In a credit constrained world where most sovereign states are having to put balance sheets on the line to save banking systems, what on earth is the Rudd Government doing blowing $10 billion in largely unproductive welfare payments?

Isn’t this just feeding the debt-funded consumer culture that got the world into this mess?

Now, more than ever, Australia needs a strong federal budget but, in the blink of an eye, we could be back in deficit in 2008-09.

Crikey had some excellent links to quality commentary from around the world in the “Briefly Business” section yesterday and the overwhelming message was that the world has to start living within its means.

That means everyone from the US government with $US10.2 trillion in public debt to an Australian pensioner maxing out their credit card.

As a nation lumbered with $1 trillion of household debt, $620 billion in foreign debt and a current account deficit of $60 billion a year, we are far more highly leveraged than most of our Asian partners who learnt the savings message from the Asian economic crisis.

Warren Buffett is getting plenty of coverage with this quote:

Leverage is the only way a smart guy can go broke … You do smart things, you eventually get very rich. If you do smart things and use leverage and you do one wrong thing along the way, it could wipe you out, because anything times zero is zero.

And so it is with Australia. What contingencies are in place if house prices plunge by 30%, our banks need to be recapitalised and the dollar crashes below US50c? The government only has $30 billion in foreign reserves, which is way below the Asian average, and has now recklessly distributed $10 billion before we really know the full implications of the meltdown.

Whilst the solvency of the world’s major financial institutions has now been saved by governments around the world, the next phase of the crisis has to be a contraction of economic activity as the debtor nations repay their dues to the creditor nations.

Witness the weak Pepsi profit last night and Intel’s gloomy forecast for the fourth quarter.

The banks have been the first to pay the price in a massive transfer of value from their shareholders to the people who have defaulted, starting with those 3 million Americans who should never have been lent money to buy homes in the first place.

However, with governments now stepping up to the plate, the game now shifts to the inevitable economic slowdown and the strength of public sector finances.

Never before in peace time has the world seen such a sudden surge in public sector debt issuance, so why on earth should Australia join a very long queue in a crowded debt market by blowing $10 billion?

Who would have thought Australia would come out of the biggest resources boom in history to be a nation back running twin deficits.

And how long before the Federal government has to formally guarantee the $20 billion-plus that profligate state governments are planning to borrow this financial year?

*Listen to yesterday’s financial crisis discussion with Deborah Cameron on 702 ABC Sydney.