Smoke drifts across London. Photo: Getty Images

WHERE will the money come from this time?

In this global financial crisis Mark II, the sovereign debt crisis, things really are different. During GFC I, the debt lay in the hands of companies and people. It was the governments that bailed them out. Now we have GFC II, who will bail out the governments?

Thankfully, the Australian government doesn’t have much debt, but Europe and the United States do, and our prosperity is, to a great degree, intertwined with theirs.

We have a lot riding on the outcome of policy in America and Europe, as does China, who in turn we have even more riding on these days.

Besides the government rescue and stimulus programs during the GFC, which bailed out banks and others considered ”too big to fail”, corporations around the world went cap-in-hand to their equity markets big time.

In Australia, floats had completely dried up but secondary market capital raisings totalled a record $106 billion in 2009 alone as most of corporate Australia rushed to recapitalise.

The institutions, large funds managers, bailed out the corporates. Ironically the biggest of these are owned or controlled by the banks and the banks had been underpinned by government guarantees over their funding and deposits.

Now, Australian companies are mostly in fine shape, cashed up with low debt levels and ready, for the most part, to withstand sluggish economic conditions should things get tighter.

This is largely the case in the US too, where there is $US2.5 trillion ($A2.4 trillion) swishing around on corporate balance sheets. The government, on the other hand, would be broke but for another well-reported rise in its debt ceiling last month from $US14.3 trillion.

The furious debate between Republicans and Democrats, which held America to ransom until an eleventh-hour reprieve and paved the way for the country’s first credit-rating downgrade, provides the key to the next bailout.

Republicans argued that cuts to government spending were the sole answer to restoring the budget while Democrats wanted to raise taxes. Spending cuts versus revenue rises: those are the two options.

Just as the corporate world recapitalised via placements and rights issues, the public world needs to recapitalise.

Governments can hardly have a rights issue, in the traditional sense, but they do have the choice to either raise taxes or cut spending.

This option will become even more perplexing for administrations in Europe and the US as time marches on. The London riots, which have now spread across Britain, are being blamed on the Tory government’s austerity programs.

Although much of the disorder comes down to pure looting and vandalism, the cause of the mob has arguably been dignified by cuts to social programs. They can point to government bailing out their mates at the top end of town.

Right or wrong, the mob now has its raison d’etre. The rich are still rich but the poor are poorer.

Washington would be looking at this with some discomfort. Corporate lobbying and the Republican control of Congress makes it easier to envision violence on the streets than the introduction of higher taxes.

In the debt ceiling fight, the Tea Party was prepared to wreck America’s economic credentials by threatening default in order to force the Obama government to capitulate and agree to spending cuts over tax hikes.

The right wing is violently opposed to lifting taxes. But the spectre of real violence on the streets if social programs are cut, and recession deepens, is real.

Unemployment on the official numbers still hovers above 9 per cent. The likelihood of a double-dip recession is increasing.

The flip side of raising taxes is damage to demand. That’s also the flip side to spending cuts. Either will expedite the slide back into recession.

Europe faces the Cameron-government dilemma too. It’s not a matter of if but when Greece defaults. The industrious countries will not carry the fiscally lazy ones forever. Germany and France would let the euro-zone laggards go if the choice came down to social unrest in their own countries.

And they may have to make those choices soon. When governments need to be bailed out, where will the money come from? Where is the money? Big corporates and rich people.

It’s not a palatable proposition for either the rich or the corporations but governments on either side of the Atlantic are likely to hit them up soon. Call it the government rights issue if you like.

They may try cutting spending first but images of burning buildings in London will now reside for some time in the collective consciousness of leaders in every indebted nation.

Economics and the GFC have now well and truly criss-crossed with social policy.