on each individual country legislating debt controls. So much for solidarity.

So where are we on the greatest fiscal weakness and threatened financial collapse since the Great Depression? There are no fiscal resources, no hidden piggybanks of stored-up reserves for a rainy day. Government rescues of other governments or their banks would need to be debt financed, which is the problem rather than the solution. Hence, we are left with the option of monetization. Think of this as market support based solely on liquidity rather than solvency.

Read the full version of this article on Professor Spellman’s blog, The Spellman Report.