June 18th, 2010
03:48 AM GMT
If you’re looking for a scary summer read, here’s a suggestion: “The World Economic and Financial Surveys Fiscal Monitor” by the International Monetary Fund.
Sure, it’s not Stephen King, but in reading through the IMF’s look at growing public debt and extrapolate the ramifications, you’ll find a chilling tale.
To set the scene: Right now, in the G7 nations, the government debt-to-GDP ratio (essentially how much they owe versus how much they make) is rising “to levels exceeding those prevailing in the aftermath of the Second World War.”
The report suggests that the wave of austerity sweeping the eurozone due to public debt is a mere skirmish compared to the three economies where public debt is truly the largest offenders: The U.S., Japan and the UK.
By 2015, the report estimates the collective debt level of the U.S., Japan and most of Western Europe will hit 110 percent of GDP, compared to 73 percent in 2007.
“Events in Europe are providing the clearest demonstration of the increased attention being paid by markets to differences in underlying fiscal conditions across countries,” the report says. Translation: Just as investors turned sour on Greek bonds, they may turn on bonds from the U.S., Japan and other large economies that are sinking further in the red.
A dystopia as a result of public debt has already turned into popular fiction in Japan. The comic book series “Salary Man, Kintaro,” paints a world where Japan’s debt bomb explodes, swallowing the nation in red in the wake of a worldwide sell-off of Japan’s national bonds, CNN’s Kyung Lah reports.
Japan’s top leaders fear that fiction could turn to fact. New Prime Minister Naota Kan now is talking tough about reducing its public debt – which is the among developed nations – to avoid a similar crisis that Greece faced, saying Japan risks financial collapse if public debt mounts as confidence in the bond market drops.
The IMF report shows the amount of fiscal tightening needed to bring countries’ government debts below 60 percent of gross domestic product by 2030. The report is thick with graphs, appendices and a glossary, but its take-away seems clear: Developed economies need to cut spending, raise taxes and reduce medical benefits for their aging populations.
Yikes. How’s that for a popular platform to woo voters? But unless politicians and their public embrace austerity, the IMF report suggests that greater battles lie ahead than the credit implosion of the Great Recession.
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