Montreal, Canada

The world's weakest credits are starting to roll over.

Over the last 48 hours credit rating agencies have downgraded Spain, Greece and Dubai.

More countries are likely to lose their coveted AAA rating – basically a joke at this point with many countries not even close to deserving a AAA grade. How the United States and the United Kingdom manage to retain AAA ratings is beyond me. Both economies harbor the fastest accumulation of debt since 2008 among the world's major economies. Japan, laced with almost a 200% debt-to-GDP ratio, is also a fiscal mess.

And if this trend accelerates in the absence of meaningful deficit reduction by those countries most indebted, the next pillar to fall is domestic currencies, triggering the next global financial crisis. Nations cannot spend their way into oblivion forever; creditors will strike at some point, driving interest rates much higher to attract deficit financing.

The seeds of the next financial crisis have been sowed. This time, either a debt collapse or a currency crisis will be the trigger. Since the likelihood of any government seriously reducing debt is next to nil over the next few years amid a weak economic recovery and high unemployment, investors should brace for more volatility.

This trend, however, has already started in earnest.

Since 2005, all currencies have declined vis-à-vis gold with the U.S. dollar the worst-performing unit among the majors. Even the mighty EUR is declining sharply versus gold (see above chart of gold measured in EUR terms).

Governments almost everywhere are piling on all sorts of debt to finance fiscal spending and supplementary budget spending plans, blowing-up their balance sheets in the process. There's a price to pay for a huge credit overshoot – and payback will be painful and lengthy.

For the United States, the world's reserve currency since WW II, deficits stretch as far as the eye can see. The government has lost control of its finances. Fiscal deficits are estimated at about $1.5 trillion dollars for this fiscal year and more than $1 trillion per year over the next several years – not including the cost of recent escalations in Afghanistan.

A $200 billion dollar residual TARP surplus this month (or whatever you want to call it) is being directed to employment efforts. Though a noble cause, the United States should be reducing its monster-sized deficits with that $200 billion dollars, not spending more money.

Frightened, many investors are moving money offshore while they still can or diversifying into foreign currencies and gold. Smart investors the world over are rightly concerned.

Unless governments get a handle on spending – and soon – the Great Crash of 2008-2009 will go down in the history books as a wasted opportunity to fix the financial system. The odds of that happening are less and less each day as financial markets continue to rally. Only the Piper can force hard decisions. And he's coming back for more – eventually.