Pay cuts for public employees of all kinds has become a long term necessity, not just a temporary fix.

The public sector rides on the private sector. The servant can’t expect more, when the master is in long term decline.

For the last 25 years, the growth illusion was fueled by debt. As our industrial sector, the only real creator of new capital, was sold off to  low wage third world production, the return on GNP for additional debt has almost reached zero.

In the US, for example,  the ratio of annual debt increase to the increase in GNP reached 6x in 2007-08, from 3x in the 1990's.

That’s 6 dollars of debt to create 1 dollar of additional GNP.

Household debt soared to 135% of disposable income, from 85% in 1990. Truly, this was an economy based on piling debt upon debt.

Thus, today's "Crisis": What the debt bubble giveth, the debt implosion taketh away - and very swiftly, at that. It is a maxim of financial markets that the downside is much swifter than the long climb up. Likewise for the US economy, which had come to resemble a casino more than anything else: everyone "bet" on fast gains on assets (houses, stocks, credit derivatives, etc.), instead of embarking on the long and arduous process of generating long-lasting income streams (good jobs).

We have now entered the inevitable Liquidation Phase; governments all over the West are furiously working to cushion the blow by transforming private debts into public obligations. In layman's terms, governments are taking defaulted mortgages (and credit card bills, auto loans, tuition loans, etc.) off the banks' hands, replacing them with newly-minted treasury bills. How long can this AAA for D swap last is up for discussion, but it is already raising serious concerns amongst those who regularly fund our debts (the Chinese being a prime example).

Add in declining energy and  resource supplies, and the long term outcome is grim.

We have reached Peak Capital. The result will be a long slow decline in real personal income and living standards. A tangible, classic recovery is impossible. Happy inflation derived numbers will look great on a speadsheet, but real income will decline.

The party is over for the public sector work force. They must rebalance expectations, since the private sector can no longer support them in the old style, and will not be able to do so going forward.