Sean O'Grady: If the US can't bail out the world, then who do we turn to? Mars?

So here we are. The debt endgame. The reckoning. The pain postponed is about be endured.

The world's three largest economic blocs – the US, the eurozone and Japan – have one thing in common. No, two things in common. First that their debts are unsustainable long term. Second, that their political systems are incapable of dealing with them. Governments have run out of road to bail out stricken banks and economies, and with that goes their ability to protect our savings and our livelihoods. And if the US can't bail out the rest of the world, whom do we turn to? Mars? In the circumstances, some degree of panic is understandable, indeed rational.

Maybe the best way to understand the current crisis is to think of how we got here. It is a story of debts postponed and migrating on an epic scale. For debts don't go away; they just move around. As we now see, the first credit crunch in 2007-08 had its origins in the American real estate market. Huge sums were lent to homeowners who had only a slim chance of repaying their debts. As the economy slowed their losses mounted. In America, distressed homeowners handed their keys in and walked away from their debts (in a way they cannot in the UK). So the loans migrated from homeowners to banks.

Those losses spread through the world's financial system, as the original loans had been spliced into new securities, the notorious mortgage-backed securities. Apart from the infamous case of Lehman Brothers, and in part because of it, the authorities opted not to let more banks go to the wall but to nationalise them to keep them going. So homeowners' losses that had moved to the banks' books moved to national treasuries, and taxpayers. Those national treasuries decided to spend and borrow their way out of the second great depression.

The recession that followed was severe enough to depress trade and wages and added to unemployment. It scaled up banks' bad debts and government deficits. Two bursts of inflation caused by bad weather, poor food harvests and demand for raw materials from China added to the problems by sucking spending power out of the West.

The US Treasury has spent trillions of dollars on rescuing its own financial institutions, trying to keep the world economy moving and, as the major contributor to the IMF, helping other countries to stay afloat. Even if the US had never done any of those things, its debts would have been impressive – in a bad way. The surprise is not that one of the ratings agencies has downgraded America, but that it took them so long. Most economists agree that when a national debt hits 90 per cent of national income, an economy starts to enter a sort of death spiral. America is not far off that point, and may even have passed it, as Greece and others did.

Which bring us to the eurozone. Even had the world carried on growing, the peripheral nations would have encountered difficulties. When Greece, Ireland and Portugal needed help, Germany took on the lion's share, but Spain and Italy chipped in too. Now it all falls to Germany, and it is beyond its means. The only sane answer is for the eurozone to Europeanise its debts. Taken together the burden is manageable. "Euro-bonds" mean higher interest bills for Germans, Finns, Dutch and other solvent peoples, and that is unfair. But in a world of unpleasant alternatives that is the only way forward.

We are witnessing and living through a massive redistribution of income and wealth eastwards – to China, India and the other emerging economies. The counterpart of the West's debts is the East's wealth – trillions of dollars in reserves. Two-thirds of the $3trn America owes privately and publicly "belongs" to China. This, the great "global imbalance" of the 21st century, sowed the seeds of the current crisis. The money the Chinese lent us to pay for their exports went into real estate and speculative bubbles in the US especially, but also in UK, Ireland, Iceland, Spain and elsewhere. These bubbles directly led to the bust. Now it is up to the world's great creditor powers – China, the oil-rich Gulf states and Germany – to recycle those surpluses, to spend and lend to help others – and themselves if they wish to avoid a collapse in their markets.

China says it wants a new world reserve currency. It can have it – its own, the yuan. That should be its own, freely traded and freely floating. All eyes are on Washington and Brussels and a G7 summit next month; they should be focused on Beijing.