Posts tagged debt

Plan to cut down US Public Debt failed

US Government’s Plan (1999) to Cut Down Public Debt

BBC News: Business: The Economy  US to buy back national debt

US Public Debt Data: Wikipedia file

I have found an interesting news article from 1999 about how US government was trying to cut down its public debts.

US government was planning to cut down public debts by paying the debts. The US government expected to decrease its debt of  $3,700 billion to $1,200 billion by 2009. However, as you can see from the actual data collected over 11 years, this plan wasn’t well executed.

The Actual Data of US Public Debt (1997-2008)

Instead of decreasing its debt to $1,200 billion, the debt increased to $10,000 billion. This suggests that the US government’s ‘plan’ to cut down its public debt was a poorly planned/executed policy.

According to U.S National Debt Clock, the US public debt is $13,621 billion or $13.6 trillion (Data Retrieved: 18 Oct 2010 at 12:38:23 PM GMT). I think that this increase in US public debt will someday have a detrimental effect not just on the US economy but on the economies around the world.

This blog post is an ‘add-on’ to the original blog post: Debt Time Bomb, Is It an Impending Death of Pax Americana?

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What Greece must do to Survive the Debt Crisis

A frustrated Greek expressing his angry through violent protest

CNN News: Click Here

In action to fight off the increasingly unbearable debt crisis, Greece chose to get financial support from both EU (mainly Germany) and IMF. This might help Greece out of the problem in a short-run, yet they still have to pay back the money they have borrowed from EU and IMF. Now all Greeks must tighten their belt in order to fight off the crisis. There is a list of what Greece must to do recover their economy.

  1. Salary Cuts
  2. Retirement
  3. Increase in Taxation
  4. Reform in Pension System

First of all, all Greeks (at least public workers) will increase a cut in their salaries. Salaries are one of the big factors that take up large percentage of the cost in business and government spending. Though this will arouse some violent protests from the people, there is no other way to fight off the debt crisis without a cut in wages.

With some cuts in wages, many business and governments will want to minimize the number of employees as possible to decrease the money spent. This will result in early retirement of many workers with ages over 60. This will also contribute to the high unemployment rate, however, significantly cut the unnecessary budgets.

Interestingly, the Greek government decided not to have an early retirement for its workers but to increase the retirement. The retirement age was shifted from 61 to 65. It may be that Greece government didn’t want more unemployment and more protests regarding it. I think that the Greece government is tightening the payment of wages so much that they don’t need to cut down its workforce.

Greek people will most definetly exprience the rise in taxation. Greek government said that it was going to raise all VAT’s by 10%. Increasing taxation is one of the key ways that Greece can endure the crisis.

Greeks will also exprience a cut in pension. Unplanned pension system was the main culprits for the cause of Greece’s debt crisis. The government borrowed money, unplanned, in order to fulfil its populistic policy of pension system. The system supported too many people and gave out excess amount of money. So many aged Greeks will exprience this frustrating cut in their pension.

In sum, these were the actions that Greece must implement in order to survive the debt crisis. I think that the government’s determination to get out of the deb crisis is firm, but I think that this determination is not supported by lots of Greeks. Greek people must bear in mind that if they don’t start tighenting their belts, the government’s effort in order to get out of the crisis.

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Analysis of Greek Economy in Debt Crisis

Probability of  Countries Being Unable to Pay Back Debt

BBC News: Article 1

BBC News: Article 2

European Commission has announced that Greek economy would shrink by 3% this year due to its high risk of defaulting.

As illustrated in the graph, Greek’s probability of defaulting has passed 50% and is heading for 60%. At this rate, Greece will most definitely default if there are no strict cut-offs on government spending and European countries to aid Greece.

Other countries in Eurozone fear for Greek’s economic crisis might affect Eurozone severely. As a result of Greece’s high CDS, it is badly affecting Euro.

“The euro hit its lowest level against the dollar in more than a year, at $1.2887, and was also down against the pound, with one pound worth 1.1706 euros.”

EU economic and monetary affairs commissioner Olli Rehn describes Greek economic crisis as a “bush fire” and that “it must be contained” in order to prevent it to become a “forest fire” putting Eurozone at risk also.

Accordingly, EU and IMF has promised immediate aid and bail-out package for Greece’s debt crisis. However, there are many doubts about how the bailout package could help the Greek crisis.

“The problem is no one has a clear idea of how we’re going to get out of this situation,” said Julian Callow, chief Europe economist at Barclays Capital.

What will happen if Greece defaults? Last post, I have explained about the consequences of defaulting. First, the Greek currency and possibly Euro will experience hyperinflation and it will be a no better than a piece of toilet paper. Second, as the currency Euro is affected, this will affect the taxpayers in the Eurozone, forcing them to carry the some parts of Greek burden. If this is sever enough, it could mean the dissembling of the Eurozone.

So, what are the actions Greece is taking to fight this problem? Well, first is that they have asked help from EU and IMF, which helped them pay their short-run bills. Secondly, they have announced to cut their governmental spending from more than 10% to 3% by 2012.

It was a wise choice to ask for a bailout package, however, if Greece fails to recover from this debt crisis, it means that they’ve just added another debt to their already unbearable- debt list.

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Saving is a Good Habit, but also a Bad Habit

Japan’s $15 Trillion Not Enough to Make It a Buy by William Pesek: Click Here

Is saving a good habit? If you look at Japanese people, they save a lot. As a result of assiduous saving, Japanese households have about $15 trillion according to the Bloomberg commentary by William Pesek. Wow, $15 trillion dollars! It’s higher than United State’s GDP of $14.2 Trillion (2008). However, the author acerbically criticized that Japanese people’s habit of saving is actually harming the Japanese economy for several reasons.

As you see, the saving is considered as a leakage along with importing and taxing. Why is saving considered a leakage? It is because the money saved is not used in the economy or market for long period of time. It is like blocking a current of river by building a dam. Saving is necessary, however, excessive saving can result in deflation, which Japan is severely suffering from.

Although the Japanese households have $15 trillion, they do not use it. This is one of the major roots of Japan’s lost decades and current economic crisis. The news columnist William Pesek claims that Japanese people’s saving of consuming is causing the deflation because the market has lack of currency flowing through it. If an economy is compared to a human body, people’s lack of consuming can be compared to low blood pressure. There just aren’t any money to get the economy going. Due to low demands for almost all the goods and services in Japan, the suppliers has to lower the price of their product. And this causes deflation, which William Pesek considers it to be a big problem for Japanese economy. The market is just hamstrung by Japanese’ excessive saving.

Japanese government’s public debt of 200% (to GDP) has resulted from this excessive saving too. Because there is a big leakage (saving) in the market, the Japanese government has to borrow from banks or households and pour it in the market to make it working. If the government do not support the market, the economic crisis would have been more devastating. As a result of trying to pour the money into the market, the Japanese government’s 45% of its spending is from Japanese’ households lending. This has further accumulated the public debt of 200% (to Japanese GDP).

Why are Japanese people reluctant in spending? It is from the lack of confidence about the future. The Japanese government is to be ascribed to the blame. The government did not take aggressive measures to tackle the problem. This has resulted in Japanese people’s distrust toward the government. The government now has to take aggressive measures to tackle the economic depression and encourage the people to spend more.

In sum, saving is a necessary habit, however, it could also hurt the economy if this is done excessively, when no one is willing to buy anything and just save money. I think that the best solution for Japanese economy to rise again to for the Japanese people to spend more again. Just think. If Japanese people spends all of $15 trillion, the GDP will surpass the US GDP. 🙂 yay and Japan will have the top GDP in the world. I personally do not think that that much of spending is worth it :(. Yet, this will be the best solution to the economic crisis in Japan.

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Analysis on Japanese Crisis

Japanese Economy is in Deep Coma

Times Online: Click Here

According to Bronwen Maddox on Times Online, Japanese Crisis resulted from extremely inefficient bureaucracy culture, lack of risk-taking, aging population, and bad governmental budget.

The article states that Japanese government (local and central) have debt over 180% of Japan’s GDP. That means, the Japanese government has to pay almost double the country’s GDP to the lenders, who are mostly Japanese citizens. So, the Japanese government is carrying the unexpectable time-bomb of national bankruptcy. Japan is the second highest in debt percentage to GDP in the world, after Zimbabwe’s 200%. However, Zimbabwe’s GDP is so infinitesimal compared to the world’s second biggest Japanese GDP. So Zimbabwe could get support from other countries, but Japan will not be able to survive the misery even if there were some supports from other countries.

The main reason for Japan’s enormous debt is the Japanese government’s bad planning for budget. According to the article, over 45% of the governmental spending was borrowed from Japanese people’s savings. This kind of spending started from 1992, so this debt accumulated for 20 years until the debt almost went up to twice the country’s GDP. United States had deficit governmental spending just like Japan, however, Obama passed the Budget Plan for 2010 to minimize the deficit and ultimately get rid of the debt. Japan is not taking any actions to minimize and get rid of debts they are carrying. Instead, the new government is increasing the deficit almost forced by its populist economic policies. If the new government does not cancel its policies and sketch a new way to get out of this misery, Japan will face more serious problem than ‘lost decades’ : a bankruptcy.

There why are Japanese government spending so much money? My answer to this question was that Japanese people did not want to use money. That is why the Japanese government has to release money to the paralyzed Japanese market. I have heard and read that many Japanese people had lack of confidence in their futures because of the prolonged economic recession in Japan (lost decades). Even if they have one of the highest GDP per capita in the world, they do not use money in fear of another economic recession. This is called leakage in economic term. So Japan is suffering from deflation because of very very low demands in domestic market. Japanese domestic markets do have money to spend, however, people simply chose not to and save it. That is why Japanese companies are having a bad time in the domestic market. To get back to the point, the Japanese government has to release money in order to get the domestic market going, or else, it will collapse.

This lack of confidence or fear about future is devastating to the economy. This once happened to Korea when it was near national bankruptcy in 1998 during the economic crisis in Asia. People feared for the future and they stopped spending but saving. This had rather devastating effect on the Korean economy. So the government had made up the mind to get help from IMF, the international monetary fund, and cold-heartedly let the lazy banks or companies to go bankrupt. The government has forced many companies and economic figures to reform. The economic reform has resulted in tons of people without jobs, however, Korea managed to get out of the trouble until 2000, which only took them 4 years to overcome the trouble.

Japan, in the other hand, did not take such daring measures to overcome the economic crisis, which started from 1992. As a result, Japan has suffered from two lost decade, and ‘is’ suffering from another losing decade. The Japanese government was not determined like the Korean government so that the economic crisis of Japan has lingered around since 1992, almost 20 years from now.

There is another factor that is aggravating the crisis in a long term. It is the low birth rate. Japan has the birth rate of 7.64 out of 1000 population, which ranks 221th in the world. It was estimated that in 20 or 30 years, there will be 45% of Japanese population with old people over 65. This will reduce governmental income from taxation and aggravate the responsibility the young people have to carry out. Thus, it will have unenthusiastic young people and there will lack of labor in the market. Every economically active young person (at 25-30) will have to take care of 2 elders. This will give disincentive to the young people to get a job. Also, it will discourage the young people not to have babies because it’ll be even more burdensome. Thus, the low birth rate gets worst. The Japanese government has to do something to give incentive for the young people to have babies. Or else, the national will fall into the abyss of low birth rate and ultimately ‘extinction’ of Japanese people.

In sum, the Japanese government has to do something. The Japanese government should first pass a new budget plan in effort to minimize the deficit, and they should pass a new law to encourage young people to have babies. Also, they should get rid of the culture of bureaucracy. Or else, Japan will confront the irremediable problem of bankruptcy.

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UK economy ‘faces crisis’ warns former IMF economist

BBC News: Click Here

“The UK should be seen in the same category of countries as Greece and Spain, who are facing severe debt problems, a leading economist has said.”

Like any other countries, UK has borrowed tons of money to protect its economy during the recession. This has resulted in tremendous amounts of debts that UK will eventually have to pay in the future.

It is not bad to borrow money in order to recover economy, but it follows with some consequences if it is not properly planned out how it is going to repay its debt. It is a common sense, however, it is an essential rule.

Even if its economy recovers, tremendous amounts of accumulated debts would be another hindrance to economic prosperity. It could stimulate another global economic crisis.

Sometimes, it is appropriate for countries to borrow money to recover its economy. It could have an economic effect that covers the price of the debt. However, if countries borrow too much money, it could be a critical problem. Therefore, countries should look between the line where they can approximate the effect by borrowing and money and lessening the debt as small as possible. 

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G7 nations pledge debt relief for quake-hit Haiti

Earthquake crisis in Haiti could be a chance to recover economy

BBC News: Click Here

According to BBC News, the world’s leading industrialised nations have pledged to write off the debts that Haiti owes them, following a devastating earthquake last month.

“Some $1.2bn (£800m) of Haiti’s debts to countries and international lending bodies has already been cancelled.”

This earthquake crisis could be said to be a catastrophic setback for many Haitians. However, in my opinion, this could be a chance to recover their impotent economy. Many countries are trying to financially support Haiti by financial aids and cancellation of debts.

Haiti had about $1.9bn of debt was an impediment to economic development and growth. But, already, $1.2bn of its debt had been cancelled. I am very hopeful that Haiti’s economy will recover right after its reconstruction with many countries willing to support Haiti.

As a conclusion, this quake crisis could be a setback for many Haitians, but, it could be a chance for them to recover their economy.

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Debt Time Bomb, Is It an Impending Death of Pax Americana?

<High Public Debt, is it an impeding death of Pax Americana?>

According to U.S. National Debt Clock, United States has approximately 12 trillion dollars of public debt, and the debt is increasing by one hundred-thousand dollars every second. Once I saw this I thought that it was just another phishing website or conspiracy website which tries to fool people with false information. So I thought this specific number was a fake. However, I have mistaken it for a false information. It actually has a data graph from US government’s official website (1).

As you see in the graph, the debt will increase and increase until it is 100% of US’ GDP. It will be not long till it goes over 100%. Now, many people would be seriously concerned about this problem by now. Many people will wonder, “How has the biggest economy in the world got an exponential amount of public debt?” When I have googled this problem, many people posted that the ‘War Against Terrorism’ has caused this. I remember looking at a graph of US public debt skyrocketing right after the year 2001 when the President Bush declared ‘War Against Terrorism.’ Therefore the prolonged exhausting war of Iraq and Afghanistan has certainly been a part of the cause. As the result of these wars, it has debilitated US economy. This could be noticed from the recent news reporting, US dollar fell to 14-year low against the yen.

For this blog post, we will look into following questions about exponentially high public debt: 1) How has US managed this high public debt over 10 years? 2) What is the relationship between this debt and the news “US dollar fell to 14-year low against the yen“? 3) What will happen if US no longer can sustain this burden?

How has United States managed to even ‘function’ as a state with this sky-scrapping public debt? There are several answers to this question. First of all, many countries are ‘giving’ billions of money to United States to support this exponentially high public debt. You might think, “Are those countries stupid enough to give away money to United States for nothing?” However, these countries are obviously not stupid to give away money to United States for nothing. It is because of the inevitable economic structure.

United States has the key currency, dollar, which is used widely around the world to buy, sell, and to settle economic problems. US Dollar is used as official currency or de facto currency in many countries. United States also has the strongest, biggest market in the world. With key currency and strong economy, United States is well trusted in the world. This trust allows US to cover up their public debt by issuing their own security, usually called government bonds. It is a governmental promise that any individual or nation who buys US treasury securities will be payed back in the future.

Basically, United States can borrow money (issue treasury security) based on its credit/trust and pay the debt by this money. So the public debt accumulates as US issue treasury security to countries and repaying the countries with the borrowed money. This creates a ‘vicious circle of public debt.’ Or other might call it ‘the ultimate economic motor that never stops.’ United States is actually enjoying this cycle as they are spending and letting the other countries do the paying.

The countries are in an inevitable structure where they have to buy US treasury. For example, Japan is one of the major foreign holder of US treasury security. Also Japan has the second most US dollar as a foreign country. The reason why Japan bought lots of US treasury security is that Japan’s major exporting country is United States. Japan gets payed in US dollars as they sell their product in US market. However, US manages to ‘take away’ the money by inflating US Dollar. For example, lets say that Japan earned $100 by selling a product in US. However, United States issues another $100 and causes inflation. The $100 Japan earned is now not as valuable as it was before United States issued $100. So Americans are basically spending and spending, and other countries are paying and paying for United State’s spending.

The following is a simplified graph of this accumulation of public debt.

The Pax Americana of spending and spending could come to an end with various factors threatening US economy.

Firstly, US dollar fell to 14-year low against the yen is considerably a big threat. As Japanese Yen has rose and US dollar fell, Japanese exporters are very frustrated as they cannot export their products. So the Japanese government is trying to sell its dollars stored up in the bank to cause depreciation of Japanese Yen. However, if they do this, sharp depreciation of US dollar will occur causing US dollar to value no more than a piece of paper. So the US government is pressuring Japanese government not to intervene in the foreign exchange market.

Counterfeit “Supernote” and the Real Dollar

Secondly, North Korea has printing facilities for printing counterfeit currency called ‘supernote.’ Supernotes are counterfeit currencies that are very difficult to figure out even with latest-technology equipments. Supernotes could be a threat to US dollar’s position as a key currency because it could depreciate the US dollar. I believe that this is the problem that US should be worried about not the nuclear bombs. If North Korea decides to release billions dollar worth of supernotes into foreign exchange market, US dollar will worth nothing in matter of days which is much destructive than the nuclear bomb that North Korea has. If billions of supernotes influx into the foreign exchange market, US dollar will lose its position as a key currency and other currencies such as European Euro or Japanese Yen will replace that position. As US dollar loses its position as a key currency, the United States government would not be able to issue a treasury security to raise the fund.

If United States cannot long sustain the public debt, United States as a nation could go bankrupted. Obviously, United States will not be able to pay the public debt if they cannot issue a treasury security if the dollar loses its position as a key currency. Also there is a possibility of war as World War I and II occurred because of economic reasons.

In conclusion, United States should better stop borrowing money and using the as an economic stimulus package. They should slowly get rid of the deficit spending and adjust their balance in order to decrease exponentially high public debt.

Little Reflection: I personally thought that this blog post was unorganized. I had some understanding of the situation, however, it was not firm nor clear. I actually understood more about the situation as I wrote the blog post. So, I felt this blog post was little bit unorganized in what I wanted to say.

Resource:

(1)GPO Access: US government’s official printing office. It has official data of US budget 2008.

(2) US Department of Treasury: Pie graph about foreign holders of US treasury security

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Dubai under scrutiny after debt payment delay

BBC News: Click Here

Yahoo News: Click Here

“Dubai’s financial health has come under scrutiny after a major, government-owned investmnet company asker for a six-month dely on repaying its debts.”

According to BBC News, Dubai World, the government-owned investment company, has a debt of $59 billion to the banks in Europe. The request for a postpone had considerable effect on the European stock market. Especially the Royal Bank of Scotland’s stock market was badly affected.

Dubai World was suffering from a credit-crunch as global economic recession has started from last year. Also the massive construction of skyscrappers, hotels, and fancy facilities has put a lot of financial burden on the company.

This is a credit default swap chart for countries that have been affected by Dubai’s delay in debt payment. This lists countries from left to right that are most vulnerable to this event. Those countries that are in deep danger of bankruptcy are Ukraine, Venezuela, Vietnam, and countries in Middle East. Countries that have low CDS points but have rapid increase are Japan, Chile and UK. These countries do not have high risk, however, they are potential danger.

Overall, this event certainly abashed Dubai’s credibility on its reliability and of its investment.

Resource:

CDS data Chart: Asian Economy News (In Korean Language)

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