US Economy and Financial Crisis

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US Economy and Financial Crisis

International Finance Presentation


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How did the US mortgage crises lead

to economic crises

Real Estate boom 1990s- 2000

Deregulation

Massive InvestmentsPrices up Mortgage Companies- credit standard's down

Sub prime mortgages high interest

Normal mortgages floating rates MBS


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CDS

Foreclosures

No moneyLay offsIncome down- C down D downdownsizing- Investment down-

Income Down- GDP down


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What is Globalization

The growing liberalization of international

trade and investment and the resulting

increase in the integration of national

economies


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Advantages

Specialization

Larger Market

Creates more jobs Competition

FDI-development

More choice More information between two countries


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Disadvantages

Unemployment in some countries

Environmental problems

Financial problems Poorer countries get poorer because of lack of

education

Exploitation of labor


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Discontent to U.S due to

Globalization


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Risk of free market policies.

Unemployment due to globalization andcheap alternatives.

Decreasing standards of labor andenvironment; ultimately leading to politicaldiscontent.

Advantage in labor for LDCs.

Trade with developing countries becomesdifficult due to unequal level of globalization.


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Fear in the industrial world that increased globalcompetition will lead inexorably to a race to thebottom in wages, labor rights, employment

practices, and the environment. New concerns in civil society organizations;

having to deal with more complex issues of tradeand investment, international financial flows etc.

Increase in speculation. US taxpayers alone have spent some $9.7 trillion

in bailout packages and plans.


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Importance of US $

85% of the international trade is done in USD.

USD has been given the status of reserve

currency.

All the disbursement by IMF and World Bank

are made in $$.

Most of the currencies of the world are

compared to USD as a benchmark.


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Foreign goods and services are cheap,

including foreign travel. Helps the import

sector of the economy, companies that sell

foreign goods (for e.g. Toyota dealers). HelpsU.S. companies buying foreign inputs. Helps

U.S. consumers - imports are cheaper.


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Fiscal cliffDefinition

The "fiscal cliff" is a term used to describe a bundle of momentous U.S. federaltax increases and spending cuts that are due to take effect at the end of 2012and early 2013.

Components of Fiscal Cliff

Revenue Increases

2001/2003/2010 Tax Cuts & AMT Patch.This series of legislation, often

referred to collectively as the "Bush tax cuts," expired on December 31,2012,

Payroll Tax Cut.The Social Security payroll tax holiday expired December31, raising the rate from 4.2 to 6.2 percent.

Other Provisions.Several other policies such as the Research and

Experimentation tax credit, many of which are typically enactedretroactively, are due to sunset at years' end.

Affordable Care Act Taxes.Some provisions in the Obama health-carelegislation, including increased tax rates on high-income earners, are set totake effect in January 2013.


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Spending Cuts

Budget Control Act.Half of the scheduled annual cuts($109 billion/year from 2013-2021) come directly

from the national defensebudget, half from non-defense. However, some 70 percent of mandatoryspending will be exempt.

Extended Unemployment Benefits.The eligibility tobegin receiving federal unemployment benefits, lastextended in February, expired at year's end.

Medicare "Doc Fix."The rates at which Medicare paysphysicians decreases nearly 30 percent on December31.
http://www.cfr.org/united-states/defense-spending-deficit-debate/p26442http://www.cfr.org/united-states/defense-spending-deficit-debate/p26442http://www.cfr.org/united-states/defense-spending-deficit-debate/p26442


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The 2012 Fiscal Cliff Debate In dealing with the fiscal cliff, U.S. lawmakers had a choice among

three options, none of which were particularly attractive:

They could have let the policies scheduled for the beginning of 2013

which featured a number of tax increases and spending cuts that

were expected to weigh heavily on growth and possibly drive the

economy back into a recessiongo into effect.

The plus side: the deficit would have fallen significantly under the

new set of laws.

They could have cancelled some or all of the scheduled tax increases

and spending cuts, which would have added to the deficit andincreased the odds that the United States would face a crisis.

The flip side of this, of course, is that the United States' debt would

have continued to grow.


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The Term "Cliff" Was Misleading

It's important to keep in mind that while the termcliffindicated an immediate disaster at the beginningof 2013. There were two important reasons why this isthe case:

If all of the laws went into effect as scheduled andstayed in effect, the result would undoubtedly be areturn to recession.

Even if the deal did not occur before December 31,Congress had the options to change the scheduled lawsretroactively to January 1 afterthe deadline.


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QUANTITATIVE EASING AND IT

AFFECTS ON US ECONOMY


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INTRODUCTION

Quantitative easing (QE) is the Federal Reserve's program of buyingbonds from its member banks.

The Fed purchases U.S. Treasury notes and mortgage-backed

securities(MBS), and issues credit to the banks' reserves to buy the

bonds.

The purpose of this expansionary monetary policy is to lower

interest rates and spur economic growth.

Quantitative easing is a massive expansion of the Fed'snormal open market operations.


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Even before the recession, the Fed held between $700-$800 billion of

Treasury notes on its balance sheet,

However, as a result of QE, the Fed's balance sheet has more than quadrupled,

to $4 trillion.

That makes QE the most massive economic stimulus program in world history.


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HOW IT WORKS ?

QE increases the money supply because lower interest rates allow

banks to make more loans.

Bank loans stimulate demand by giving businesses more money to

expand, and shoppers more credit to buy things with.

By increasing the money supply, QE keeps the value of the

dollar low.

This made U.S. stocks seem like a relatively good investment to

foreign investors, and made U.S. exports relatively cheaper.


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Quantitative easing stimulates the economy in anotherway.

The Federal government auctions off large quantities of

Treasuries to pay for expansionary fiscal policy.

As the Fed buys Treasuries, it increases demand,keeping Treasury yields low.

Since Treasuries are the basis for all long-term interestrates, it also keeps auto, furniture and other consumerdebt rates affordable.

The same is true for corporate bonds, allowing businessesto expand more cheaply.

Most important, QE keeps long-term, fixed-interestmortgage rates low. And that'simportant to support thehousing market.


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DIFFERENT OPERATIONSQE1 (December 2008 - June 2010)

On November 25, 2008,the Fed announced it would purchase$800 billion in bank debt, MBS, and Treasury notes frommember banks.

It ended up buying much more that that. It bought $175

million in MBS that had been originated by Fannie Mae,Freddie Mac, or the Federal Home Loan Banks

The Fed halted purchases in June 2010 because the economywas growing again. Just two months later, the economystarted to falter, so the Fed renewed QE1.

It bought $30 billion a month in longer-term Treasuries tokeep its holdings at around $2 trillion.

The Fed created quantitative easing to combat the financial

crisis of 2008.


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DID IT WORK

QE achieved some of its goals, missed others completely,and may have created a bubble.

First, QE did remove toxic subprime mortgages frombanks' balance sheets, restoring trust and thereforebanking operations.

Second, it also helped to stabilize the U.S. economy,providing the funds and the confidence to pull out of therecession.

Third, it kept interest rates low enough to revive thehousing market.

Fourth, it did stimulate economic growth, althoughprobably not as much as the Fed would have liked.


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However, it didn't achieve the Fed's goal of making more

credit available.

It gave the money to banks, which basically sat on the funds

instead of lending it out.

Banks used the funds to triple their stock prices through

dividends and stock buy-backs.

The large banks also consolidated their holdings, so that the

largest .2% of banks control more than 70% of bank assets.


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Since banks didn't lend out the money, inflation wasn't created

in consumer goods.

However, QE did create asset inflation, first in gold and other

commodities, and then in stocks

As investors were forced out of bonds.

An ounce of gold more than doubled, rising from $869.75 to

$1,895 between 2008 and 2011.

After that, investors shifted to stocks.


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Cold War: US- China. How it impacts

the world

Us & China are the 2 largest economies

respectively

More of a mistrust

2 way trade to $536 billion- China exports to

US $426 billion, Us to china $110 billion

Us has 3 main threats from China- Commercial

cyber espionage, China's currency devaluation

policy and Chinas holding of US treasuries


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Currency Devaluation

Exports high

Us is the second largest importer of Chinese products

US trade deficit

Slow growth-> US producers moving offshore ->FDI indeveloping countries rises

Trade deficit -> US borrowing from Financial markets ->

low trust in $ -> $ goes down -> countries with $backing take a negative hit as well


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East Asian countries with surplus with US are

forced to revalue their currencies.

They are afraid if China wouldnt do the same,

It will substitute their exports


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US treasury holdings with China

China is the largest holder of US treasury-

$1.32 trillion

Threaten to dump off

US resources will go down

Recession

1930, 2008 once more!


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US Economy and Financial Crisis

HOW to come out of Recession??

Lower the Wages

Cut back Health Insurance / centrally controlled.

Retirement & Pension Benefits

Speedup Labor

Increase Usage of own Oil & Gas Resources

Transfer Production Houses to low cost centers.


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US Economy & Financial Crisis

Recommendations-US Role in growth of World

Economy

Global Imbalances

Role as Super Power

World Peace

Oil Handling

Regularization of Ranking Agencies

Funding in Infrastructure


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US Economy & Financial Crisis

Recommendations-US Role in growth of World

Economy

Investment / Agriculture Quotas

Technology + Production Transfer

Anti- Corruption Action Plan

Global Agency for FX fluctuations

US Economy and Financial Crisis

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