Posted by – July 13, 2011
As Japan struggles to rebuild after the tsunami and earthquake it is becoming apparent that their economy is far from stable. The substandard GDP and costs to rebuild make getting the economy back up to world standards a difficult task.
What are the costs of rebuilding after a succession of natural disasters?
- According to an article in the New York Times, the costs to rebuild the northeast region of Japan are so large that lawmakers are planning to double the national sales tax to 10 per cent.
- Government estimates say rebuilding will cost as much as $312-billion.
Japan’s economy should not rely on debt financing to pay for the reconstruction costs because they have the highest level of public debt among advanced economies. It is likely that Japan will have to cut spending costs and raise taxes to keep up with interest payments.
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Republicans in the American government are backing a debt-default plan to reduce the country’s projected US$1.4 trillion deficit. Going ahead with the debt-default plan would mean potentially destabilizing the economy and worsening relations with foreign creditors like China. China, the largest foreign creditor, holds over US$1 trillion in Treasury debt. Some information regarding the debt-default plan includes:
- Going into default could weaken the US dollar.
- A debt-default would mean delaying interest payments for a few days.
- The US Treasury Department believes there will be no more room to borrow by the beginning of this August.
- The US Congress is against increasing government spending.
- If the US were to default on their payments, it could create a global reaction.
- If interest payments aren’t made the economy could be pushed back into a full-blown recession.
- Republicans believe foreign creditors would be content with a default if it means a better chance of paying government debts off later on.
- US Treasury debt is still one of the safest forms of liquid investments.
For the full story, read this article in the Financial Post.
To prepare your business for tough economic times or any other business need, contact the Winflow Financial Group. We can reached at 1.800.956.6897 or request a free consultation today.