US Debt crisis update

8/4/2019 US Debt crisis update

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US EconomyConditions

and its Effects onOther Economies


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Group 7:

Omaer Ahmed (ZR 09)Gaus Samdani (ZR 12)

Shaik Mahmood (ZR 18)

Kawsar Ahmad (ZR 50)

Rafaat Wasik Ahmed (ZR 53)

Nasimul Haque (ZR 54)

Sadek Jake Alam (ZR 55)

Rashed Al Ahmed Tarique (ZR 61)


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Fun facts about mostwealthy(!) country

Every single personliving in the United

States born with adebt approximately$46,000 .


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Total revenue 2.2 trillion, totalexpense 3.8 trillion

Total debt 14.3 trillion Debt rises at an average of

approximately $3.8 billion per

day.


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The U.S. government has such avoracious appetite for debt that the

rest of the world simply doesn't haveenough money to lend.

Total liabilities of the United Statesgovernment, that the U.S.government is already committed to

pay out, now exceed 65 TRILLION


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Debt Ceiling

Prior to 1917:

Congress directly authorized the

amount of each borrowing.In 1917:

In order to provide more flexibility to

finance the US involvement in Worldwar 1, Congress instituted theconcept of a "debt ceiling.


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Debt ceiling

Also known as the Statutory Debt

Limit, debt ceiling allows the U.S.

Treasury to issue debt to cover thebudget deficit as long as the totallevel of debt does not exceed a limit

set by the Congress.

However, the debt limit can be raised,

and has often been raised, with


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Why is the debtceiling so

important?


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Why is Debt Ceiling soImportant?

The US governmentreached its debtceiling (of $14.3tn at

that time) in May,which meant itcannot borrow any

more money.


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Why is Debt Ceiling soImportant?

Without additional funds the U.S.Government would be unable to pay itsbills, thereby also defaulting on its

sovereign debt.

Its consequences would also affect theglobal economy because of the relianceof the global economy on U.S.Treasuries.( 32% owned by the

foreigners)


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US Budget Deficit


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Debt Ceiling Debate

Though this limit has been raised manytimes in the past, the Republicans insistedthat the government must cut the deficit

first before any agreement on raising thedebt limit can be reached.


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The Gridlock


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Proposed Solution

The Republican position on raising the debtceiling:

Dollar-for-dollar deal raise the debtceiling to match corresponding spendingcuts

Spending caps

No tax increases

More of the budget cuts in the first twoyears


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Proposed Solution

The Democratic position on raising the debtceiling:

Initially wanted unconditional raise to thedebt ceiling with no spending cutsattached

Spending cuts combined with taxincreases on some categories oftaxpayers, to reduce deficits.

Large debt limit increase to support

borrowing into 2013 (after the next


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Problem with ProposedSolution

Raising tax rate means losing businessfurther. Why establish a business in theUS, when you can do it in Switzerland,

where businesses pay 10% tax instead of35%?

Larger debt ceiling means more debtwhich leads to possibility of defaulting infuture.


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Problem with ProposedSolution

Expenditure reduction means reduction indefense, health care and social securitywhich will lead to fall in popularity of

democratic party.

Also spending cuts means worsening thecurrent unemployment problem .


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Final Agreement

To cut spending more than it increased thedebt limit. $917 billion would be cut over10 years in exchange for increasing the

debt limit by $900 billion.


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Final Agreement

To produce debt reduction legislation byNovember 23, 2011 to cut at least$1.5 trillion over the coming 10 years.

Congress must vote on a Balanced budgetamendment between October 1, 2011, andthe end of the year.


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The Historical Downgrade


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Standard & Poor's (S&P) downgradedthe USA's long term federal debt from

AAA to AA+

The downgrade came despite the

announcement to raise the US debtceiling by US$2.1 trillion


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The reason for the reclassification was

the failure of the US government to

present a viable plan to manage itsgovernment finances,

as opposed to any doubt over the abilityof the USA to reduce its deficit.


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Implication of the U.S. DebtCrisis


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Impact of the U.S. DebtCrisis

Loss of investor confidence andliquidity of global financial markets.

The Dow Jones Industrial Average fellby 11.7% by 8th August 2011 from itsclosing value in July 2011.

The loss of liquidity could mean slowergrowth in countries which rely heavily onthe USA for financing (such as India).


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The perception of the US dollar asan ultra-safe investment has been

tarnished. The flood of investment into the Swiss

Franc, Japanese yen and Gold after the

announcement of the US downgrade isindicative of the fact

By mid-August, gold prices almost

reached US$1,800 per troy ounce from


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f S


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US treasury bonds are owned bygovernments of many countries.

According to the US Department of theTreasury, by June 2011 the top 3 foreignholder of US treasury bonds-

1. China US $1.2 trillion

2. Japan US $911 billion

3. UK US $350 billion

I f h U S D b


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The US downgrade is likely toworsen the EU debt

situation.

I f h U S D b


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The European Central Bank (ECB)bought Italian and Spanish bonds

for the first time in mid-August2011.

Other AAA rated countries that have

high levels of public debt, likeFrance (84.8% of GDP in 2010)could also have their credit ratings

reduced;

I f h U S D b


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Consumer expenditure in the biggestconsumer market in the world, is set

to remain stagnant until the end of2011 at US$10.1 trillion, unchangedfrom 2010.

Many emerging markets are likely to tryto diversify their exports going to USA.

I f h U S D b


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Asia in particular, which accounted for34.0% of total imports into the USA in2010, has attempted to increase

regional trade since the global economiccrisis of 2008-2009.

China and Mexico, accounting for 19.5%and 11.8% of US imports in 2010, will beaffected the most as a result of reduced

US demand for imported goods.

I t f th U S D bt


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The US downgrade had an immediateimpact on crude oil prices.

Crude oil prices (WTI Cushing) declinedto US $79.32 per barrel by 8th August

2011, after reaching US $97.30 perbarrel in July 2011.


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Takeaways


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Takeaways


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Takeaways


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Takeaways


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Takeaways


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Thank You

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US Debt crisis update

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