Offering at HIS lotus feet

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US Debt Crisis2011

By Bhavesh .A Srinivas. K Sudheendra

Mohan

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THE US DEBT CRISIS - AN OVERVIEW

A DEBT CRISIS IS A VICIOUS CYCLE OF MOUNTING BORROWING AND INTEREST PAYMENT ON THEM.

US HAD BORROWED MONEY TO SERVICE ITS INTEREST Click to edit NOW MUST BORROW EARLIER,AND Master subtitle style FRESH TO SERVICE THAT LOAN.THIS GOES ON AND ON.

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WHAT DOES THIS DEBT LOOK LIKE? $100 - Most counterfeited money denomination in the world.

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$10,000- Approximately one year of work for the average human on earth.

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$1,000,000 - 92 years of work for the average human on earth.

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$100,000,000 - Fits nicely on an ISO / Military standard sized pallet.

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$1,000,000,000 - Now we are getting serious!

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$1,000,000,000,000 - If you spent $1 million a day since Jesus was born,still you would have not spent $1 trillion by now...

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 One Trillion Dollars in comparison to a standard sized American Football field and European Football field

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$15,000,000,000,000(15 trillion dollars) in comparison to statue of liberty. US national debt has passed 20% of the entire world's combined GDP

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$114,500,000,000,000(114.5 Trillion Dollars) - US unfunded liabilities.

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SUB-PRIME CRISIS : THE BEGINNING OF THE US DEBT CEILING CRISIS-2011

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Government response to the crisis: Federal Reserve

Lowers discount interest rate to near 0 $30 Billion for Bears Stearns buyout $200 Billion to nationalize Fannie and Freddie Buys most of AIG for $182 Billion (or $85B) -- covers investors who bought credit default swaps at full value. (2008-9) Buys $300 Billion of US Debt (monetizes the debt) Buys $1.25 Trillion in Mortgage-backed securities

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TARP: Troubled Asset Relief Program

$750 Billion Fall, 2008 (big issue in presidential campaign) Initial purpose: to buy toxic mortgage securities Instead: to buy the Banks themselves: AIG: $40B CITI $45B Bank of Am. $45B GM: $13.4B Chrysler: 4B

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American Recovery and Reinvestment Act of 2009 Stimulus Bill

Feb, 2009: $787 Billion Tax cuts: $288B Health Care: $144B (Medicaid and COBRA) Education: $90B Income assistance: $83B (unemployment, Food Stamps, Social Security bonus) Infrastructure\vehicles\energy $81B Homebuyers tax credit $8000 (until 4/30/10)

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DEBT CEILING

When total expenditures exceed total revenues there is a Budget Deficit The only way to cover up the short fall is to borrow the short fall amount through issuing debt instrumets The amount that the government can borrow is limited by debt ceiling which can be increased through vote.
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DIVISION OF US DEBT:
The United States public debt is the money borrowed by the federal government of the United States at any one time through the issue of securities by the Treasury and other federal government agencies. The US public debt consists of two components: Debt held by the public : Investors outside the federal government, including that held by investors, the Federal Reserve System and foreign, state and local governments. Intragovernment debt :comprises Treasury securities held in accounts4/15/12

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Debt limit to GDP History

WW II Civil War W WI

Iraq War

Since the inception of the U.S. Treasury in 1792 the level of U.S. debt as a percentage of GDP has risen significantly, and 4/15/12

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DEFICIT= $1.3 TRILLION

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INCOME STATEMENT-USA-2011-REVENUES & EXPENDITURES AT A GLANCE.

DEFICIT= $1.43 TRILLION 4/15/12

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Japan & China together hold around 46% of us debt.

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US DEBT DRIVERS
SHORT
q

TERM

LONG

TERM

ECONOMIC CRISIS:

q RAPID HEALTH CARE

(LOST REVENUE AND INCREASED SPENDING FROM AUTOMATIC STABILIZERS)

q

COST:
(CAUSING MEDICARE AND MEDIDINE COST TO GROW.)
q

ECONOMIC RESPONSE:
( STIMULUS SPENDING OF TAX BREAKS AND FINANCIAL SECTOR RESCUE POLICY)

POPULATION AGING:

(INC. SOCIAL SECURITY AND REVENUE TO FALL.)

q GROWING INTEREST

COSTS:
(FROM CONTINUAL DEBT ACCUMALATION)

TAX CUTS:
(IN 2001,2003 AND 2010)

q INSUFICIENT SAVINGS: 4/15/12

SHORT TERM DRIVERS

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MILITARY EXPENDITURES & WAR SPENDING : WORLD VS USA

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WAR SPENDING OF USA:SINCE2001

$1,250,087,800,000
WAR SPENDING IN AFGHANISTAN:
$474,740,000,000

WAR SPENDING IN IRAQ:

$795,350,000,000

INCREASING EVERYMINUTE BY $300,000

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Tax Hikes, Tax Cuts 1993 saw a tax hike on the wealthy (via two new brackets at the top), and then 2001 through 2003 saw a series of tax cuts that lowered the tax brackets as 1993 2003 2011 2013 follows: 1992 2001 2002
2000 2010 2012 (proposed) 10% 15% 28% 31% 15% 28% 31% 36% 39.6%

10% 15% 25% 28% 33% 35% 39.6% Same as 2010

10% 15% 25% 28% 36%

15% 27.5% 30.5% 35.5% 39.1%

15% 27% 30% 35% 38.6%

TAX CUTS REDUCED TAX RECEPITS THOUGH IT ENCOURAGES PEOPLE TO GENERATE MORE INCOME. THE TAX RECIPTS TO GDP RATIO HAVE REDUCED TO LEVELS BELOW THE 4/15/12

ECONOMIC CRISIS:
LOST REVENUE: DUE TO RECESSION THE PEOPLE LOSE THEIR JOBS AS WELL AS INCOMES ,SO INTURN NOT ABLE TO PAY TAXES GREATER SPENDING FROM AUTOMATIC STABILIZERS:Master subtitle style Click to edit AN $1BN INCREASE IN EXPENDITURE WOULD SHOW AS MORE THAN $1BN INCREASE IN EXPENDITURE DUE TO THE MULTIPLIER EFFECT.

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ECONOMIC RESPONSE
BAIL OUTS: Bears Stearns $30 Billion AIG $40B CITI $45B BOA $45B Click GM to edit Master subtitle style $13.4B Chrysler $4B

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LONG TERM DRIVERS OF THE DEBT

Click to edit Master subtitle style

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RISING INTEREST COSTS

Click to edit Master subtitle style

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RISING INTEREST RATES

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INSUFFICIENT SAVINGS :

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AGEING POPULATION

Median age 36.8 years (male: 35.5 years, female: 38.1 years, 2010 est.) Age structure USA INDIA Click years: Master subtitle style 0-14 to edit 20.2% 31.3% 1564 years: 67% 63.6% 65 years and over: 12.8 5.3%

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RISING HEALTH CARE COSTS :

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THE SOLUTION TO THIS MESS..

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MAKING MORE MONEY

Making More Money will lead to devaluation of dollar or in simpler terms lesser value of money leading to inflation. Increased taxes will lead to possible job losses and rise of unemployment and greater expense on unemployment and medical Benefits. Cutting expenses will slow down the recovery and interest on US debt could accumulate, leading to possibleedit Master subtitle style Click to default. Thus US is in a Catch-22 situation which may lead to double-dip recession incurred due to rise in inflation and slower Growth.

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The Agreement that saved the day

The US government avoided the default by making a deal with the opposing Republican members in the House of Representatives as it was granted to raise the debt ceiling by $900 billion provided they cut back on expenses of $1 trillion in next decade. Click to edit Master subtitle style

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What does it mean to rest of the world?

A

crisis there will effect the investments and thus development in other parts of the world as seen during the 2008 recession. If war expenses arent reduced, we must be ready for another storm. A recession-like situation in US would only take attention away from these key points. But then, US is still a favored destination for investors and if history can be trusted then US has thwarted bigger crisis before.
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LOBAL IMPACT OF US DEBT CRISIS

loss of investor confidence and liquidity of global financial markets

Slow growth in Master subtitle style which rely Click to edit countries such as India, heavily on the USA for financing.

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US being the largest consumer of oil,the debt crisis is likely to reduce crude oil prices.

This will ease inflationery pressure on developing countries a good sign for businesses.

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Steady appreciation of currencies of emerging economies against USD.Expected to enhance their export competitiveness.

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Plummeting consumer confidence.

Consumer expenditure in US will remain stagnant at $10.1trillion at the end of 2011.Same as it was in 2010.
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A possible worsening of the EU debt situation. The downgrade of infallible US", highlights the mess the heavily indebted economies of PIGS are in.

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The fall of US may force many economies who export to US to diversify trade and increase regional trade.

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Likelihood of default
2ND august set as a deadline by US treasury for cutting spending or increasing taxes. US reached its debt limit set by congress in march2011. Its managed since then without borrowing due to higher than expected tax receipts. US manage to continue meeting its debt payments by stopping paymentsubtitle style Click to edit Master to federal employees

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IMPACT OF CURRENT CRISIS

Only US & UK have never committed a sovereign default. Hence US will avoid default at any cost. US credit rating will be downgraded if it cant induce long term cuts in spending or increase in taxes to the order of $5trn. This will lead to higher interest payments on existing debts. Euro, Yen & Sterling have their own problems and hence this edit Master subtitle style Click to fact helps US dollar to stay afloat.

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IMPACT OF CURRENT CRISIS: (CONTD.)

Investment Grade and High Yield Credit would likely experience a widening in spreads, as investors anticipate another economic downturn and spike in default rates Volatility may increase as investors seek to reposition their portfolios to avoid significant loss of capital China and Japan hold 46% of total U.S. debt, and should they start selling U.S. treasuries, this could add upward pressure on interest rates and raise the cost of borrowing for the U.S. 4/15/12

CONCLUSION
US is highly unlikely to default. Will continue paying interest by hook or crook US will definitely have its credit rating cut.. (S&P already did it in august)..but much of the impact of this has already been priced in as US treasury is paying AA level interest on new debts. Biggest impact will be on $ as it will lose its credibility as a reserve currency.

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