Those records reflect a long-term trend accelerated by the recession and the federal stimulus program to counteract the downturn. The result is a major shift in the source of personal income from private wages to government programs.

The trend is not sustainable, says University of Michigan economist Donald Grimes. Reason: The federal government depends on private wages to generate income taxes to pay for its ever-more-expensive programs. Government-generated income is taxed at lower rates or not at all, he says. "This is really important," Grimes says. The recession has erased 8 million private jobs. Even before the downturn, private wages were eroding because of the substitution of health and pension benefits for taxable salaries.

Economist Veronique de Rugy of the free-market Mercatus Center at George Mason University says the riots in Greece over cutting benefits to close a huge budget deficit are a warning about unsustainable income programs. Economist David Henderson of the conservative Hoover Institution says a shift from private wages to government benefits saps the economy of dynamism. "People are paid for being rather than for producing," he says.

The dramatic deterioration in ties came as US Secretary of State Hillary Rodham Clinton visited Seoul on Wednesday for talks expected to focus on how to deal with North Korea. The North's announcement late Tuesday came hours after South Korea began taking steps that were seen as among the strongest it could implement short of military action - ranging from slashing trade, resuming propaganda warfare and barring the North's cargo ships.

Tensions have risen since last week, when a team of international investigators concluded that a torpedo from a North Korean submarine tore apart the Cheonan warship off the west coast on March 26, killing 46 South Korean sailors. The North flatly denies involvement in the sinking of the Cheonan, one of the South's worst military disasters since the Korean War, and has warned that retaliation would mean war.

North Korea is cutting all ties with the South until President Lee Myung-bak leaves office in early 2013, the country's Committee for the Peaceful Reunification, which handles relations with South Korea, said in a statement. It also said North Korea would expel all South Korean government officials working at a joint industrial park in the northern border town of Kaesong, and South Korean ships and airliners would be banned from passing through its territory. North Korea would start "all-out counterattacks" against the South's psychological warfare operations. Pyongyang called its moves "the first phase" of punitive measures against Seoul, suggesting more action could follow.

He said China's extensive claims to islands and waters in the region were "generating increasing concern broadly across the region and require address". The admiral's remarks follow complaints by Japan in recent weeks about aggressive behaviour from a Chinese coastguard vessel in contested waters and a Chinese military helicopter in international waters.

Some of China's neighbours have been watching the People's Liberation Army's modernisation and efforts at expanding the navy's reach with unease, and defence experts see this expansion as one factor behind a developing arms race in south-east Asia.

Adm Willard was speaking ahead of talks with Ma Xiaotian, deputy chief of general staff of the PLA, the first meeting between senior US and Chinese military officers since Beijing suspended bilateral military-to-military dialogue in January after US arms sales to Taiwan.

Italy will take measures to reduce public sector pay and will put a freeze on new recruitment. Public sector pensions and local government spending are also expected to be hit. Added to these, a clampdown on tax avoidance is also planned. The cuts are equal to some 1.6% of gross domestic product (GDP). Similar reductions in spending measures have already been announced by Greece, Spain and Portugal.

Some Italian workers have already been out protesting. In Rome, workers at the Italian Institute for the Professional Development of Vocational Training of Workers (Isfol) held protests against the cuts at their headquarters. One worker, Simone Casadei, said, "We demand that the money needed to face this problems... is obtained through a tough action against tax evasion. The state cannot always take the money from the same sources, that is workers and pensioners."

The government hopes to bring its deficit down to below 3% of GDP by 2012 - from 5.3% now - in order to help maintain the confidence of international investors and prevent the spread of a Greek-style debt crisis.

It came after shares in Asia had seen sharp falls. Stocks in South Korea and Japan had been affected as North Korea reportedly went on to military alert. Japanese stocks fell by 3.1%, and shares in South Korea fell by 2.7%. In London, the FTSE 100 has fallen by more than 10% in little more than a month after hitting a 22-month high in April.

Another factor worrying investors was the weekend rescue of Spanish bank Cajasur by Bank of Spain, only the second time the central bank has saved a regional lender. Amid concerns over solvency in the sector, and in the wake of the Cajasur rescue, four Spanish savings banks then announced plans to merge.

The pronouncement from a highly regarded US think tank reflected popular opinion across northern European countries. Uri Dadush, of the Carnegie Endowment's International Economic Programme, said: 'The current welfare state is unaffordable. The crisis has made the day of reckoning closer by several years in all the industrial countries.' The verdict follows the surprise in the US caused by the discovery that the average age of retirement in Greece is 53, thanks to a generous benefit system and pensions for state employees.

It symbolised the unaffordability of the welfare states set up across Europe from the 1940s onwards with the aim of suppressing popular unrest and paying off tensions that could lead to another continental war. Other recently discovered welfare state provisions that also look too generous to transatlantic eyes include the German unemployment benefit provisions. Under these, sacked workers under the age of 50 can collect 60 per cent of their last pre-tax pay packet from the state for a year after losing their job. In France, meanwhile, there are looming moves to cut the cost to the state of pensions. State workers can retire at 60 on half their average lifetime salary.

Southern European countries with similar economies to Greece and welfare systems sometimes as generous also look poised to rein back. Spain has already cut a 3,000 pounds state payment to parents of newborns. It also proposes to push up retirement age from 65 to 67. Greece also plans to end lavish perks for civil servants, including two extra months' salary paid to those on 3,000 pounds a month or more.

Professor Iain Begg of the European Institute at the London School of Economics said: 'There has been a lack of willingness to shift away from welfare as social protection towards an approach seen in northern Europe ... which is welfare as social investment.'

One is through amputation. Greece could be allowed to leave the euro and devalue, thereby pricing itself into the market and winning time to carry through economic reforms.

Another version of amputation, runs the rumour in Brussels, would be for Germany and its neighbours to create a new, hard currency among themselves, bequeathing the legal carcase of EMU to southern Europe. The effect would be the same: Greece and the other Club Med states would benefit from an immediate economic stimulus, and northern taxpayers would be excused having to fund a bail-out.

What we are seeing, 11 years after the launch of the euro, is a vindication of what opponents of the single currency - and, indeed, its more honest supporters - argued all along, namely that you can't have monetary union without political union. If a state can't accommodate an economic shock in its interest rate or exchange rate, it will need to be bailed out. Common taxes mean common government - or, as Romano Prodi, the former head of the European Commission, put it last week, "fiscal federalism".

You can't decentralise power in the UK while centralising it in the EU. You can't object to the quango state while submitting to the biggest quango of the lot, namely the unelected European Commission. You can't ask for across-the-board budget savings while increasing our net contributions to Brussels by 60 per cent. You can't strengthen parliamentary control over the executive when orders-in-council simply implement EU rulings. You can't, in conscience, give people a referendum on how to elect their MPs while denying them a referendum on whether those MPs are sovereign.

When the Lisbon Treaty was adopted, many thought that the EU would try to digest it before consuming additional powers. But the crisis in Greece has whetted its hunger anew. Satisfying that appetite will be expensive for all of us.

In its fight to influence animal welfare policies on food products - including how chickens are slaughtered and how pigs are kept - Peta has changed tactics. By buying stock in companies, Peta is guaranteed the right to present its ideas directly to officials and other shareholders, many of whom might otherwise pay little attention to the group.

"It gives us a new forum in which to present the research we've done to company executives, their shareholders and the public," said Ashley Byrne, a senior campaigner for Peta. She claimed the tactic was proving successful. In many cases, shareholders were "horrified" when they learned of some of the production methods used by their companies' suppliers, Ms Byrne said.

She said companies such as the Safeway grocery store chain and Ruby Tuesday restaurants in the US had agreed to buy products from companies that practised more humane slaughter methods or supplied free range eggs and pork. Meridith Hammond, a spokesman for Ruby Tuesday, said the company was "pleased to cooperate with Peta and grateful for their advice, help with resources, and information about suppliers." Kraft Foods would not comment on Peta, but said all shareholders were free to express their opinions to management and the board.

European leaders have rejected a proposal by Hungary that a 169 billion pounds rescue fund be set up to help poorer eastern European nations through the economic downturn. "The EU nations seem to be taking very much a nationalistic approach and that's obviously going to be a big negative," said Ian Stannard, currency strategist at BNP Paribas in London. "We would certainly be looking for the euro to come under further pressure."

The pound may also drop further against the dollar as a result of the crisis in some eastern European economies, Mr Stannard said, because large British and European banks were among the biggest lenders to the region during the boom years. The dollar has enjoyed a strong run in recent months because of a flight to safety by investors, and that is likely to continue as emerging markets increasingly feel the pain of the global slowdown.

Hungary has warned Europe could be split by a "new iron curtain" if the economic crisis is allowed to separate east and west. Prime Minister Ferenc Gyurcsany said there could be a flood of immigrants into western Europe, social unrest and defaults on loans made by western European banks if nothing is done by wealthier EU nations to help central and eastern European states.

South Korean President Lee Myung-bak, in a nationally televised address, said he would take the issue to the UN Security Council, whose past sanctions are already sapping what little energy North Korea's communist economy has left. The United States, which has 28,000 troops on the peninsula, threw its full support behind South Korea and said it was working hard to stop the situation from worsening.

"North Korea's goal is to instigate division and conflict," said Lee, speaking from the country's war memorial in Seoul. "It is now time for the North Korean regime to change." Analysts say China's leaders fear that if North Korea's government falls, it will send chaos across into its territory and lead to US troops moving right to its border.

China, Australia and the 15 other largest mining nations averaged weekly output of 41.6 tons last year, researcher GFMS Ltd estimates. Even though prices have fallen 4.6 percent to $1,191.65 from a record $1,249.40 an ounce May 14, the median in a Bloomberg survey of 23 traders, analysts and investors shows it will reach $1,500 by the end of the year.

Buying accelerated as the MSCI World Index of 23 developed nations' stocks tumbled as much as 16 percent since mid-April and the euro weakened to a four-year low against the dollar. Holders of ETPs, including George Soros and John Paulson, accumulated a record 1,938 tons by May 21, eclipsing all but four of the biggest central-bank holdings.

"You could see gold go up another $1,000," said Evan Smith, who helps manage $2 billion at US Global Investors Inc in San Antonio and in 2006 correctly predicted that gold would reach $700 within two years. "All of the turmoil and problems we've seen in Europe is just another reminder that there's a lot of value in gold as a safe haven."

"People are afraid of the debasement of all the currencies," said Peter Schiff, president and chief global strategist for Darien, Connecticut-based Euro Pacific Capital, whose clients have more than $2 billion in assets. "What's surprising is that gold is still as low as it is," he said, predicting $5,000 to $10,000 an ounce in the next five to 10 years.

"The second half of this year will likely show very anemic growth on a global basis," he said. "The crisis in Greece is going to spread to Spain and it's going to be very difficult to deal with. They are bailing out debt with more debt and it isn't sustainable. It's a wonderful scenario for gold."

Last week, Spain's government passed austerity measures to cut its deficit. This deficit - the money the administration has to borrow to pay for public services due to insufficient tax returns and other revenues - currently equates to 11% of Spain's economic output.

This is substantially higher than the eurozone ceiling of 3% and another concern that the IMF has highlighted. It also pointed to Spain's property market slump, heavy indebtedness in the private sector, and weak productivity and competitiveness.

"It is not the first time that the IMF has said Spain needs economic reform, but the language has a much greater sense of urgency," said BBC economics correspondent Andrew Walker. "The IMF says bluntly, the Spanish labour market is not working and needs reform of pay bargaining and lower payments for fired workers."

If one or more fail to make the expected progress on cutting budgets, restructuring economies or boosting growth, it could drain confidence in a broad and unsettling way. Credit markets worldwide could lock up and throw the global economy back into recession. For the average American, that seemingly distant sequence of events could translate into another hit on the 401(k) plan, a lost factory shift if exports to Europe decline and another shock to the banking system that might make it harder to borrow.

"If what happened in Greece were to happen in a large country, it could fundamentally mark our times," Angelos Pangratis, head of the European Union delegation to the United States, said Friday after a panel discussion on the crisis in Greece sponsored by the Greater Washington Board of Trade. That local economic development boards are sponsoring panels on government debt in Greece is perhaps proof enough that Europe's problems are the world's. That the dominoes can tumble fast was shown Thursday when a new and narrowly drawn stock-trading policy in Germany helped trigger a sell-off on Wall Street.

The most vulnerable European countries - Greece, Spain, Portugal and Ireland - may represent only about 4 percent of world economic activity, but "the debt crisis and its ripple effects are bad news for all corners of the world," said Cornell University economist Eswar Prasad.

These seven deadly domestic problems have three things in common. First, inept politicians and bureaucrats have consistently worked on the wrong problem. They have put political agendas and political pandering ahead of what's best for the people.

Much has been written about the fact that we do not have a health-care crisis in America; we have a health-care cost crisis. The recently passed health-care deform legislation does not address the real problem, nor will it bring down the deficit as we have been falsely told. The right steps to solve the right problem have also been written about extensively, but those steps would get in the way of the all-out power grab we are seeing from this administration and the Democrats in Congress.

Congress is about to pass financial reform legislation, which will also be another "deform" bill because it establishes another unneeded oversight bureaucracy to oversee all financial institutions, except Fannie Mae and Freddie Mac. One would think that the two entities that were the catalyst for the financial meltdown more than a year ago would be included in any so-called reform legislation even if the new bureaucracy is un-needed. But we are not supposed to think.

Secondly, these same politicians provide lip service to the least informed voters who usually continue to re-elect them, while they let the problems grow for decades. The Social Security and Medicare systems are in desperate need of modernization. This could start with the novel idea of just using payroll taxes for their originally intended purpose of providing benefits, but legislation introduced by Senator Tom Coburn a few years ago to do that failed with 85 votes against.

And thirdly, we know how to solve all of these problems, but we do not have the leadership or political courage in Washington, DC, to solve them. Instead, problems go unsolved, or we get incremental band-aids and, worse yet, more problems are created. The exponential increase in the national debt is simply irresponsibility on steroids! Collectively, these seven deadly unsolved problems have us headed for the same type of economic and social turmoil we are seeing in Greece. It's just a matter of time, and there is no "sugar daddy" to bail Uncle Sam out.

State and local government are frantically scrambling to meet budget shortfalls as high unemployment and shaky consumer confidence mean less income tax and smaller sales tax revenue for government coffers. At the same time, falling home prices and rising foreclosures will start to hit municipalities hard this year as all those property reassessments done over the past 18 months kick in.

A couple of municipalities, such as Los Angeles and Detroit, have even whispered the "B" word. Former Los Angeles Mayor Richard Riordan argued in an editorial in the Wall Street Journal earlier this month that the city will likely have little choice but to declare bankruptcy between now and 2014. Also, several smaller markets, such as Harrisburg, Pennsylvania, and Jefferson County, Alabama, have openly talked about filing for Chapter 9 bankruptcy - a reorganization available only to municipalities.

Market experts say they're keeping a particularly sharp eye on Detroit and Los Angeles, as well as markets that were hit hard by the boom-and-bust housing meltdown, such as Las Vegas, Phoenix, Miami, Jacksonville, Orlando and Orange County. Cohen says many investors believe that if such a doom-and-gloom scenario becomes reality, the federal government will step in. "I think there is a complacency mentality that if something big happens, well, the government will bail us out," says Cohen.