Economic Crisis
-
Upload
josephindyna -
Category
Documents
-
view
220 -
download
0
Transcript of Economic Crisis
ECONOMIC CRISIS IN USA AND EUROZONEREASONS AND SOLUTIONS
INTRODUCTION:The term economic crisis is applied broadly to a variety of situations in which some financial
assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries,
many financial crises were associated with banking panics, and many recessions coincided with
these panics. Other situations that are often called financial crises include stock market crashes
and the bursting of other financial bubbles, currency crises, and sovereign defaults. Financial
crises directly result in a loss of paper wealth but do not necessarily result in changes in the real
economy.
Negative GDP growth lasting two or more quarters is called a recession. An especially
prolonged or severe recession may be called a depression, while a long period of slow but not
necessarily negative growth is sometimes called economic stagnation. Some economists argue
that many recessions have been caused in large part by financial crises. One important example is
the Great Depression, which was preceded in many countries by bank runs and stock market
crashes. The subprime mortgage crisis and the bursting of other real estate bubbles around the
world also led to recession in the U.S. and a number of other countries in late 2008 and 2009.
Some economists argue that financial crises are caused by recessions instead of the other
way around, and that even where a financial crisis is the initial shock that sets off a recession,
other factors may be more important in prolonging the recession. In particular, Milton Friedman
and Anna Schwartz argued that the initial economic decline associated with the crash of 1929 and
the bank panics of the 1930s would not have turned into a prolonged depression if it had not been
reinforced by monetary policy mistakes on the part of the Federal Reserve.
Common Causes and consequences of financial crisis:1. Strategic complementarities in financial markets:
It is often observed that successful investment requires each investor in a financial market to
guess what other investors will do. In many cases investors have incentives to coordinate their
choices. For example, someone who thinks other investors want to buy lots of Japanese yen may
expect the yen to rise in value, and therefore has an incentive to buy yen too. Economists call an
incentive to mimic the strategies of others strategic complementarity.
2. Leverage:
Leverage, means borrowing to finance investments, is frequently cited as a contributor to
financial crises. When a financial institution (or an individual) only invests its own money, it can,
in the very worst case, lose its own money. But when it borrows in order to invest more, it can
potentially earn more from its investment, but it can also lose more than all it has. Therefore
leverage magnifies the potential returns from investment, but also creates a risk of bankruptcy.
Since bankruptcy means that a firm fails to honour all its promised payments to other firms, it
may spread financial troubles from one firm to another. The average degree of leverage in the
economy often rises prior to a financial crisis.
3. Asset-liability mismatch:
Another factor believed to contribute to financial crises is asset-liability mismatch, a
situation in which the risks associated with an institution's debts and assets are not appropriately
aligned. For example, commercial banks offer deposit accounts which can be withdrawn at any
time and they use the proceeds to make long-term loans to businesses and homeowners. The
mismatch between the banks' short-term liabilities (its deposits) and its long-term assets (its
loans) is seen as one of the reasons bank runs occur (when depositors panic and decide to
withdraw their funds more quickly than the bank can get back the proceeds of its loans). In an
international context, many emerging market governments are unable to sell bonds denominated
in their own currencies, and therefore sell bonds denominated in US dollars instead. This
generates a mismatch between the currency denomination of their liabilities (their bonds) and
their assets (their local tax revenues), so that they run a risk of sovereign default due to
fluctuations in exchange rates.
4. Uncertainty and herd behavior:
Many analyses of financial crises emphasize the role of investment mistakes caused by lack
of knowledge or the imperfections of human reasoning. Behavioral finance studies errors in
economic and quantitative reasoning. Historians, notably Charles P. Kindleberger, have pointed
out that crises often follow soon after major financial or technical innovations that present
investors with new types of financial opportunities, which he called "displacements" of investors'
expectations. Early examples include the South Sea Bubble and Mississippi Bubble of 1720,
which occurred when the notion of investment in shares of company stock was itself new and
unfamiliar, and the Crash of 1929, which followed the introduction of new electrical and
transportation technologies. More recently, many financial crises followed changes in the
investment environment brought about by financial deregulation, and the crash of the dot com
bubble in 2001 arguably began with "irrational exuberance" about Internet technology.
5. Regulatory failures
Governments have attempted to eliminate or mitigate financial crises by regulating the
financial sector. One major goal of regulation is transparency: making institutions' financial
situations publicly known by requiring regular reporting under standardized accounting
procedures. Another goal of regulation is making sure institutions have sufficient assets to meet
their contractual obligations, through reserve requirements, capital requirements, and other limits
on leverage.
6. Contagion
Contagion refers to the idea that financial crises may spread from one institution to another,
as when a bank run spreads from a few banks to many others, or from one country to another, as
when currency crises, sovereign defaults, or stock market crashes spread across countries. When
the failure of one particular financial institution threatens the stability of many other institutions,
this is called systemic risk.
One widely cited example of contagion was the spread of the Thai crisis in 1997 to other
countries like South Korea. However, economists often debate whether observing crises in many
countries around the same time is truly caused by contagion from one market to another, or
whether it is instead caused by similar underlying problems that would have affected each
country individually even in the absence of international linkages.
7. Recessionary effects
Some financial crises have little effect outside of the financial sector, like the Wall Street
crash of 1987, but other crises are believed to have played a role in decreasing growth in the rest
of the economy. There are many theories why a financial crisis could have a recessionary effect
on the rest of the economy. These theoretical ideas include the 'financial accelerator', 'flight to
quality' and 'flight to liquidity', and the Kiyotaki-Moore model. Some 'third generation' models of
currency crises explore how currency crises and banking crises together can cause recessions.
List of recessions in the United StatesIn the United States, the unofficial beginning and ending dates of national recessions have
been defined by an American private nonprofit research organization known as the National
Bureau of Economic Research (NBER). The NBER defines a recession as "a significant decline
in economic activity spread across the economy, lasting more than a few months, normally
visible in real gross domestic product (GDP), real income, employment, industrial production,
and wholesale-retail sales".
There have been as many as 47 recessions in the United States since 1790 (although
economists and historians dispute certain 19th-century recessions). Cycles in agriculture,
consumption, and business investment, and the health of the banking industry also contribute to
these declines. U.S. recessions have increasingly affected economies on a worldwide scale,
especially as countries' economies become more intertwined.
Early recessions and crises
Attempts have been made to date recessions in America beginning in 1790. These periods of
recession were not identified until the 1920s. To construct the dates, researchers studied business
annals during the period and constructed time series of the data. The earliest recessions for which
there is the most certainty are those that coincide with major financial crises.
Name Characteristics
Copper Panic of
1789
Loss of confidence in copper coins due to debasement and counterfeiting led to
commercial freeze up that halted the economy of several northern States and was not
alleviated until the introduction of new paper money to restore confidence.
Panic of 1797
Just as a land speculation bubble was bursting, deflation from the Bank of
England (which was facing insolvency because of the cost of Great Britain's
involvement in the French Revolutionary Wars) crossed to North America and
disrupted commercial and real estate markets in the United States and the Caribbean,
and caused a major financial panic. Prosperity continued in the south, but economic
activity was stagnant in the north for three years. The young United States engaged in
the Quasi-War with France.
1802–1804 A boom of war-time activity led to a decline after the Peace of Amiens ended the war
Name Characteristics
recessionbetween the United Kingdom and France. Commodity prices fell dramatically. Trade
was disrupted by pirates, leading to the First Barbary War.
Depression of
1807
The Embargo Act of 1807 was passed by the United States Congress under
President Thomas Jefferson as tensions increased with the United Kingdom. Along
with trade restrictions imposed by the British, shipping-related industries were hard
hit. The Federalists fought the embargo and allowed smuggling to take place in New
England. Trade volumes, commodity prices and securities prices all began to
fall. Macon's Bill Number 2 ended the embargoes in May 1810, and a recovery
started.
1812 recession
The United States entered a brief recession at the beginning of 1812. The decline was
brief primarily because the United States soon increased production to fight the War
of 1812, which began June 18, 1812.
1815–21
depression
Shortly after the war ended on March 23, 1815, the United States entered a period of
financial panic as bank notes rapidly depreciated because of inflation following the
war. The 1815 panic was followed by several years of mild depression, and then a
major financial crisis – the Panic of 1819, which featured widespread foreclosures,
bank failures, unemployment, a collapse in real estate prices, and a slump
in agriculture and manufacturing.
1822–1823
recession
After only a mild recovery following the lengthy 1815–21 depression, commodity
prices hit a peak in March 1822 and began to fall. Many businesses failed,
unemployment rose and an increase in imports worsened the trade balance.
1825–1826
recession
The Panic of 1825, a stock crash following a bubble of speculative investments in
Latin America led to a decline in business activity in the United States and England.
The recession coincided with a major panic, the date of which may be more easily
determined than general cycle changes associated with other recessions.
Name Characteristics
1828–1829
recession
In 1826, England forbade the United States to trade with English colonies, and in
1827, the United States adopted a counter-prohibition. Trade declined, just as credit
became tight for manufacturers in New England.
1833–34
recession
The United States' economy declined moderately in 1833–34. News accounts of the
time confirm the slowdown. The subsequent expansion was driven by land
speculation.
Free Banking Era to the Great Depression
In the 1830s, U.S. President Andrew Jackson fought to end the Second Bank of the United
States. Following the Bank War, the Second Bank lost its charter in 1836. From 1837 to 1862,
there was no national presence in banking, but still plenty of state and even local regulation, such
as laws against branch banking which prevented diversification. In 1863, in response to financing
pressures of the Civil War, Congress passed the National Banking Act, creating nationally
chartered banks. There was neither a central bank nor deposit insurance during this era, and thus
banking panics were common. Recessions often led to bank panics and financial crises, which in
turn worsened the recession.
Name Characteristics
1836–1838
recession
A sharp downturn in the American economy was caused by bank failures and
lack of confidence in the paper currency. Speculation markets were greatly
affected when American banks stopped payment in specie (gold and silver
coinage). Over 600 banks failed in this period. In the South, the cotton market
completely collapsed.
Name Characteristics
late 1839–late
1843 recession
This was one of the longest and deepest depressions. It was a period of
pronounced deflation and massive default on debt. The Cleveland Trust
Company Index showed the economy spent 68 months below its trend and only
9 months above it. The Index declined 34.3% during this depression.
1845–late 1846
recession
This recession was mild enough that it may have only been a slowdown in the
growth cycle. One theory holds that this would have been a recession, except
the United States began to gear up for the Mexican–American War, which
began April 25, 1846.
1847–48
recession
The Cleveland Trust Company Index declined 19.7% during 1847 and 1848. It
is associated with a financial crisis in Great Britain.
1853–54
recession
Interest rates rose in this period, contributing to a decrease in railroad
investment. Security prices fell during this period. With the exception of falling
business investment there is little evidence of contraction in this period.
Panic of 1857
Failure of the Ohio Life Insurance and Trust Company burst a European
speculative bubble in United States' railroads and caused a loss of confidence
in American banks. Over 5,000 businesses failed within the first year of the
Panic, and unemployment was accompanied by protest meetings in urban areas.
This is the earliest recession to which the NBER assigns specific months (rather
than years) for the peak and trough.
1860–61
recession
There was a recession before the American Civil War, which began April 12,
1861. Zarnowitz says the data generally show a contraction occurred in this
period, but it was quite mild. A financial panic was narrowly averted in 1860 by
the first use of clearing house certificates between banks.
1865–67
recession
The American Civil War ended in April 1865, and the country entered a lengthy
period of general deflation that lasted until 1896. The United States
occasionally experienced periods of recession during the Reconstruction era.
Production increased in the years following the Civil War, but the country still
had financial difficulties. The post-war period coincided with a period of
Name Characteristics
some international financial instability.
1869–70
recession
A few years after the Civil War, a short recession occurred. It was unusual since
it came amid a period when railroad investment was greatly accelerating, even
producing the First Transcontinental Railroad. The railroads built in this period
opened up the interior of the country, giving birth to the Farmers' movement.
The recession may be explained partly by ongoing financial difficulties
following the war, which discouraged businesses from building up
inventories. Several months into the recession, there was a major financial
panic.
Panic of
1873and the
Long
Depression
Economic problems in Europe prompted the failure of Jay Cooke & Company,
the largest bank in the United States, which burst the post-Civil War speculative
bubble. The Coinage Act of 1873 also contributed by immediately depressing
the price of silver, which hurt North American mining interests. The deflation
and wage cuts of the era led to labor turmoil, such as the Great Railroad Strike
of 1877. In 1879, the United States returned to the gold standard with
the Specie Payment Resumption Act. This is the longest period of economic
contraction recognized by the NBER. The Long Depression is sometimes held
to be the entire period from 1873–96.
1882–85
recession
Like the Long Depression that preceded it, the recession of 1882–85 was more
of a price depression than a production depression. From 1879 to 1882, there
had been a boom in railroad construction which came to an end, resulting in a
decline in both railroad construction and in related industries, particularly iron
and steel. A major economic event during the recession was the Panic of 1884.
1887–88
recession
Investments in railroads and buildings weakened during this period. This
slowdown was so mild that it is not always considered a recession.
Contemporary accounts apparently indicate it was considered a slight recession.
1890–91
recession
Although shorter than the recession in 1887–88 and still modest, a slowdown in
1890–91 was somewhat more pronounced than the preceding recession.
Name Characteristics
International monetary disturbances are blamed for this recession, such as
the Panic of 1890in the United Kingdom.
Panic of 1893
Failure of the United States Reading Railroad and withdrawal of European
investment led to a stock market and banking collapse. This Panic was also
precipitated in part by a run on the gold supply. The Treasury had to issue bonds
to purchase enough gold. Profits, investment and income all fell, leading to
political instability, the height of the U.S. populist movement and the Free
Silver movement.
Panic of 1896
The period of 1893–97 is seen as a generally depressed cycle that had a short
spurt of growth in the middle, following the Panic of 1893. Production shrank
and deflation reigned.
1899–1900
recession
This was a mild recession in the period of general growth beginning after 1897.
Evidence for a recession in this period does not show up in some annual data
series.
1902–04
recession
Though not severe, this downturn lasted for nearly two years and saw a distinct
decline in the national product. Industrial and commercial production both
declined, albeit fairly modestly. The recession came about a year after a 1901
stock crash.
Panic of 1907
A run on Knickerbocker Trust Company deposits on October 22, 1907, set
events in motion that would lead to a severe monetary contraction. The fallout
from the panic led to Congress creating the Federal Reserve System.
Panic of 1910–
1911
This was a mild but lengthy recession. The national product grew by less than
1%, and commercial activity and industrial activity declined. The period was
also marked by deflation.
Recession of
1913–1914
Productions and real income declined during this period and were not offset
until the start of World War I increased demand. Incidentally, the Federal
Reserve Act was signed during this recession, creating the Federal Reserve
Name Characteristics
System, the culmination of a sequence of events following the Panic of 1907.
Post-World
War I recession
Severe hyperinflation in Europe took place over production in North America.
This was a brief but very sharp recession and was caused by the end of wartime
production, along with an influx of labor from returning troops. This, in turn,
caused high unemployment.
Depression of
1920–21
The 1921 recession began a mere 10 months after the post-World War I
recession, as the economy continued working through the shift to a peacetime
economy. The recession was short, but extremely painful. The year 1920 was
the single most deflationary year in American history; production, however, did
not fall as much as might be expected from the deflation. GNP may have
declined between 2.5 and 7 percent, even as wholesale prices declined by
36.8%. The economy had a strong recovery following the recession.
1923–24
recession
From the depression of 1920–21 until the Great Depression, an era dubbed
the Roaring Twenties, the economy was generally expanding. Industrial
production declined in 1923–24, but on the whole this was a mild recession.
1926–27
recession
This was an unusual and mild recession, thought to be caused largely
because Henry Ford closed production in his factories for six months to switch
from production of the Model T to the Model A. Charles P. Kindleberger says
the period from 1925 to the start of the Great Depression is best thought of as a
boom, and this minor recession just proof that the boom "was not general,
uninterrupted or extensive".
Great Depression onward
Recessions may be viewed as undesirable, some people benefit from them. Modern
recessions tend to create monetary winners and losers by rapidly shifting assets. Recessions harm
middle-class and lower earners the most, and upper earners may lose small businesses and have
greater assets at risk. But wealthy individuals and cash-rich companies can benefit dramatically
from the results of a recession by buying commercial properties at tremendous discounts and
waiting just a few years for property values to return, multiplying their wealth. Large
corporations benefit by eliminating or absorbing competitors and by trimming labor and other
costs. The overall result is a transfer of assets from the general populace to the wealthy.
Following the end of World War II and the large adjustment as the economy adjusted from
wartime to peacetime in 1945, the collection of many economic indicators, such as
unemployment and GDP, became standardized. Recessions after World War II may be compared
to each other much more easily than previous recessions because of these available data.
NameGDP
declineCharacteristics
Great
Depression
Aug 1929 –
Mar 1933
−26.7%
Stock markets crashed worldwide. A banking collapse took place in
the United States. Extensive new tariffs and other factors contributed
to an extremely deep depression. The United States did remain in a
depression until World War II. In 1936, unemployment fell to 16.9%,
but later returned to 19% in 1938 (near 1933 levels).
Recession of
1937–1938−18.2%
The Recession of 1937 is only considered minor when compared to
the Great Depression, but is otherwise among the worst recessions of
the 20th century. Three explanations are offered for the recession: that
tight fiscal policy from an attempt to balance the budget after the
expansion of the New Deal caused recession, that tight monetary
policy from the Federal Reserve caused the recession, or that
declining profits for businesses led to a reduction in investment.
Recession of
1945−12.7%
The decline in government spending at the end of World War II led to
an enormous drop in gross domestic product, making this technically
a recession. This was the result of demobilization and the shift from a
wartime to peacetime economy. The post-war years were unusual in a
number of ways (unemployment was never high) and this era may be
considered a "sui generis end-of-the-war recession".
Recession of
1949
−1.7% The 1948 recession was a brief economic downturn; forecasters of the
time expected much worse, perhaps influenced by the poor economy
in their recent lifetimes. The recession also followed a period of
NameGDP
declineCharacteristics
monetary tightening.
Recession of
1953−2.6%
After a post-Korean War inflationary period, more funds were
transferred to national security. In 1951, the Federal
Reserve reasserted its independence from the U.S. Treasury and in
1952, the Federal Reserve changed monetary policy to be more
restrictive because of fears of further inflation or of a bubble forming.
Recession of
1958−3.7%
Monetary policy was tightened during the two years preceding 1957,
followed by an easing of policy at the end of 1957. The budget
balance resulted in a change in budget surplus of 0.8% of GDP in
1957 to a budget deficit of 0.6% of GDP in 1958, and then to 2.6% of
GDP in 1959.
Recession of
1960–61−1.6%
Another primarily monetary recession occurred after the Federal
Reserve began raising interest rates in 1959. The government
switched from deficit (or 2.6% in 1959) to surplus (of 0.1% in 1960).
When the economy emerged from this short recession, it began the
second-longest period of growth in NBER history. The Dow Jones
Industrial Average (Dow) finally reached its lowest point on Feb. 20,
1961, about 4 weeks after President Kennedy was inaugurated.
Recession of
1969–70−0.6%
The relatively mild 1969 recession followed a lengthy expansion. At
the end of the expansion, inflation was rising, possibly a result of
increased deficits. This relatively mild recession coincided with an
attempt to start closing the budget deficits of the Vietnam War (fiscal
tightening) and the Federal Reserve raising interest rates (monetary
tightening).
1973–75
recession
−3.2% A quadrupling of oil prices by OPEC coupled with high government
spending because of the Vietnam War led to stagflation in the United
States. The period was also marked by the 1973 oil crisis and
NameGDP
declineCharacteristics
the 1973–1974 stock market crash. The period is remarkable for rising
unemployment coinciding with rising inflation.
1980
recession−2.2%
The NBER considers a very short recession to have occurred in 1980,
followed by a short period of growth and then a deep recession.
Unemployment remained relatively elevated in between recessions.
The recession began as the Federal Reserve, under Paul Volcker,
raised interest rates dramatically to fight the inflation of the 1970s.
The early '80s are sometimes referred to as a "double-dip" or "W-
shaped" recession.
Early 1980s
recession−2.7%
The Iranian Revolution sharply increased the price of oil around the
world in 1979, causing the 1979 energy crisis. This was caused by the
new regime in power in Iran, which exported oil at inconsistent
intervals and at a lower volume, forcing prices up. Tight monetary
policy in the United States to control inflation led to another
recession. The changes were made largely because of inflation carried
over from the previous decade because of the 1973 oil crisis and the
1979 energy crisis.
Early 1990s
recession−1.4%
After the lengthy peacetime expansion of the 1980s, inflation began to
increase and the Federal Reserve responded by raising interest rates
from 1986 to 1989. This weakened but did not stop growth, but some
combination of the subsequent 1990 oil price shock, the debt
accumulation of the 1980s, and growing consumer pessimism
combined with the weakened economy to produce a brief recession.
Early 2000s
recession
−0.3% The 1990s were the longest period of growth in American history. The
collapse of the speculative dot-com bubble, a fall in business outlays
and investments, and the September 11th attacks, brought the decade
of growth to an end. Despite these major shocks, the recession was
NameGDP
declineCharacteristics
brief and shallow. Without the September 11th attacks, the economy
might have avoided recession altogether.
The U.S. economic crisis
United States debt-ceiling crisis of 2013The 2013 United States debt-ceiling crisis is part of an ongoing political debate in the United
States Congress about federal government spending, the national debt and debt ceiling. The 2013
crisis began in January 2013 and ended on October 17, 2013 with the passing of the Continuing
Appropriations Act, 2014, though the debate continues.
After the passing in early January 2013, the American Taxpayer Relief Act of 2012 to avert
the projected fiscal cliff, political attention shifted to the debt ceiling. The debt ceiling had
technically been reached on December 31, 2012, when the Treasury Department commenced
"extraordinary measures" to enable the continued financing of the government.
The debt ceiling is part of a law (Title 31 of the United States Code, section 3101) created by
Congress. According to the Government Accountability Office, "The debt limit does not control
or limit the ability of the federal government to run deficits or incur obligations. Rather, it is a
limit on the ability to pay obligations already incurred." It does not prohibit Congress from
creating further obligations upon the United States. The ceiling was last set at $16.4 trillion in
2011.
On January 15, 2013, Fitch Ratings warned that delays in raising the debt ceiling could result
in a formal review of its credit rating of the U.S., potentially leading to it being downgraded from
AAA. Fitch cautioned that a downgrade could also result from the absence of a plan to bring
down the deficit in the medium term. Additionally, the company stated that "In Fitch's opinion,
the debt ceiling is an ineffective and potentially dangerous mechanism for enforcing fiscal
discipline."
Debt ceiling suspension
In mid-January, Paul Ryan, Chairman of the House Budget Committee, floated the idea of a
short-term debt ceiling increase. He argued that giving Treasury enough borrowing power to
postpone default until mid-March would allow Republicans to gain an advantage over Obama
and Democrats in debt ceiling negotiations. This advantage would be due to the fact that
postponing default until mid-March would allow for a triple deadline to be in March:
the sequester on March 1, the default in the middle of the month, and the expiration of the
current continuing resolution and the resulting federal government shutdown on March 27. This
was supposed to provide extra pressure on the Senate and the President to work out a deal with
the Republican-led House.
Shortly after that, the House learned that the Senate had not passed an independent budget
plan since April 2009. House Republicans quickly came up with an idea that would suspend the
debt ceiling enough to allow time for both chambers of Congress to pass a budget.
On February 4, 2013, President Obama signed into law the "No Budget, No Pay Act of
2013", which suspended the U.S. debt ceiling through May 18, 2013. The bill was passed in the
Senate one week previously by a vote of 64-34, with all "no" votes from Republican
senators, who were critical of the lack of spending cuts that accompanied an increase in the limit.
In the House, the bill passed the week before by a vote of 285-144, with both parties voting in
favor. In the House a provision was attached by Republican representatives that mandates the
temporary withholding of pay to members of Congress if they do not produce a budget plan by
April 15. Pay would be reinstated once a budget was passed or on January 2, 2015, whichever
came first. Under the law, the debt ceiling would be set on May 19, 2013 to a level "necessary to
fund commitment incurred by the Federal Government that required payment."
Developments during suspension
On March 1, the sequester, cutting $1.2 trillion over the next decade, went into effect after
the parties failed to reach a deal. On March 21, the House passed a FY 2014 budget that would
balance the United States budget in 2023. This was a shorter period than envisaged in their 2013
budget, which balanced in 2035, and the 2012 budget, which balanced in 2063. It passed the
House on a mostly party-line 221-207 vote. However, later that day, the Senate voted 59-40 to
reject the House Republican budget. On March 23, the Senate passed its own 2014 budget on a
50-49 vote. The House refused to hold a vote on the Senate budget. On April 10, the President
released his own 2014 budget, which was not voted on in either house of Congress. Throughout
March and April, there were several developments that reduced the sequester's impact. The bill
that extended the government's continuing resolution to September 30 lessened the sequester's
effect on defense, and later bills removed furloughs for air traffic control and food service
industries.
Debt ceiling reached again
On May 19, the debt ceiling was reinstated at just under $16.7 trillion to reflect borrowing
during the suspension period. As there was no provision made for further commitments after the
ceiling's reinstatement, Treasury began applying extraordinary measures once again.
Despite earlier estimates of late July, Treasury announced that default would not happen "until
sometime after Labor Day". Other organizations, including the Congressional Budget
Office (CBO), projected exhaustion of the extraordinary measures in October or possibly
November.
On August 26, 2013, Treasury informed Congress that if the debt ceiling was not raised in
time, the United States would be forced to default on its debt sometime in mid-October.
On September 25, Treasury announced that extraordinary measures would be exhausted no later
than October 17, leaving Treasury with about $30 billion in cash, plus incoming revenue, but no
ability to borrow money. The CBO estimated that the exact date on which Treasury would have
had to begin prioritizing/delaying bills and/or actually defaulting on some obligations would fall
between October 22 and November 1.
Resolution
On October 16, the Senate passed the Continuing Appropriations Act, 2014, a continuing
resolution, to fund the government until January 15, 2014, and suspending the debt ceiling until
February 7, 2014, thus ending both the United States federal government shutdown of 2013 and
the United States debt-ceiling crisis of 2013.
It set up a House-Senate budget conference to negotiate a long-term spending agreement, and
strengthened income verification for subsidies under the Patient Protection and Affordable Care
Act. The Senate vote was 81-18 in favor, with 1 member absent due to illness. The House passed
the bill unamended later that day, by a vote of 285-144, with 3 members absent due to illness.
The President signed the bill early the next morning on October 17. Under the resolution, the
debt ceiling debate and partial government shutdown were postponed, with federal workers
returning to work on October 17.
On January 14, 2014, the House and the Senate Appropriations Committees agreed on a
spending plan that would fund the federal government for two years. A bill extending the
previous continuing resolution through January 18 was also passed. On January 16, 2014,
Congress passed a $1.1 trillion appropriations bill that will keep the federal government funded
until October 2014. President Obama signed the appropriations bill into law on January 18.
On February 7, 2014, the debt limit suspension expired and treasury began applying
extraordinary measures once again, warning that such measures would not last beyond February
27 due to large tax refunds that would need to paid during February. On February 11th, after
finding insufficient support for various conditions for increasing the debt ceiling, the house
passed a bill suspending the debt ceiling without conditions through March 15, 2015. The senate
passed the bill unamended on February 12, 2014, and it was signed by the president on February
15th.
Three Solutions To The Debt Crisis That Don’t Require Raising The Debt Ceiling
Based on the following premises:
1. The national debt is not an obligation to pay value; it is an obligation to pay money.
2. The government has the authority to create unlimited money out of thin air. The Federal
Reserve was created by the government, and derives its authority to create unlimited money from
the government.
3. The government can make, change or ignore any rule they want as long as they declare
national security.
There are at least three ways for congress to “pay their bills on time” and not become “a
deadbeat nation” that don’t require borrowing any more money and would spare the American
people another crisis over the debt ceiling.
Inflation without negative consequences
“Inflation is bad because it raises the price of goods and services”, but the price increase is
offset by the fact that there’s more money available to buy these goods and services in the first
place. “But inflation is bad because it devalues the money!” but there’s more devalued money
than there was before, so the overall value in the economy stays the same. It’s called equilibrium.
Inflation with positive effects
It may be difficult to know how much money to send everybody if you don’t have a way of
knowing exactly how much they have. But if you have a rough idea of how many dollars there
are in existence, then it would be easy to think of everybody as a single sum of money for the
purposes of the formula, then divide the result by the number of people and pay everyone that
same amount.
Debt forgiveness via National Security
If the government became insolvent during an economic depression and could no longer pay
welfare and social security, the American people might become so poor and hungry that it might
cause riots, which would make us vulnerable to terrorism. Therefore, if the government can
declare national security to override the Constitution, then the government can also declare
national security to forgive their own debt.
Hence it can be said that the government has other choices. They don’t have to increase the
national debt in order to avoid default. They want to raise the national debt and they’re using
default as an excuse. It is never in anybody’s interest to owe somebody else if it can be helped,
because the borrower becomes servant to the lender. Therefore the national debt, and the
government’s inevitable default, is both proof of the infiltration.
POSSIBLE SOLUTIONS:
Reversing the Trend: Some Suggestions for Action
Access to markets must be conditioned on a strategic analysis of our own national needs first
and foremost. As things stand, sovereign rights to be handed to domestic markets to international
bodies like the World Trade Organization and are committed to disastrous “one-way free trade”
agreements such as Value Added Tax regulations and NAFTA. We are in a dramatically different
position from emerging low-wage markets. The policies should carefully protect the wealth and
resources rather than simply provide the lowest consumer cost regardless of the impact on the
industries and workers. Promoting open markets and economic growth abroad will not alone
rebalance America’s trade accounts and domestic industrial collapse. Our industries have been so
disarmed and dismantled and hence now there is a lack of knowledge, capacity, and investment
capital to facilitate self -sustaining production.
Key Solutions
Drastic action is needed to restore the economic and financial independence and must begin
immediately to rebuild industries. The first essential is that government should ensure that it is
once again profitable to produce most goods and services in American factories employing
American workers. Policies must be established that prevent other countries from hindrances to
US. The sale of key assets to foreign entities has to be halted. It is also a must to close
opportunities for foreign corporations to compete unfairly against the homeindustries.
Immediate move to curb out-of -control spending on unnecessary programs and initiatives
that are being financed by foreign debt is also necessary. Instituting policies to cut back
consumption and particularly consumption of imported products are to be considered. Individuals
and companies are to be allowed to make profit by selling out the United States.
The stimulation for new policies must come directly from the broad American public. Voters
must use all reasonable methods to pressure elected officials. Without direct and immediate
action, there will soon be little left to save.
Defense
Industries, assets, resources, and companies need to be protected from foreign countries and
corporations seeking to gain control of key industrial processes and technologies. This would
include preventing the sale of strategic US domestic companies to foreign companies and
eliminating off shore outsourcing except in extreme circumstances.
Fair Trade
The trade treaties should protect the country from predatory foreign countries and companies
seeking to weaken or destroy American industry. Tariffs should be erected where needed and
where practical. Experience has shown that it is f utile to expect other countries to adopt our
policies on, f or instance, f air and free competition. The most obvious tool is tariffs on their
exports.
Domestic Industry Competitiveness
In addition to establishing protection for industry and country, companies with the national
interest should be properly aligned by changing the incentive system within which they operate.
The tax structure should be changed to encourage industrial revival, particularly in industries
which have been hit worst by unfair foreign competition. One simple but highly effective
measure would be to shorten the depreciation schedules on capital investment and research
spending. Meanwhile capital gains taxes should be increased to discourage short-term thinking
and reduce the incentive f or entrepreneurs to cash out.
Suggestions:
• Appointing an economic minister, a major cabinet post, to develop an industrial policy that
would:
1. Create conditions to make manufacturing competitive and profitable through tax changes and
subsidies where needed.
2. Protecting economy from foreign predatory practices.
3. Creating an industrial research and development division similar to government sponsored
National Institute of Health (NIH) in medicine or the Apollo project.
• Changing the tax structure for selecting industries that are vital to strategic American interests –
steel, transportation, cement and others.
• Controlling the balance of trade deficit. The majority of this money leaves the economy and
never returns. The money that does return is the means through which foreign companies are able
to accumulate funds to purchase the best companies.
• Amending or getting out of the agreement with the WTO. It places the domestic trade laws in
the hands of an undemocratic organization whose decisions have been consistently and unfairly
adjudicated.
• Eliminating the foreign Value Added Tax (VAT) discrepancy. It unjustifiably subsidizes foreign
exports, while simultaneously penalizing the exports to them.
• Faster depreciation on capital equipment investment – it will lessen the need to outsource
manufacturing.
• Free trade has been a disaster. It must be replaced with intelligent trade that prevents foreign
predatory practices and better serves U.S. interests.
The Eurozone economic crisis causes and solutions:
The Eurozone crisis is an ongoing financial crisis that has made it difficult or impossible for
some countries in the euro area to repay or re-finance their government debt without the
assistance of third parties. Public debt $ and %GDP (2010) for selected European countries
Government debt of Eurozone, Germany and crisis countries compared to Eurozone GDP. The
European sovereign debt crisis resulted from a combination of complex factors, including the
globalisation of finance; easy credit conditions during the 2002–2008 period that encouraged
high-risk lending and borrowing practices; the 2007–2012 global financial crisis; international
trade imbalances; real-estate bubbles that have since burst; the 2008–2012 global recession; fiscal
policy choices related to government revenues and expenses; and approaches used by nations to
bail out troubled banking industries and private bondholders, assuming private debt burdens or
socialising losses.
One narrative describing the causes of the crisis begins with the significant increase in
savings available for investment during the 2000–2007 period when the global pool of fixed-
income securities increased from approximately $36 trillion in 2000 to $70 trillion by 2007. This
"Giant Pool of Money" increased as savings from high-growth developing nations entered global
capital markets. Investors searching for higher yields than those offered by U.S. Treasury bonds
sought alternatives globally. The temptation offered by such readily available savings
overwhelmed the policy and regulatory control mechanisms in country after country, as lenders
and borrowers put these savings to use, generating bubble after bubble across the globe. While
these bubbles have burst, causing asset prices (e.g., housing and commercial property) to decline,
the liabilities owed to global investors remain at full price, generating questions regarding the
solvency of governments and their banking systems.
Rising household and government debt levels
In 1992, members of the European Union signed the Maastricht Treaty, under which they
pledged to limit their deficit spending and debt levels. However, a number of EU member states,
including Greece and Italy, were able to circumvent these rules, failing to abide by their own
internal guidelines, sidestepping best practice and ignoring internationally agreed standards. This
allowed the sovereigns to mask their deficit and debt levels through a combination of techniques,
including inconsistent accounting, off-balance-sheet transactions as well as the use of complex
currency and credit derivatives structures.
The complex structures were designed by prominent U.S. investment banks, who received
substantial fees in return for their services. The adoption of the euro led to many Eurozone
countries of different credit worthiness receiving similar and very low interest rates for their
bonds and private credits during years preceding the crisis. As a result, creditors in countries with
originally weak currencies (and higher interest rates) suddenly enjoyed much more favourable
credit terms, which spurred private and government spending and led to an economic boom. In
some countries such as Ireland and Spain low interest rates also led to a housing bubble, which
burst at the height of the financial crisis. Commentators such as Bernard
The average fiscal deficit in the euro area in 2007 was only 0.6% before it grew to 7% during the
financial crisis. In the same period, the average government debt rose from 66% to 84% of GDP.
Government's mounting debts are a response to the economic downturn as spending rises and
tax revenues fall, not its cause. Government deficit of Eurozone compared to USA and UK
Either way, high debt levels alone may not explain the crisis. The budget deficit for the euro area
as a whole is much lower and the euro area's government debt/GDP ratio of 86% in 2010 was
about the same level as that of the US. Moreover, private-sector indebtedness across the euro area
is markedly lower than in the highly leveraged Anglo-Saxon economies.
Trade imbalances
During the crisis, from 1999 to 2007, Germany had a considerably better public debt and
fiscal deficit relative to GDP than the most affected eurozone members. In the same period, these
countries (Portugal, Ireland, Italy and Spain) had far worse balance of payments positions.
Whereas German trade surpluses increased as a percentage of GDP after 1999, the deficits of
Italy, France and Spain all worsened.
A trade deficit can also be affected by changes in relative labour costs, which made southern
nations less competitive and increased trade imbalances. Since 2001, Italy's unit labour costs rose
32 % relative to Germany's. Greek unit labour costs rose much faster than Germany's during the
last decade. However, most EU nations had increases in labour costs greater than Germany's.
Those nations that allowed "wages to grow faster than productivity" lost competitiveness.
Germany's restrained labour costs, while a debatable factor in trade imbalances, are an important
factor for its low unemployment rate. More recently, Greece's trading position has improved; in
the period 2011 to 2012, imports dropped 20.9% while exports grew 16.9%, reducing the trade
deficit by 42.8%.
Structural problem of Eurozone system
There is a structural contradiction within the euro system, namely that there is a monetary
union (common currency) without a fiscal union (e.g., common taxation, pension, and treasury
functions). In the Eurozone system, the countries are required to follow a similar fiscal path, but
they do not have common treasury to enforce it. That is, countries with the same monetary
system have freedom in fiscal policies in taxation and expenditure. So, even though there are
some agreements on monetary policy and through the European Central Bank, countries may not
be able to or would simply choose not to follow it. This feature brought fiscal free riding of
peripheral economies, especially represented by Greece, as it is hard to control and regulate
national financial institutions. Furthermore, there is also a problem that the Eurozone system has
a difficult structure for quick response. Eurozone, having 17 nations as its members, require
unanimous agreement for a decision making process. This would lead to failure in complete
prevention of contagion of other areas, as it would be hard for the Eurozone to respond quickly to
the problem.
In addition, as of June 2012 there was no "banking union" meaning that there was no
Europe-wide approach to bank deposit insurance, bank oversight, or a joint means of
recapitalisation or resolution (wind-down) of failing banks. Bank deposit insurance helps avoid
bank runs. Recapitalisation refers to injecting money into banks so that they can meet their
immediate obligations and resume lending, as was done in 2008 in the U.S. via the Troubled
Asset Relief Programme.
Monetary policy inflexibility
Membership in the Eurozone established a single monetary policy, preventing individual
member states from acting independently. In particular they cannot create Euros in order to pay
creditors and eliminate their risk of default. Since they share the same currency as their
(eurozone) trading partners, they cannot devalue their currency to make their exports cheaper,
which in principle would lead to an improved balance of trade, increased GDP and higher tax
revenues in nominal terms. In the reverse direction moreover, assets held in a currency which has
devalued suffer losses on the part of those holding them.
Loss of confidence
Sovereign CDS prices of selected European countries (2010–2013). The left axis is in basis
points; a level of 1,000 means it costs $1 million to protect $10 million of debt for five years.
Prior to development of the crisis it was assumed by both regulators and banks that sovereign
debt from the Eurozone was safe. Banks had substantial holdings of bonds from weaker
economies such as Greece which offered a small premium and seemingly were equally sound. As
the crisis developed it became obvious that Greek, and possibly other countries', bonds offered
substantially more risk. Contributing to lack of information about the risk of European sovereign
debt was conflict of interest by banks that were earning substantial sums underwriting the bonds.
The loss of confidence is marked by rising sovereign CDS prices, indicating market expectations
about countries' creditworthiness. Furthermore, investors have doubts about the possibilities of
policy makers to quickly contain the crisis. Since countries that use the euro as their currency
have fewer monetary policy choices (e.g., they cannot print money in their own currencies to pay
debt holders), certain solutions require multi-national cooperation. Further, the European Central
As of June, 2012, many European banking systems were under significant stress, particularly
Spain. A series of "capital calls" or notices that banks required capital contributed to a freeze in
funding markets and interbank lending, as investors worried that banks might be hiding losses or
were losing trust in one another. In June 2012, as the euro hit new lows, there were reports that
the wealthy were moving assets out of the Eurozone and within the Eurozone from the South to
the North. Between June 2011 and June 2012 Spain and Italy alone have lost 286 bn and 235 bn
euros. Altogether Mediterranean countries have lost assets worth ten per cent of GDP since
capital flight started in end of 2010. Mario Draghi, president of the European Central Bank, has
called for an integrated European system of deposit insurance which would require European
political institutions craft effective solutions for problems beyond the limits of the power of the
European Central Bank.
On 5 December 2011, S&P placed its long-term sovereign ratings on 15 members of the
eurozone on "CreditWatch" with negative implications; S&P wrote this was due to "systemic
stresses from five interrelated factors: 1) Tightening credit conditions across the eurozone; 2)
Markedly higher risk premiums on a growing number of eurozone sovereigns including some
that are currently rated 'AAA'; 3) Continuing disagreements among European policy makers on
how to tackle the immediate market confidence crisis and, longer term, how to ensure greater
economic, financial, and fiscal convergence among eurozone members; 4) High levels of
government and household indebtedness across a large area of the eurozone; and 5) The rising
risk of economic recession in the Eurozone as a whole in 2012. Currently, we expect output to
decline next year in countries such as Spain, Portugal and Greece, but we now assign a 40%
probability of a fall in output for the eurozone as a whole."
SOLUTIONS FOR EUROZONE CRISIS:
European fiscal union
Increased European integration giving a central body increased control over the budgets of
member states was proposed on June 14, 2012 by Jens Weidmann President of the Deutsche
Bundesbank, expanding on ideas first proposed by Jean-Claude Trichet, former president of the
European Central Bank. Control, including requirements that taxes be raised or budgets cut,
would be exercised only when fiscal imbalances developed. This proposal is similar to
contemporary calls by Angela Merkel for increased political and fiscal union which would "allow
Europe oversight possibilities."
European bank recovery and resolution authority
European banks are estimated to have incurred losses approaching €1 trillion between the
outbreak of the financial crisis in 2007 and 2010. The European Commission approved some €4.5
trillion in state aid for banks between October 2008 and October 2011, a sum which includes the
value of taxpayer-funded recapitalizations and public guarantees on banking debts. This has
prompted some economists such as Joseph Stiglitz and Paul Krugman to note that Europe is not
suffering from a sovereign debt crisis but rather from a banking crisis.
On 6 June 2012, the European Commission adopted a legislative proposal for a harmonized
bank recovery and resolution mechanism. The proposed framework sets out the necessary steps
and powers to ensure that bank failures across the EU are managed in a way which avoids
financial instability. The new legislation would give member states the power to impose losses,
resulting from a bank failure, on the bondholders to minimize costs for taxpayers. The proposal is
part of a new scheme in which banks will be compelled to “bail-in” their creditors whenever they
fail, the basic aim being to prevent taxpayer-funded bailouts in the future. The public authorities
would also be given powers to replace the management teams in banks even before the lender
fails. Each institution would also be obliged to set aside at least one per cent of the deposits
covered by their national guarantees for a special fund to finance the resolution of banking crisis
starting in 2018.
Eurobonds
A growing number of investors and economists say Eurobonds would be the best way of
solving a debt crisis, though their introduction matched by tight financial and budgetary
coordination may well require changes in EU treaties. On 21 November 2011, the European
Commission suggested that eurobonds issued jointly by the 17 euro nations would be an effective
way to tackle the financial crisis. Using the term "stability bonds", Jose Manuel Barroso insisted
that any such plan would have to be matched by tight fiscal surveillance and economic policy
coordination as an essential counterpart so as to avoid moral hazard and ensure sustainable public
finances.
Germany remains largely opposed at least in the short term to a collective takeover of the
debt of states that have run excessive budget deficits and borrowed excessively over the past
years, saying this could substantially raise the country's liabilities.
European Monetary Fund
On 20 October 2011, the Austrian Institute of Economic Research published an article that
suggests transforming the EFSF into a European Monetary Fund (EMF), which could provide
governments with fixed interest rate Eurobonds at a rate slightly below medium-term economic
growth (in nominal terms). These bonds would not be tradable but could be held by investors
with the EMF and liquidated at any time. Given the backing of all eurozone countries and the
ECB "the EMU would achieve a similarly strong position vis-a-vis financial investors as the US
where theFed backs government bonds to an unlimited extent." To ensure fiscal discipline despite
lack of market pressure, the EMF would operate according to strict rules, providing funds only to
countries that meet fiscal and macroeconomic criteria. Governments lacking sound financial
policies would be forced to rely on traditional (national) governmental bonds with less favorable
market rates.
The econometric analysis suggests that "If the short-term and long- term interest rates in the
euro area were stabilized at 1.5% and 3%, respectively, aggregate output (GDP) in the euro area
would be 5 percentage points above baseline in 2015". At the same time sovereign debt levels
would be significantly lower with, e.g., Greece's debt level falling below 110% of GDP, more
than 40percentage points below the baseline scenario with market based interest levels.
Furthermore, banks would no longer be able to unduly benefit from intermediary profits by
borrowing from the ECB at low rates and investing in government bonds at high rates.
Drastic debt write-off financed by wealth tax
Overall debt levels in 2009 and write-offs necessary in the Eurozone, UK and U.S. to reach
sustainable grounds.
According to the Bank for International Settlements, the combined private and public debt of
18 OECD countries nearly quadrupled between 1980 and 2010, and will likely continue to grow,
reaching between 250% (for Italy) and about 600% (for Japan) by 2040. A BIS study released in
June 2012 warns that budgets of most advanced economies, excluding interest payments, "would
need 20 consecutive years of surpluses exceeding 2 per cent of gross domestic product - starting
now - just to bring the debt-to-GDP ratio back to its pre-crisis level". The same authors found in
a previous study that increased financial burden imposed by aging populations and lower growth
makes it unlikely that indebted economies can grow out of their debt problem if only one of the
following three conditions is met.
government debt is more than 80 to 100 percent of GDP;
non-financial corporate debt is more than 90 percent;
private household debt is more than 85 percent of GDP.
The first condition, which was suggested by an influential paper written by Kenneth
Rogoff & Carmen Reinhart has been disputed due to major calculation errors. In fact, the average
GDP growth at public debt/GDP ratios over 90 percent is not dramatically different than when
debt/GDP ratios are lower.
The Boston Consulting Group (BCG) added to the original finding that if the overall debt
load continues to grow faster than the economy, then large-scale debt restructuring becomes
inevitable. To prevent a vicious upward debt spiral from gaining momentum the authors urge
policy makers to "act quickly and decisively" and aim for an overall debt level well below 180
percent for the private and government sector. This number is based on the assumption that
governments, nonfinancial corporations, and private households can each sustain a debt load of
60 percent of GDP, at an interest rate of 5 percent and a nominal economic growth rate of 3
percent per year. Lower interest rates and/or higher growth would help reduce the debt burden
further.
To reach sustainable levels the Eurozone must reduce its overall debt level by €6.1 trillion.
According to BCG this could be financed by a one-time wealth tax of between 11 and 30 percent
for most countries, apart from the crisis countries (particularly Ireland) where a write-off would
have to be substantially higher. The authors admit that such programs would be "drastic",
"unpopular" and "require broad political coordination and leadership" but they maintain that the
longer politicians and central bankers wait, the more necessary such a step will be. Instead of a
one-time write-off, German economist Harald Spehl has called for a 30-year debt-reduction plan,
similar to the one Germany used after World War II to share the burden of reconstruction and
development. Similar calls have been made by political parties in Germany including
the Greens and The Left.