1. THE UNITED STATES
OF
AMERICA
Group 4, SECTION B
11DM-094 Nitesh Goyal
11DM-098 Pallavi Kumar
11DM-127 Rohan Aggarwal
11FN-099 Shobhit Singh
11IB-033 Manoj Singh
11IB-053 Saurabh Bansal
2. 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
3. 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.
4. 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)
5. 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.
6. 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
7. 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).
9. • 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
10. • 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.
11. 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.
12. 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
13.
14.
15. Economic Crisis 2007-09
• Considered worst financial crisis since the
great depression of 1930
• Period – December 2007 to June 2009
16. Origin of Crisis
• From 2000-2003, federal interest rates
reduced from 6.5% to 1%
17. • 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
18. 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.
19. 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
20. 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)
22. • Sharp drop in international trade
Increase in unemployment
23. Policies used to recover
r
Y
(1) Capital injection by LM
governments
i1
Due to this
LM Curve shifts to right IS
Y increases & I decreases Y1
24. Policies used to recover
r
Y
(2) Enacted large fiscal LM1 LM2
stimulus package
i1
Due to this
i2
IS Curve shifts to right IS
Y increases & I increases Y1 Y2 Y3
25. r
LM1
LM2
i1
IS2
Due to this IS1
IS Curve shifts to right
Y increases & I increases Y1 Y3 Y
26. Effects of US Monetary Policies
• Excessive Money Supply
• Huge US trade deficit
• Dollar volatility
• Public deficits
27. 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.
28. 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.
29. 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)
30. 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
31. 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
32. 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)
33. 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
34. 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
35. 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
36. 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
37. 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
38. 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
