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Thursday 28th December 2000

Level of debt seen as major economic concern in 2001

The Tokyo stockmarket will end the year around the 14,000 level on the Nikkei Index. That is bad news when it started the year around 20,000.

Yet a recent poll of Tokyo economists found most of them are expecting a strong rally in 2001.

Dr Kenneth Curtis, Vice-Chairman of the investment bank Goldman Sachs in Tokyo - and a man much saught after for his views at conferences worldwide - told us what he thought were the top economic issues facing the world next year.

Already in the last few weeks Turkey and Argentina have been blowing up with conditions very similar to the crisis that rocked Asia three years ago.

If that continued, we would see other countries in Eastern Europe, Southern Europe or Africa getting into trouble.

The second part of the economy which is getting squeezed to the gills at the moment is anything related to the "new economy".

Telephonic and Internet companies have gone through a deflation in the last six months similar to the 1930s. If that is not reversed quickly, these companies will not be able to get credit, so the decision of Mr Greenspan in the next couple of months will be critical for the course of the world economy ahead.

"If the Fed does not cut rates substantially, and cut them soon, there will be some long-term damage done to the world economy."

Boom conditions always lead people to over-invest and over-borrow. As conditions reverse, the marginal investor - typically the last one in, is the one to get squeezed most. That is what is occurring at the moment.

Behind the great optimism about the world economy is the last few years there have also been some other realities that we need to focus on, and that is the constant build-up of debt.

For example, in the 1990s, as the US Government debt came down, the increase in debt of the US household sector and corporate sector has been greater than the decrease in government debt.

The net result is that America's overall financial position is more precarious today than it was a decade ago.

"A decade ago, Japan's government debt was only 51 per cent of GNP - by the end of next year it will be 151 per cent."

Emerging markets around the world levered themselves up through the 1990s and broadly, with the exception of East Asia in the last two or three years, the rest of the emerging markets have continued to increase debt.

Any tightening of the global credit market, as we have seen in the last six months, puts tremendous squeeze on highly-levered players. That is at the centre of the huge sell-off we have seen on the stock markets and the pressure that is occurring now on the emerging markets.

The only way you can be optimistic about the numbers on the Japanese economy is to look at the charts upside down.

Everything we look at flashes warning signs about Japan.

Not only are the short-term indicators announcing a slow-down of the economy, but figures show that the government must cut down on its spending - and yet it is government spending that has kept the economy afloat over the last two years.

"Japan's economy is carrying a Himalaya of debt - a level of debt that no modern major economy has ever before seen in peacetime."

-- (M@rket.trends), December 30, 2000