US Debt Crisis Presentation v1.1

8/4/2019 US Debt Crisis Presentation v1.1

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US DEBT Crisis and ITSIMPLICATIONS

Team:

Nagaraju Oruganti (D041)

Hemant Negi (D039)

Saurav Sharma (D056)

Subbareddy P (D039)


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It is now August and this

month the United Statesgovernment expects totake in about $170 billionin revenues.

Expenses willlikely total more than$300 billion; however, so

about $130 will have tobe raised by borrowing.


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Borrowing a normal thing?

That is normal.

The US government is deeply in debt more than $ 14 trillion and it borrows tomeet its debt obligations every month. There are usually more than enoughpeople willing to lend the US government money because it is seen as a verysafe investment.

What is not normal is that for the first time a substantial number ofRepublican lawmakers are not willing to allow the additional borrowing unlesshuge spending cuts without tax increases are agreed on. They have the power toforce spending cuts because of what is called the debt ceiling.


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US Treasury Department andRepublican lawmakers Periodically, the Congress authorizes the US Treasury Department to borrow

money up to a certain limit. That is the debt ceiling. In the past, whenever thedebt ceiling was reached, Congress simply voted to increase it. That hashappened dozens of times in the past without problems, but not this time.

The last election brought a large group of new Republican lawmakers into the USHouse of Representatives who were committed to forcing the governmentinto balancing its budget. They are refusing to support raising the debt ceilingunless their demands are met. Since the Republicans control the House ofRepresentatives, this threat has been taken very seriously.

This is a dangerous game, because if the debt ceiling is not raised very quickly,the US Treasury Department will run out of money and it will not be able to payits bills. This could result in financial panic throughout the world, because somany people around the world either receive payments from the US governmentor have lent it money.

It now looks likely that some sort of a compromise will be reached at the last


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What is the debt ceiling in US?

In the United States, the federal government can only pay for expenditures ifCongress has approved the expenditure. If the total expenditure exceeds therevenues collected there is a budget deficit, and the only way that the shortfallcan be paid for is for the government, through the Department of theTreasury, to borrow the shortfall amount by the issue of debt instruments. Underfederal law, the amount that the government can borrow is limited by the debt

ceiling, which can only be increased with a vote by Congress. Prior to 1917, Congress directly authorized the amount of each borrowing. In

1917, in order to provide more flexibility to finance the United States'involvement in World War I, Congress instituted the concept of a "debt ceiling".Since then, the Treasury may borrow any amount needed as long as it keeps thetotal at or below the authorized ceiling.

The process of setting the debt ceiling is separate and distinct from the regularprocess of financing government operations, and raising the debt ceiling does nothave any direct impact on the budget deficit. The US government passes afederal budget every year. This budget details projected tax collections andoutlays and, therefore, the amount of borrowing the government would have todo in that fiscal year. A vote to increase the debt ceiling is, therefore, usuallyseen as a formality, needed to continue spending that has already beenapproved previously by the Congress and the President.


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Causes of us debt Ceiling

Expansion of the housing bubble

This encouraged quite a few homeowners to refinance their homes at lowerinterest rates, and take out second mortgages secured by the price appreciation.Although this collection of money roughly doubled in amount, income generatinginvestments were not able to grow as fast..

Simple credit conditions

From 2000 to 2003, the Federal Reserve lowered the federal funds rate from6.5% to 1.0% to reduce the effects of the disintegration of the dot-com bubble.

These lower interest rates encouraged borrowing. The USA's high and rising current

account deficit further pressurized to lower the interest rates as US required toborrow money from overseas. This developed a demand for different types offinancial assets, thus raising the prices of those assets while reducing the interestrates.

Sub-prime lending2004-2006 saw a dramatic increase in U.S. Sub prime lending. Borrowers with


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Deregulation

Critics have debated that the regulatory framework did not keep up to the mark withfinancial advancements. The shadow banking system, derivatives and off-balance sheetfinancing were not given due importance. In many cases, laws were altered and enforcementmade weak in parts of the financial system. Regulators and accounting standard-setterspermitted the depository banks such as Citigroup to shift important amounts of assets and

liabilities off-balance sheet into complex legal entities. These were among the main causes ofAmerican debt crisis

Over-leveraging

During the years preceding the crisis, the U.S. households and financial institutionsbecame increasingly indebted and thus adding to their susceptibility to the collapse of thehousing bubble, this only led to worsen the following economic downturn. Reports reflect howthe free cash used by consumers from home equity extraction doubled from 2001 to 2005 asthe housing bubble expanded. This is looked upon as one of the several reasons for Americandebt crisis.

Complexity in financial modernizationUse of the financial innovations like the adjustable-rate mortgage, collateralized debt


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Predatory lending

Another of the reasons for Americandebt crisis was predatory lending, whichrefers to the practice of dishonestlenders, to enter into "risky" loans forimproper purposes. This resulted in

negative amortization, which the creditconsumer might not observe until longafter the loan transaction had been

accomplished. There is growing


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The United States has had public debt since its inception.

Debts incurred during the American Revolutionary War and under the Articles ofConfederation led to the first yearly report on the amount of the debt ($75,463,476.52on January 1, 1791).

Every president since Harry Truman has added to the national debt. The debt ceilinghas been raised 74 times since March 1962, including 18 times under Ronald Reagan,eight times under Bill Clinton, seven times under George W. Bush and three times (asof August 2011) under Barack Obama.


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Statistics and Figures of US Debt

Red lines indicate the Debt Held by the Public (net public debt) and blacklines indicate the Total Public Debt Outstanding (gross public debt). Thedifference between the two is the debt that is held by the federal governmentitself.


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Initially, nearly all Republican legislators (who held a majority in the House ofRepresentatives) opposed any increase in taxes and proposed large spendingcuts as part of the agreement to raise the debt ceiling.

A large majority ofDemocratic legislators (who held a majority in the Senate)favored tax increases along with smaller spending cuts

The immediate crisis ended on July 31, 2011, when a complex deal was reachedthat raised the debt ceiling and reduced future government spending. However,similar debates are anticipated for the 2012 and 2013 budget. After thelegislation was passed by both the House and Senate, President BarackObama signed the Budget Control Act of 2011 into law on August 2, theday of the deadline.


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Impact of this crisis on india


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Exports to USA

0

2

4

6

8

10

12

Indian Exports to the US(Crores)

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

76828 85368 83388 96458 92416 81884


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Impact on exports

US is the Indias leading export destination, so aslowdown in US will have an impact on Exports.

Indian exports will become uncompetitive because ofa stronger rupee against dollar.

Export driven industries like garments, handicraftsand leather may suffer badly.

IT sector can suffer depending on the Policies of US

Govt, as most of its revenues nearly 2/3 rd are fromUS clients.


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Shift in Trade pattern

India is exporting more to China and East Asiancountries where the effect of slow down is minimum.

It leads to robust infrastructure development andspurs the progress of special export zones.

Indian IT service providers are concentrating more ondomestic and Middle east markets.

Imports like crude oil will turn cheaper as dollar

depreciates and our subsidy bill can come downdrastically

Indian Government may Tax Sops to increase Exports.


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Impact on equity market


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Impact on equity market

Panic among Investors about a probable double diprecession has resulted in Stock Market Crash.

In near term we can see out flow of money investedby FII and FDI.

Stocks which are dependent on Exports will getimpacted in medium and long term depending on theappreciation of Rupee against Dollar.

In long term, we can expect Indian Stocks to reach totheir Pre-US Debt crisis levels.

Present situation can be treated as a buyingopportunity and investors can accumulate shares.


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Impact on gold


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Impact on gold

Flow of capital from all other avenues into GoldMarket as it is considered to The Most SafeInvestment.

In the long term, Depending on the growth Europeanand North American major economies, there can be ahuge correction in Gold prices.

Gold reserves has been increased to USD 500 croresdue to increase in value of gold by 20% .

India contains 8% of National Forex reserves in Goldand this may increase in future if dollar valuedepreciates.


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Impact on Forex Market


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Impact on Forex Market

Persistent demand for Dollar from oil refiners forimport payments added to the selling pressure onthe Rupee and FDI outflow have resulted in theweakening of Rupee.

in the medium run the RBI ( Reserve Bank of India)may step in to stabilize rupee by providingbackstop swap window for banks to equityoutflows.

In the Long term, Rupee will appreciate againstdollar if US Economy is not able to maintain itsgrowth trajectory.

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Growth in GDP will come down.

A default may push up borrowing costs and hencegovernment may cut spending and increase taxes.

Decrease in global trade due to protectionism

Increase in unemployment due to job losses inservice sector.

Slowdown in Agriculture sector due to impasse inimport of technology

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Inflation

Inflation in India has stayed above 9 percent since thestart of December, eroding spending power of people.

Softening crude prices in the International Market dueto Us debt Crisis will help in bringing down inflation.

If the inflation comes down, RBI can change themonetary policy by reducing REPO Rate and CRR tofuel growth.

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Impact on china

China has the world's largest foreign exchangereserves with about two-thirds estimated to be held indollars.

Although the agreement on the US debt ceiling hasreduced short-term risks for China, it has revealedsome long-term risks.

The main impact for China lies in the import andexport sectors which are closely related to theexchange rate against the dollar.

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Impact on china

Accelerated paceof Yuanappreciation is acause of concern.

As exportsaccount for a large

part of Chinese

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Impact on other countries

The U.S. Federal Reserve's policy of keeping interestrates near zero until 2013 will likely lead to higherglobal commodity prices

Weakness in the U.S. dollar will also hurt thepurchasing power of foreign exchange reserves

Economic slowdown due to protectionism, decrease inpurchasing power and cut in spending.

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Conclusion

Indian Economy is going to be affectedadversely in the short term, but depending onthe policies formulated, we can sustain growthof 8% around in the long term due to factorslike,

1. Inclusive Growth of economy.

2. Strong demand for consumption.

3. Robust Banking System.

4. Cautious and gradual liberalizationpolicy.

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THANKYOU

Documents

US Debt Crisis Presentation v1.1