Many countries (for instance the US) currently have massive debt and budget deficits. They have three ways out of it:
1. Increasing taxes.
2. Lowering expenditure.
3. Printing money.
From a political point of view #3 is by far the easiest route. I therefore fear that many countries will "default through inflation". In other words, we will see massive inflation, possible even hyper-inflation. This will be a huge hit to the middle-class. Because people with job but no savings are affected the most by massive inflation.
"Printing money is the last refuge of failed economic empires and banana republics and the Fed doesn't want to admit this is their only idea." Don't worry, it's (partially) tongue-in-cheek.
"In other words, we will see massive inflation, possible even hyper-inflation." Do governments ever learn? This is what happened in the Weimar Republic and is happening today in Zimbabwe.
Where I live (Ireland), the government is trying to do option 1 and 2, without success so far. Austerity measures are hurting the economy short-term by dampening consumer confidence (fortunately, internal consumption isn't everything, as we are an extremely open economy and will pick up as exports grow.) They'd possibly be trying option 3, except the European Central Bank controls our currency and ECB rules state that a country can't run a deficit over 3% of GDP without incurring major penalties.
Austerity measures are painful but necessary. I think that ten years from now you will be better of than the Americans, simply because the austerity measures are stopping all the malinvestment and over-consumption as quickly as possible. I'm Swedish and we went through the same process twenty years ago when our real estate market crashed. Luckily we didn't do like Japan, which still hasn't recovered from their crash from the early 90's (they did what the FED is doing now).
Bankruptcy is never fun but it's the main thing that makes a market driven economy more efficient than a planned economy. You have to stop malinvestments and reallocate resources to something more efficient. This reallocation can be painful but is necessary in the long run. The recession is not the problem, the boom was the problem.
