The Likely Effects of G20 Debt Reduction Plan
The powerful G20 nations are working furiously to work out a compromise to reduce spending deficits and debt.
However, US President and Treasury Chief were both working to undermine the efforts of other nations by warning that recovery should be the top goal not cutting deficits.
It is easier for USA to talk about indiscriminate spending since USA does not have to deal with a common currency like the euro, it can devalue its currency if needed to help it pay off debts.
However, EU does not have this luxury since it has to work with various EU governments that determine their own budgets.
The Western governments and population at large are used to large doses of the "debt" drug.
To reduce debt is extremely painful to western consumers and companies who are still yet to fully recover from the financial crisis part 1.
To westerners.
the only way they know how to get the economy up and running is to spend more than they earn.
Just look at the number of Euro-zone countries that have debt level exceeding 50% of GDP, UK, Italy, Spain, Greece, Ireland are all culprits.
Even Japan and USA have huge debt as percentage of their GDP.
Private sector debt in America also rose from 50% of GDP in 1950 to nearly 300% during the most recent peak.
For many consumers and companies, bankruptcy no longer carries the stigma it once has.
In fact, it might even be fashionable to be bankrupt.
Financial institutions certainly played a huge part in feeding this borrowing frenzy as they kept innovating new ways to increase what a company or person can borrow.
What now? G20 countries now is at an uncomfortable crossroad.
They are pressed to slash spending in order to stabilize the credit market and their currencies.
However, many of their economies are still very weak and do not have the momentum to recover fully on their own.
For Europe, the problem is more urgent.
Europe has no choice now but to have slower recovery and start balancing their books because if their books are not balanced, they will not get recovery anyway as their credit rating will plummet and currencies devalued.
Many countries in Europe is now pretty much import a vast majority consumer products from places like China.
If their currencies are devalued, they will face inflation pressures and it will be a death spiral.
However, they face quite uncompromising electorate.
Some who cannot take the pain that will be brought about by the reduction in government spending and higher taxes.
USA has below 14 population ratio of about 20% and population growth rate of almost 1% per year compared to EU which is clocking hardly any population increase at 0.
1% and a below 14 population ratio of only about 15%.
With a younger and growing population, USA is expected to fare better than EU over the longer term as its economy is likely to remain more dynamic.
EU will looking nervously as its demographics began to resemble that of Japan which is experiencing nearly 0.
25% decline in population in 2010 and has below 14 population ratio of only about 13%.
Eastern Europe is already doing worse than Japan in that aspect as Russia is facing dramatically falling population and so is Ukraine.
Japan's public debt is already ranked No.
2 in the world at astonishing 192% of GDP, only Zimbabwe is worse off.
Little wonder how they can reduce public debt with a stagnant economy, aging and declining population is a big question mark.
USA definitely has a smaller problem than Japan given its dynamism and smaller public debt of about 82% of GDP.
Given the situation, it would be little wonder that USA will fare better than Japan and EU when the plans to cut budgets are announced, probably in the coming days.
Potentially Positively Affected: If the plan to cut budgets go through then the positives will include: * stabilizing bond markets * strengthening euro * temporary side way movements of the EU and US stock markets rather than accelerating declines Potentially Negatively Affected: * Economic growth rate * Stock market valuations will need be adjusted to account for slower growth but it will be offset by positives from stabilized credit markets * Lower consumer spending from higher tax rates * Fixed asset investments * European construction industry * Japan - does not look like it is ever getting out of stagnant growth if there are budget cuts and higher taxes
However, US President and Treasury Chief were both working to undermine the efforts of other nations by warning that recovery should be the top goal not cutting deficits.
It is easier for USA to talk about indiscriminate spending since USA does not have to deal with a common currency like the euro, it can devalue its currency if needed to help it pay off debts.
However, EU does not have this luxury since it has to work with various EU governments that determine their own budgets.
The Western governments and population at large are used to large doses of the "debt" drug.
To reduce debt is extremely painful to western consumers and companies who are still yet to fully recover from the financial crisis part 1.
To westerners.
the only way they know how to get the economy up and running is to spend more than they earn.
Just look at the number of Euro-zone countries that have debt level exceeding 50% of GDP, UK, Italy, Spain, Greece, Ireland are all culprits.
Even Japan and USA have huge debt as percentage of their GDP.
Private sector debt in America also rose from 50% of GDP in 1950 to nearly 300% during the most recent peak.
For many consumers and companies, bankruptcy no longer carries the stigma it once has.
In fact, it might even be fashionable to be bankrupt.
Financial institutions certainly played a huge part in feeding this borrowing frenzy as they kept innovating new ways to increase what a company or person can borrow.
What now? G20 countries now is at an uncomfortable crossroad.
They are pressed to slash spending in order to stabilize the credit market and their currencies.
However, many of their economies are still very weak and do not have the momentum to recover fully on their own.
For Europe, the problem is more urgent.
Europe has no choice now but to have slower recovery and start balancing their books because if their books are not balanced, they will not get recovery anyway as their credit rating will plummet and currencies devalued.
Many countries in Europe is now pretty much import a vast majority consumer products from places like China.
If their currencies are devalued, they will face inflation pressures and it will be a death spiral.
However, they face quite uncompromising electorate.
Some who cannot take the pain that will be brought about by the reduction in government spending and higher taxes.
USA has below 14 population ratio of about 20% and population growth rate of almost 1% per year compared to EU which is clocking hardly any population increase at 0.
1% and a below 14 population ratio of only about 15%.
With a younger and growing population, USA is expected to fare better than EU over the longer term as its economy is likely to remain more dynamic.
EU will looking nervously as its demographics began to resemble that of Japan which is experiencing nearly 0.
25% decline in population in 2010 and has below 14 population ratio of only about 13%.
Eastern Europe is already doing worse than Japan in that aspect as Russia is facing dramatically falling population and so is Ukraine.
Japan's public debt is already ranked No.
2 in the world at astonishing 192% of GDP, only Zimbabwe is worse off.
Little wonder how they can reduce public debt with a stagnant economy, aging and declining population is a big question mark.
USA definitely has a smaller problem than Japan given its dynamism and smaller public debt of about 82% of GDP.
Given the situation, it would be little wonder that USA will fare better than Japan and EU when the plans to cut budgets are announced, probably in the coming days.
Potentially Positively Affected: If the plan to cut budgets go through then the positives will include: * stabilizing bond markets * strengthening euro * temporary side way movements of the EU and US stock markets rather than accelerating declines Potentially Negatively Affected: * Economic growth rate * Stock market valuations will need be adjusted to account for slower growth but it will be offset by positives from stabilized credit markets * Lower consumer spending from higher tax rates * Fixed asset investments * European construction industry * Japan - does not look like it is ever getting out of stagnant growth if there are budget cuts and higher taxes