This appeared as an extended response to the Guardian's article which can be found at http://www.guardian.co.uk/politics/2011/apr/02/family-debt-burden-government-figures?commentpage=last#end-of-comments.
What people don't realise is that the total level of debt, including state debt and private debt must always grow quick enough to pay the interest to service it.
The fractional reserve monetary system is essentially a giant-Ponzi scheme because it requires infinite growth. All money is deposited and then constantly re loaned at interest to cover the risk that it wont be repaid.
However, the charging of interest means that there is always more debt that money, because "money" comprises only of the "principle" or what is loaned, but the interest owed has to be leached off to pay the debt, this requires a constant expansion of the money system.
All money is debt, and all of the money the government has ever spent and will ever spend is borrowed, just not all of it directly by the government, most of it is borrowed by somebody else first. This ignores that fact that until they started Quantitative Easing, about 97% of all money was created as debt.
Now that the economy has faltered, the necessary expansion of the money supply to pay old debts has become unsustainable, causing inflation, and bankruptcies.
Our economic system is designed on the premise of constant monetary growth supported by constant consumption growth (to give the money value). As we saw in 2008, this can quickly stumble towards collapse if it cannot be sustained.
Every deficit reducing policy the government has concocted will only boost debt in other parts of the economy. When preaching that their debt was too high, they forgot to tell you that private debt, in the other half of the economy, was about 12 times greater!
When they cut spending on universities to slow the growth of government debt, student debt must grow quicker. When they cut spending on the NHS and outsource to private providers, the private providers take on more debt to grow their businesses. When they reduce spending on welfare, consumers must either take on more debt, or the businesses that loose their custom must borrow more to compensate for lost sales revenues. This government wont reduce debt at all (although it doesn't actually plan to- it just wants to reduce the deficit, the rate at which the debt grows). It will just widen the gap between state debt and private debt. This is so foolish because it is absolutely clear that when borrowing is organised by the government, is costs much less than when it is done by for example students, or businesses, or pretty anyone other than the government for that matter.
When you hear about the risk of sovereign debt defaults, this is not because the bond markets are running out of money. They can't, because they just create it at the point that the loan is issued. What is happening is that the whole system has become unsustainable, and the evidence cannot be clearer than rocketing commodity prices- which as it happens is exactly what happened in the run up to the 2008 crisis. Our growth dependant financial system is finally running up against the real world constraints of scarce resources. For years, economists arrogantly assumed that the basic contradiction between infinite human wants and finite resources could ingeniously be solved by financial wizardry. You can create money, but you cant create commodities.
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