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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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Fun facts about mostwealthy(!) country
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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Fun facts about mostwealthy(!) country
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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The Historical Downgrade
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 Historical Downgrade
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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Impact of the U.S. DebtCrisis
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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Impact of the U.S. DebtCrisis
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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Impact of the U.S. DebtCrisis
The US downgrade is likely toworsen the EU debt
situation.
I f h U S D b
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Impact of the U.S. DebtCrisis
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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Impact of the U.S. DebtCrisis
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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Impact of the U.S. DebtCrisis
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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Impact of the U.S. DebtCrisis
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