The world is drowning in personal debt. This story from Bloombergs illustrates just how serious the situation has become:

"Deng Yijun, a cargo freight agency manager in Shanghai, faced a dilemma last December. “I needed a car, but I didn't want to use up my savings as the stock market was booming,'' she says. “So I used credit cards.''

Deng, 32, was eyeing a Ford Focus that cost about 200,000 yuan ($25,815), roughly equal to her savings. Maxing out three cards, she put 140,000 yuan on plastic and gained 56 days of interest-free credit. She paid the rest herself. Most of her remaining cash went into stocks, including Sichuan Swellfun Co. - a distiller whose share price more than tripled in the past year.

Deng says she was able to buy the car for three times her annual salary and purchase stocks after card issuers Bank of Shanghai, China Merchants Bank Co. and China Construction Bank Corp. gave her credit over the phone."

Think for a moment about the implied risks; Deng's personal net worth; and lending standards in Chinese banks.

Deng starts with sufficient savings to buy this car and be debt free. However, she avoids the safe option and entangles herself in high levels of personal debt in order to maintain her over-inflated and risky investments. She would be well advised to sell her shares and pay down her debt. However, those rising stock prices are just too tempting; greed wins over financial prudence.

So she goes into debt, and she isn't thinking small. The debt to income ratio implied by this transaction is on the high side. After some arithmetic, it is clear that Deng has credit card debt equivalent to 2.1 times annual income.

The interest payments will take up a large chunk of Deng’s disposable income, because interest rates on credit cards are always extortionate. Therefore, she has to be anticipating that the return on her equity portfolio is higher than the interest payments on her credit cards.

Furthermore, Deng’s personal balance sheet looks decidedly risky. On the asset side, she has a car, which is always a depreciating asset, along with some overvalued Chinese equity. It would only take an unfortunate collusion in the rush hour and a substantial correction in the stock market, and poor Deng would be seriously upside down. In other words, she would be all liabilities and no assets.

In sum, there is a high probability that Deng will default on this debt. If there are enough Deng's out there in China, then the banks that own that credit card debt have some serious issues to resolve.

But what about the banks that allowed Deng to open herself up to these massive risks? They allowed Deng to accumulate such an enormous debt simply by talking to her on the phone. At the risk of understatement, lending standards do seem to be a little lax in China at the moment.

Unfortunately, Deng is a worldwide phenomenon. The names might change, and the transactions might be different, but across the planet, ordinary people are being encouraged to take on huge amounts of debt that they can barely service. For the most part, this debt is financing over-priced real estate. However, it is also financing unsustainable levels of consumption.

Unfortunately, this spend fest can not continue indefinitely. The easy way out of this mess would be for central banks to hike interest rates. It will be painful, and too late to save Deng, but at least it would discourage other people from being buried in debt.

However, central banks are always cowards. They will wait, and wait until it is too late. It will not be a hike in interest rates that will stem the flood of toxic debt; it will be a rise in defaults. Suddenly, commercial banks will remember that there is such a thing as credit risk, they will stop financing the Dengs of this world. There will be no more Ford Fiestas financed with credit cards; consumption will crash and the world will fall into a recession.