US Economy Conditions and its Effects on Other Economies

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)

Fun facts about most wealthy(!) country

Every single person living in the United States born with a debt approximately $46,000 .

Fun facts about most wealthy(!) country

Total revenue 2.2 trillion, total expense 3.8 trillion Total debt 14.3 trillion Debt rises at an average of approximately $3.8 billion per day.

Fun facts about most wealthy(!) country

The U.S. government has such a voracious appetite for debt that the rest of the world simply doesn't have enough money to lend. Total liabilities of the United States government, that the U.S. government is already committed to pay out, now exceed 65 TRILLION

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 World war 1, Congress instituted the concept of a "debt ceiling.

Debt ceiling
Also known as the Statutory Debt Limit, debt ceiling allows the U.S. Treasury to issue debt to cover the budget deficit as long as the total level of debt does not exceed a limit set by the Congress. However, the debt limit can be raised, and has often been raised, with

Why is the debt ceiling so important?

Why is Debt Ceiling so Important?

The US government reached its debt ceiling (of $14.3tn at that time) in May, which meant it cannot borrow any more money.

Why is Debt Ceiling so Important?

Without additional funds the U.S. Government would be unable to pay its bills, thereby also defaulting on its sovereign debt. Its consequences would also affect the global economy because of the reliance of the global economy on U.S. Treasuries.( 32% owned by the foreigners)

US Budget Deficit

Debt Ceiling Debate

Though this limit has been raised many times in the past, the Republicans insisted that the government must cut the deficit first before any agreement on raising the debt limit can be reached.

The Gridlock

Proposed Solution
The Republican position on raising the debt ceiling: Dollar-for-dollar deal raise the debt ceiling to match corresponding spending cuts Spending caps No tax increases More of the budget cuts in the first two years

Proposed Solution
The Democratic position on raising the debt ceiling: Initially wanted unconditional raise to the debt ceiling with no spending cuts attached Spending cuts combined with tax increases on some categories of taxpayers, to reduce deficits. Large debt limit increase to support borrowing into 2013 (after the next

Problem with Proposed Solution

Raising tax rate means losing business further. Why establish a business in the US, when you can do it in Switzerland, where businesses pay 10% tax instead of 35%? Larger debt ceiling means more debt which leads to possibility of defaulting in future.

Problem with Proposed Solution

Expenditure reduction means reduction in defense, health care and social security which will lead to fall in popularity of democratic party. Also spending cuts means worsening the current unemployment problem .

Final Agreement
To cut spending more than it increased the debt limit. $917 billion would be cut over 10 years in exchange for increasing the debt limit by $900 billion.

Final Agreement
To produce debt reduction legislation by November 23, 2011 to cut at least $1.5 trillion over the coming 10 years. Congress must vote on a Balanced budget amendment between October 1, 2011, and the end of the year.

Final Agreement
The debt ceiling may be increased an additional $1.5 trillion if - A balanced budget amendment is sent to the states - The joint committee cuts spending by a greater amount than the requested debt ceiling increase

The Historical Downgrade

The Historical Downgrade

Standard & Poor's (S&P) downgraded the USA's long term federal debt from AAA to AA+ The downgrade came despite the announcement to raise the US debt ceiling by US$2.1 trillion

The Historical Downgrade

The reason for the reclassification was
the failure of the US government to present a viable plan to manage its government finances, as opposed to any doubt over the ability of the USA to reduce its deficit.

Implication of the U.S. Debt Crisis

Impact of the U.S. Debt Crisis

Loss of investor confidence and liquidity of global financial markets.
The Dow Jones Industrial Average fell by 11.7% by 8th August 2011 from its closing value in July 2011. The loss of liquidity could mean slower growth in countries which rely heavily on the USA for financing (such as India).

Impact of the U.S. Debt Crisis

The perception of the US dollar as an 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 is indicative of the fact By mid-August, gold prices almost reached US$1,800 per troy ounce from

Impact of the U.S. Debt Crisis

US treasury bonds are owned by governments of many countries. According to the US Department of the Treasury, by June 2011 the top 3 foreign holder of US treasury bonds1. China US $1.2 trillion 2. Japan US $911 billion 3. UK US $350 billion

Impact of the U.S. Debt Crisis

The US downgrade is likely to worsen the EU debt situation.

Impact of the U.S. Debt Crisis

The European Central Bank (ECB) bought Italian and Spanish bonds for the first time in mid-August 2011. Other AAA rated countries that have high levels of public debt, like France (84.8% of GDP in 2010) could also have their credit ratings reduced;

Impact of the U.S. Debt Crisis

Consumer expenditure in the biggest consumer market in the world, is set to remain stagnant until the end of 2011 at US$10.1 trillion, unchanged from 2010.
Many emerging markets are likely to try to diversify their exports going to USA.

Impact of the U.S. Debt Crisis

Asia in particular, which accounted for 34.0% of total imports into the USA in 2010, has attempted to increase regional trade since the global economic crisis of 2008-2009. China and Mexico, accounting for 19.5% and 11.8% of US imports in 2010, will be affected the most as a result of reduced US demand for imported goods.

Impact of the U.S. Debt Crisis

The US downgrade had an immediate impact on crude oil prices.
Crude oil prices (WTI Cushing) declined to US $79.32 per barrel by 8th August 2011, after reaching US $97.30 per barrel in July 2011.

Takeaways

Takeaways

Takeaways

Takeaways

Takeaways

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