The maths of compound interest have only one message for politicians, says Old Mutual's Stewart Cowley - cutting debt is the only choice.

Some people say this equation, E = MC2, is the harbinger of doom for humanity. It is the famous formulation by Albert Einstein that says you can get enormous amounts of (E)nergy out of humble origins. All you need to make it work is an unstable atomic nucleus with a (M)ass to give up its energy by hitting it hard enough. Nuclear power and nuclear destruction emanates from it.

But in reality, the new equation that dictates humanity's future is this: FV = PV (1 + i)n. It is the equation for compound interest, which says the (F)uture (V)alue of your debts is equal to the (P)resent (V)alue multiplied by the (i)nterest rate over a (n)umber of years. Unless you reduce your principal, over time, any positive interest rate means the Future Value of your debts will continue to grow. It is simply inescapable. There is no hiding place from it. It's just maths.

The world appears to be breaking down into two groups: those who do and those who don't understand compound interest. Those who advocate trying to reduce our debts understand it, and those who want more spending don't.

There is scant evidence any meaningful deficit reduction is occurring in the places it is needed. Despite politicians' best efforts, those areas in Europe that have the highest debt/GDP ratios show no sign of slowing the rate of debt accumulation. As growth descends, these ratios are only set to get worse. It's not that the idea of deficit reduction is bad (it's absolutely necessary), it's just that it will make things worse before they stabilise so that they can get better. The progression from one place to another is time-consuming and comes at considerable human cost.

What is confusing for most people is that the wide-scale acceptance of a simple mathematical truth is being confused by thinkers typified by Professor Noam Chomsky. Chomsky is like the plug and socket of social theory - you have to be ready to receive him, at which point it's easy. But if you listen to Chomsky and his championing of the Occupy movement's economic analysis, deficit reduction is part of an organised right-wing plan to dismantle the Social Contract and return voting power back to property owners exclusively. An analysis like this preaches to the converted and creates an atmosphere of fear and suspicion, which preys on already vulnerable people's insecurities. In the face of such hysteria, it's difficult to get a rational response to a mathematical phenomenon.

Of course, Chomsky isn't solely to blame for the obfuscation of the debate. There is also the equal but opposite Ludwig von Mises camp, the ultra-libertarian Austrian School, which proposes a particularly rarefied version of Darwinian economics. Their strident voices proclaiming that the economy should be allowed to find its natural level no matter the human cost equally scares and confuses.

Either way, oftentimes the US is cited as the exemplar of the policy of continuous spending in the face of the debt crisis. And it is entirely true, if you look at output, it is now higher than in 2007, whereas the euro-zone and the UK are still below the start date and about to head south again.

But growth created by government borrowing is an illusion - it is a sticking plaster placed over a gaping wound. There is nothing virtuous or sustainable about it. It just pushes you further into debt. The example of the US masks the fact the US dollar is the reserve currency of the world and the US has a tendency to supply as much of it as the world wants. Imagine if you were in the situation that whenever you wanted more money you merely went down into your basement, fired up the photocopier and printed out as much as you needed. Now you sort of get where the US is coming from. Other nations simply can't do that, and so it is a false comparison to use the US as the economic model of choice.

Besides, the US is merely storing up more problems for itself (and, by association, us) in the future. The budget deficit is a remorseless \$1.2trn (€937bn) a year, and there is evidence consumers have started borrowing AGAIN, whilst the savings ratio has begun to decline. The last thing the world needs is to reignite another debt cycle before it pays for the last one.

So the swing to left here in the UK and in Europe and the groundswell against deficit reduction (even though it has hardly begun) ushers in a period of considerable problems for politicians and the financial markets. If we were starting from a lower level of debt, it would be easy to accede to the demands of the electorate - but we aren't.

The governor of the Bank of England, Mervyn King, in a recent speech said he wished he'd shouted from the rooftops about the violation of sound banking practices and the lack of heeding of historical lessons on borrowing in the run up to the Credit Crunch. So let's not be so coy this time. Instead, let's shout this loudly from the rooftops right now: "Keep borrowing at the rate we are, and our governments will go bust."

It's actually not that difficult to illustrate this. In the UK, the current annual gross public sector borrowing requirement comes to 140% of GDP. We borrow about £125bn (€157bn) a year, and our 10-year gilt yield (at the time of writing) is less than 2%. Let's be optimistic and say we are strapped to an average growth rate of 1%. At the same time, to reach a balanced budget over the course of this parliament, our coalition Conservative/Liberal Democrat government will have to reduce expenditure by about £25bn a year.

Taking those assumptions together, the shape our debt-to-GDP ratio looks grim. Astonishingly, the ratio keeps rising for the next seven years until it peaks at a breathtaking 180% of GDP before it starts descending. This is simply unsustainable. Equally, the notion that the coalition could possibly cut expenditure at a rate of £25bn per year without there being a mass civil response is equally unthinkable. It spells further trouble for the government, including opposition parties who advocate "reducing the rate" of deficit reduction like it will cure the situation.

And so you understand that pushing for illusionary growth based on expanded budget deficits is not something that will end well. In our case, no matter the colour of the ruling party, there is a grinding inevitability that sterling and the UK government bond markets will be tested in the years to come. We are getting away with it right now because attention is being deflected from us by the goings on in Europe. I doubt Mervyn King will be shouting that from the rooftops in the near future, but he should.

Stewart Cowley is manager of the Old Mutual Global Strategic Bond fund