The current debt crisis is caused by a number of factors - most of which will take some time to be corrected.

The origin of the crisis is the so called 'toxic debt' in the USA. This is a series of bundled mortgage loans to US citizens for house purchases following a prolonged period of low interest rates and economic growth. In many instances, borrowers took loans for the full value of the house being bought and had little or no equity to cushion them from any falls in value. Since house prices had been rising steadily over the past decade, this was considered a remote possibility. US banks do not hold large mortgage books - it is more common for them to bundle up a series of mortgages and sell them as a package to other, larger, financial institutions. Believing themselves to be secured by the value of the house, they did little checking of the credit worthiness of the underlying customers.

Alongside all this property lending, the global economy was expanding quickly with China, India and the former Soviet States all increasing output to meet domestic and international demand. As commodities, such as oil, coal and base metals became scarce, prices rose leading to fears of inflation. In order to control inflation, central banks around the world increased lending rates to reduce demand. This increase in interest rates led to defaults on mortgage payments and an increase in repossessions. As more property came onto the market, prices fell. With higher interest rates and lower demand, economies slowed rapidly leading to further job losses and a falling in commodity prices.

However, the damage was done. The losses built into the toxic debt were incalculable and banks lost confidence in lending to each other. With no interbank lending, liquidity dried up - effectively there was no oil in the engine to make commerce function.

Central Banks now had few options but to inject massive amounts of liquidity into the financial markets. Whilst this worked in the short term, confidence did not return and financial institutions started to fail. Governments around the world then stepped in to guarantee depositors funds (to avoid runs on banks) and the banks re-capitalised their balance sheets following the massive write downs.

Early indications are that the actions taken so far have stabilised the financial sector - but it is still very fragile and lacking any form of confidence. As banks have greatly reduced capital, they do not have the capacity to expand lending in a meaningful way.

To stimulate demand, governments are now cutting taxes and increasing public expenditure. Consumers, however, are still wary of future job losses caused by a global recession.

The global economy will recover - but the hard part is to predict exactly when. Some analysts believe it will be as early as the end of 2009 (an unprecedentedly short period for such a deep recession) with others predicting that it may be 2012 or beyond. Mountains of debt will have to be repaid. Western government borrowing is being funded by China and the Middle East oil states. This will lead to a permanent shift of economic and political influence to the Far East and Middle East.

One thing is clear, however, and that is that the world will never be the same again.