THE UNITED STATES OF

AMERICAGroup 4, SECTION B11DM-094 Nitesh Goyal11DM-098 Pallavi Kumar11DM-127 Rohan Aggarwal11FN-099 Shobhit Singh11IB-033 Manoj Singh11IB-053 Saurabh Bansal

Country’s Overview• Largest and the most powerful economy• GDP= 14,657,800 million $• Unemployment Rate= 8.6%• Inflation rate = 3.4%• Interest rate = 0.25%• FDIs= $228 Billion

Overview of US economy

• World's largest national economy• Nominal GDP was estimated to be nearly $14.5 trillion in 2010• PPP largest in the world, approximately a fifth of global GDP at

purchasing power parity• Per capita GDP (PPP) of $46,844, the 7th highest in the world• Largest trading nation in the world. Its three largest trading partners

as of 2010 are Canada, China and Mexico• Net migration rate is among the highest in the world• About 60% the global currency reserves has been invested in the

United States dollar and only 24% in euro. The country is one of the world's largest and most influential financial markets.

GROSS DOMESTIC PRODUCT• Nominal GDP- 14,657,800 (in millions of dollars)

– Agri-1.1% (161,236)– Industry-22.1% (3,239,374)– Service-76.8% (11,257,190)

Monetary Policy

• In the U.S., monetary policy is carried out by the Fed. The Fed has three main instruments that it uses to conduct monetary policy: open market operations, changes in reserve requirements, and changes in the discount rate.

• When the Fed purchases government bonds, it increases the reserves of the banking sector, and by the multiple deposit expansion process, the supply of money increases.

• When the Fed sells some of its stock of U.S. government bonds, the end result is a decrease in the supply of money.

• If the Fed increases bank reserve requirements, the banking sector's excess reserves are reduced, leading to a reduction in the supply of money; a decrease in reserve requirements induces an increase in the supply of money.

Fiscal Policy• The United States government has tended to spend more money than it

takes in, till the end of the 20th century• From 1998–2001, gross revenues exceeded expenditures and a surplus

resulted. In 1998, the federal budget reported its first surplus ($69 billion) since 1969.

• After a combination of the dot-com bubble burst, the September 11 attacks, a dramatic increase in government spending and a $1.35 trillion tax cut, the budget returned to a deficit basis.

• The budget went from a 1.8% surplus in fiscal year 2000 to a 5.2% billion deficit in fiscal year 2004

Interest Rate

• The benchmark interest rate in the United States was last reported at 0.25 percent.

• In the United States, authority for interest rate decisions is divided between the Board of Governors of the Federal Reserve (Board) and the Federal Open Market Committee (FOMC).

Balance Of Trade

• The United States reported a trade deficit equivalent to 43.5 Billion USD in October of 2011

• Main exports are: machinery and equipment, industrial supplies, non-auto consumer goods, motor vehicles and parts, aircraft and parts, food, feed and beverages.

• U.S. imports non-auto consumer goods, fuels, production machinery and equipment, non-fuel industrial supplies, motor vehicles and parts, food, feed and beverages

• Foreign investments made in the United States total almost $2.4 trillion, which is more than twice that of any other country.

• American investments in foreign countries total over $3.3 trillion, which is almost twice that of any other country.

• Domestic financial assets totalled $131 trillion and domestic financial liabilities totalled $106 trillion. As of 2010, the European Union as a whole was the largest trading partner of the U.S.,

• Total public and private debt was $50.2 trillion at the end of the first quarter of 2010, or 3.5 times GDP. The proportion of public debt was about 0.9 times the GDP.

UNEMPLOYMENT RATE• In spite of the positive developments on the employment front in

February, there still remain some 13.67 million unemployed people in the US out of 311 million populace.

• the unemployment rate is expected to be still in the range of 7.5 to 8 % at the end of 2012.

Foreign Direct Investments• Foreign investment contributes to productivity growth,

generates U.S. exports, and creates high- paying jobs or American workers.

• India, Russia (64 percent), Chile (54 percent), South Korea (31 percent), and Brazil (23 percent) are among the emerging investors in the USA

Economic Crisis 2007-09

• Considered worst financial crisis since the great depression of 1930

• Period – December 2007 to June 2009

Origin of Crisis

• From 2000-2003, federal interest rates reduced from 6.5% to 1%

• This was done because of (a) To soften the effects of the collapse of

dotcom bubbles and of the September 2001 terrorist attack

(b) To combat the perceived risk of deflation

Effects of low interest rate

• Created a flood of liquidity in the economy• People started to borrow money• This easy availability of credit inspires a bundle

of malinvestments• This prompted the development of a housing

bubble that ultimately burst, precipitating the financial crisis.

Effects of Crisis

• Collapse of large financial institutions (Fall of Lehman Brothers on September 15,2008)

• Bailout of banks by national government• Downturns in stock markets around the

world• Prolonged Unemployment

Reasons of Crisis

• Reckless lending practices by financial institutions

• Growing trend of securitization of real estate mortgages(Housing Bubble)

• Increase in oil and food prices(commodity boom)

Economic Indicators of Crisis Increase in inflation

Increase in debt

• Sharp drop in international trade

Increase in unemployment

Policies used to recover

(1) Capital injection by governments

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(2) Enacted large fiscal stimulus package

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Effects of US Monetary Policies

• Excessive Money Supply• Huge US trade deficit• Dollar volatility• Public deficits

DEBT MANAGEMENT

• The Federal Government borrows by issuing securities.

• Most of the securities that are issued to the public are marketable, meaning that once the government issues them they can be resold by whoever owns them.

• Marketable debt consists of bills, notes, bonds, and Treasury Inflation Protected Securities (TIPS). The Government Debt was last reported at 93.2% of the country´s GDP.

Public debt• Rose to 41% of GDP by the end of the 1980s• In 2008 ,Military spending caused by the wars in the Middle East, the

debt increased from $10.7 trillion in 2008 to $14.2 trillion by February 2011

• Mostly Due to : i) Increased Military Spending ii) Lower Tax Revenue• Based on the 2010 U.S. budget, total national debt will nearly double in

dollar terms between 2008 and 2015 and will grow to nearly 100% of GDP.

Debt Ceiling• The Treasury is authorized to issue debt needed to fund government

operations up to a stated debt ceiling• The debt ceiling has been raised 74 times since March 1962, the debt

ceiling was increased on February 12, 2010, to $14.294 trillion • Foreigners owned $4.45 trillion of U.S. debt, 32% of the total debt• Largest holder : China (26 % of all foreign-held U.S. Treasury securities, 8%

of total US public debt)

2011 Debt Ceiling Crisis

• It was a financial crisis in 2011 that started as a debate in the United States Congress about increasing the debt ceiling

• Markets around the world as well as the three major indexes in the US then experienced their most volatile week

• Without the increase in debt ceiling, the US would enter sovereign default (failure to pay the interest and/or principal of US treasury securities on time) thereby creating an international crisis in the financial markets

Economic Crisis : Causes

• After Effects of Subprime Mortgage Crisis in 2008

• Middle East Unrest and US Military Engagement

• Increasing Budget Deficit• Enormous Borrowings• Eurozone Debt Default

During the crisis….

• The public debt has increased by over $500 billion each year since fiscal year 2003 with increases of $1 trillion in FY 2008, $1.9 trillion in FY 2009, and $1.7 trillion in FY 2010

• As of December 15, 2011 the gross debt was $15.098 trillion, total public debt outstanding at a ratio of 100% of GDP

• 40 percent of US government spending relies on borrowed money• For the 2011 fiscal year, expenditure was estimated at $3.82 trillion, with

expected revenues of $2.17 trillion, leaving a deficit of $1.48 trillion• Resort to extraordinary measures-declare a debt issuance suspension

period (May 16 to Aug 2)

Concerns• The large budget deficits and growing debt would continue, which would

reduce national saving, leading to higher interest rates, more borrowing from abroad, and less domestic investment — which in turn would lower income growth in the United States.

• The European sovereign debt crisis was occurring throughout 2010–2011, and there were concerns that the US was on the same trajectory

If Ceiling is not raised ?

• Failure to raise the nation's debt limit would constitute a default on US debt and precipitate a financial crisis

• US will fail to pay interest and/or principal on the national debt to bondholders, thereby defaulting on its sovereign debt

• Default would effectively impose a significant and long-lasting tax on all Americans and all American businesses and could lead to the loss of millions of American jobs

• Higher borrowing costs for the US government• Without increase in debt ceiling, US needed to cut roughly 40 percent of

all government payments, selectively defaulting on obligations, which would harm the reputation of the United States so severely that there is no guarantee that investors would continue to re-invest in new Treasury securities

• Also, It would leading to a corresponding fall in aggregate demand and effectively slower growth

Alternatives

• Oblige the government to cut spending by almost half• Issue platinum coins in any denomination, so it could solve the debt

ceiling crisis by simply issuing two platinum coins in denominations of $1 trillion each, depositing them into its account in the Federal Reserve

• Government should give the Federal Reserve an option to purchase government property for $2 trillion

• The government should consider getting rid of the limit altogether• The President could declare that the debt ceiling violates the

Constitution and issue an Executive Order to direct the Treasury to issue more debt

• Increase its gold certificate deposits at the Federal Reserve, which it could do because the market price of gold had increased

Steps Taken

• The immediate crisis ended when a complex deal was reached that raised the debt ceiling and reduced future government spending.

• Budget Control Act of 2011 :-– The debt limit was increased by $400 billion immediately– The agreement cut spending more than it increased the debt limit – $917 billion would be cut over 10 years in exchange for increasing the

initial debt limit by $900 billion.

• However, similar debates are anticipated for the 2012 and 2013 budget

Consequences

• The national debt rose $238 billion (or about 60% of the new debt ceiling) on August 3, the largest one-day increase in the history of the United States

• The US debt surpassed 100 percent of gross domestic product for the first time since World War II.

• The NASDAQ, ASX, and S&P 100 lost up to four percent in value• On August 5, the credit-rating agency Standard & Poor's downgraded the

credit rating of US government bond for the first time in the country's history

• The downgrade started a sell-off in every major stock market index around the world, threatening a stock market crash in the international markets

Future Ahead• Bush tax cuts (extended by Obama) will expire per current law in 2012• Reductions in Medicare reimbursement• Government spending would decline to the lowest percentage of GDP

since before World War II• Under this scenario, public debt rises from 69% of GDP in 2011 to 84% by

2035• Otherwise public debt will rise above 100% and approaches 190% by 2035• A high debt level may affect

– Inflation – Interest rates– Economic growth– Risk of devaluation – Encouraging challenges to dollar's role as the world's reserve currency