Thursday, May 20, 2010

IMF Concerned About Japan's Debt; Markets Concerned About Global Debt

The IMF says that Japan may be the next trouble spot in the global economy, in addition to several European nations.

The IMF noted that the hundreds of billions of dollars of stimulus spending were "necessary and effective, but has pushed public debt to unprecedented levels.”

Japan's debt is nearly 230 percent of its GDP, the highest of any industrialised nation. GDP is a measure of a country's total economic output.

As a result, the IMF says the nation with the world’s second largest economy must come up with a credible plan to cut its public debt. This would come from a combination of spending reductions and raising revenues, or taxes.

However, the economic downturn has undercut tax revenues from both individuals and companies. And now Japan is being urged by the IMF to come up with a plan to bolster tax receipts using a consumption tax.

The problem is that the Japanese economy has been experiencing stagnation for 20 years, and the IMF predicts it could grow by an anemic 2% this year and next.

As the economy has stalled, so has consumer spending. Japanese consumers have been saving instead of spending in their deflationary environment. And if consumers aren't spending, a consumption tax won't be effective.

It's the size of sovereign debts that has markets around the world spooked. The Dow plunged 376 points today, and is just hanging to the psychologically critical 10,000 mark. The NASDAQ and the S&P were both down by roughly 4 percent today as well.

Many signs point to a self-perpetuating global downturn in which weakened economies produce less tax revenue, and increasing sovereign debts. The size of those debts spooks markets, and indexes tumble. And the size of many sovereign debts precludes any additional stimulus, so the problems just spiral downward.

This is not a pretty picture, but it is symbolic of the problems associated with debt-driven economies using fiat currencies. Money, and debt, backed by nothing is very dangerous.

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