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US economy

Hot TOPICS FOR TODAY…. About USA

• Current account deficit


• Various currency standards
• Twin deficit
• Various recessions
• Sub prime crisis
• Some current issues


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The current account

Current account of a country


records current or short term flows

of fund into and out of a country.

 The current account of US


includes:

– Net Export
– Net income on investments
– Net transfers

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Current account deficit

• 1997 - $140.4 billion


• 2001 – $384.7 billion
• 2005 - $729.0 billion
• 2006 - $788.1 billion
• 2007 - $731.2 billion
Historical perspective on U.S. external
balances

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Global gold standard
(1870-1914)

• The gold standard fixed major currencies against one


another, which encouraged high level of capital
mobility.

• British investment in US flowed into bonds of canal,
turnpike and railroad companies or state govt.

• United state joined Gold Standard in 1879.



• In 1897 global holding of the foreign assets were
estimated 7% of the world GDP.

• In 1914 this rose close to 20%

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Global gold standard
(1870-1914)


• Due to adherence to the gold std., during
1891 and 1897 the US Treasury
increased interest rates in order to
avoid dollar sales and maintain fixed
exchange rate.

• This resulted into harsh recession .

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The interwar period
(1914- 1939)

• During World War 1 in 1914, monetary


policy around the world became directed
towards domestic goals such as
financing war .

• This led to decrease in worldwide holding
of the foreign assets.

• In 1925, a new gold standard initiated
under which countries held reserves in
dollar, sterling or gold.

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• Since UK has set the value of sterling against
dollar at prewar exchange rate, pound was
overvalued due to inflation after the war.

• This encouraged investors to sell pound in
exchange for gold.

• To avoid outflow of the gold in UK, the US
increased money supply in order to
decrease interest rate to the level as in UK.

• With this excess supply and low interest rate
there came a major stock market boom.

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• To protect its gold reserve the US
increased interest rates, after the UK
abolished the Gold standard in 1931

• Tighter money supply caused by this hike
in interest rates caused great
depression

• US withdrew from gold standard in 1933.

• Critics believe that gold standard was the
main reason for the Great Depression
of 1930s.
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Bretton woods system
(1950-1971)

• Under this fixed exchange rate system the


dollar was pegged to gold while other
currencies of the world were pegged to
dollar.

• The dollar was convertible with gold at the
rate of $35 per ounce.

• In the initial years of bretton wood


arrangement current account
transactions had to be regulated.

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• European policymakers chose to prevent open
purchase and sales of foreign exchange.

• The US officially allowed them to build dollar
exchange reserves by expanding Export and
restricting Import.

• In 1958 US authorities started concerning about
balance of payment.

• By the 1964, the official liability exceeded the US
monetary gold stock.

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• In 1971 the US trade balance turned
negative first time after since 1893.

• When other countries along with the
Britain showed intention to convert to
gold, president Nixon introduced
floating exchange rate system.

• A world wide recession followed as
inflationary pressure took hold,
exacerbated by the oil crisis.

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Twin deficit of the 1980s

q Ronald Reagan became President in 1981


v Policies undertaken
v
v Taxes were cut
v Defense spending increased
v Expansionary fiscal policy

v Results
v
v High inflation
v High interest rates
v Dollar appreciated
11/29/09 v Export < AMRITA
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CURRENT ACCOUNT DEFICIT-

• It increased from
 0.1% of GDP in 1980 to
a deficit of 3.3% in 1986

• Which later improved to a


deficit of 1.8% of GDP

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Current Account Deficit

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Budget deficit
The government budget deficit increased from
2.8% of GDP in1980 to 4.8% in1986.

3
Budget Deficit
2

0
1980 1986
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New Economy of Late 1990s

• Twin deficit separated



• Productivity increased through use of IT

• Consumer spending increased and lower
household saving rates

• Budget deficit of 5% in1992 decreased to 2%
in2000

• Huge foreign capital investment
18

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Escalating Current Account Deficits
(2000–2005)

• 2001-2002
– mild recession
– oil price soared
– fiscal stimulus – tax cut
– monetary stimulus – low interest
rate


• Budget surplus of 2.4% in 2000 to
budget deficit of 3.4% in 2003.

• Current account deficit continued
and it was $ -4,242 billion
between 2001 and 2007
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GREAT DEPRESSION(1929-1940)

 The Great Depression


in the United States
began on "Black
Tuesday" with the Wall
Street crash of
The White Angel , Bread Line October, 1929.
Massive unemployment, factory and
mill closings, and mortgage 
foreclosures characterized the Great
Depression in the United States in
the 1930s. This photograph was taken
by Dorothea Lange in 1933. 
Culver Pictures

Microsoft ® Encarta ® 2007 . © 1993-2006


Microsoft Corporation. All rights reserved. 


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Effects:

– High
unemployment
– Poverty
– Low profits
– Deflation
– Plunging farm
incomes
– Lost opportunities
for economic
growth and
personal
advancement.
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Banking Crisis, 1930’s

By 1933 the banking system in the


United States was near collapse.
Some banks had made speculative
investments in the stock market and
were hurt by the crash of 1929. Others
failed when depositors, fearing that
their bank would go bankrupt, rushed
to withdraw their savings. Here,
depositors besiege Merchants Bank in
Passaic, New Jersey.
Microsoft ® Encarta ® 2007. © 1993-2006 Microsoft
Corporation. All rights reserved.

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Causes of Great Depression

• Stock market crash in


1929

• High consumer debt

• Ill-regulated markets that
permitted malfeasance
by banks and
investors

• Cutbacks in foreign trade
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Cont..

• Lack of high-growth new


industries

• Growing wealth inequality

• Interaction to create a
downward economic spiral
of reduced spending

• Also falling confidence, and
lowered production.

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THE BETTMANN ARCHIVE
Microsoft ® Encarta ® 2007 . © 1993-2006 Microsoft Corporation. All rights
reserved.

Franklin Delano Roosevelt


Franklin Delano Roosevelt took
office as president of the United
States in the depths of the Great
Depression. His optimism and
projects between 1935 and 1943.
confidence helped reassure
employed 9 million people in various public works
Work Projects Administration after 1939, the WPA Americans, while he initiated
Progress Administration (WPA) in 1935. Called the programs known as the New Deal
President Franklin D. Roosevelt created the Works to aid Depression victims and try
To ease unemployment during the Great Depression, to revive the economy.
WPA Workers
Microsoft ® Encarta ® 2007. © 1993-2006
Microsoft Corporation. All rights reserved.

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OIL SHOCK(1973)

 The 1973 oil crisis started on October


15, 1973, when the members of
Organization of Arab Petroleum
Exporting Countries or the OAPEC
(consisting of the Arab members of
OPEC plus Egypt and Syria)
proclaimed an oil embargo "in
response to the U.S. decision to re-
supply the Israeli military during the
“Yom Kippur war”

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CAUSES OF OIL SHOCK(1973)

 1- After the Bretton Woods Accord, there was a


depreciation of the value of the US dollar, as well as
the other currencies of the world and OPEC country
charged higher per barrel.

 2- America’s support to Israel in Yom Kippur War.


3-Charging of high price of refined petrochemical and


food items in OPEC countries.


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IMPACT OF OIL SHOCK

• OPEC forced the oil companies to increase


payments drastically. The price of oil
quadrupled by 1974 to nearly US$12 per
barrel (75 US$/m3).

• The traditional flow of capital reversed as
the oil exporting nations accumulated vast
wealth and Much was absorbed in
massive arms purchases that
exacerbated political tensions, particularly
in the Middle East.

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Impact of Oil Shock… Cont…

• “Oil price shocks”, referring to disruptions in


the production and distribution of oil, that
result in the increase of oil prices “have
been held responsible for recessions,
periods of excessive inflation, reduced
productivity, and lower economic growth”

• In the United States, the retail price of a gallon
of gasoline rose from a national average of
38.5 cents in May 1973 to 55.1 cents in
June 1974. Meanwhile, New York Stock
Exchange shares lost $97 billion in value in
six weeks

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Dotcom Bubble

• Was a speculative bubble covering roughly1995–2001


• Stock markets in Western nations saw their value
increase rapidly from growth in the new Internet sector
and related fields


• The technology-heavy NASDAQ Composite index
peaked at 5,048 in March 2000, reflecting the high point
of the dot-com bubble


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BUSINESShad 30
• Over 1999 and early 2000, the Federal
increased interest rates six times and the runaway
NASDAQ Movement

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Cont..

 A combination of :

ü rapidly increasing stock prices


ü
ü individual speculation in stocks
ü
ü widely available venture capital created an exuberant
environment
ü
ü many of these businesses dismissed standard business
models
ü
ü focused on increasing market share at the expense of the
bottom line

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Reason for collapse

• Massive, multi-billion dollar sell orders for major


bellwether high tech stocks (Cisco, IBM, Dell,
etc.)

• This selling resulted in the NASDAQ opening
roughly four percentage points lower on
Monday March 13, 2000 from 5,038 to 4,879

• The massive initial batch of sell orders
processed on Monday, March 13 triggered a
chain reaction of selling that fed on itself as
investors, funds, and institutions liquidated
positions

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Cont..

• Accelerated business spending in preparation for


the Y2K switchover

• Poor results of Internet retailers following the
1999 Christmas season

• Several communication companies, burdened
with unredeemable debts from their expansion
projects, sold their assets for cash or filed for
bankruptcy

• Many DOT-COMS ran out of capital and were
acquired or liquidated

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Subprime crisis

•Credibility criteria

•A credit score above 620
(credit scores are between
350 and 850 with a median
in the U.S. of 678 and a
mean of 723)


•A debt-to-income ratio no
greater than 45% (meaning
that no more than 45% of
gross income pays for
housing and other debt)
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Causes:

– Boom and bust in the


housing market

– Speculation

– High-risk mortgage loans
and lending/borrowing
practices

– Securitization practices

– Inaccurate credit ratings

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CURRENT RECESSION(2007………

 Many crisis interlinked to form


a giant recession.

– Fuel crisis  where oil prices
soared to over $150 a
barrel

– Food crisis  where
wheat/rice prices tripled
and was followed by riots
and export controls

– Housing bubble  where in
the asset values had a
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Cont..

– Subprime mortgage crisis


 raised alarming
doubts about solvency
of major banks

– Credit crisis  where the
banks almost stopped
lending

– Securitization Liquidity
crunch spreads the
crisis like a wildfire.
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Obama’s stimulus package
• Middle-Class Assistance:

– Congress to direct 40 percent
of the stimulus bill toward
tax breaks aimed at
businesses and middle-
class workers

– Most workers would receive
a $500 payroll credit, and
some businesses would
"receive incentives to
create job

– Making equipment purchases
more affordable
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Cont..

• Considering unemployment
benefits and health coverage to
assist jobless workers
 Infrastructure Development

• Important part of Obama's job


creation plan is infrastructure
investment

• Support new federal spending of as
much as $700 billion on
construction projects and other
programs to try to stimulate the
economy

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Cont..

• Direct Aid to States:



– Federal government to find $700
billion to bail out Wall Street and
bank executives
– Health care, in particular, is one of
the top costs plaguing the states
– Currently, at least 27 states are
facing budget gaps and some
have already slashed safety-net
programs
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Obama’s policy “OUTSOURCING”

 Obama Govt. is strictly avoiding outsourcing.


• Unemployment rate at 7.6 per cent, there is no


need for companies to hire foreign guest
workers through the H1-B programme.

• Elimination of Incentives and tax break for
companies that ship jobs overseas,"

• US President Barack Obama opposed the idea


of inviting overseas nurses, including from
India.

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OBAMA’S POLICY “EDUCATION”
"The future belongs to the nation that best educates its
citizens," Obama said. "My fellow Americans, we have
everything we need to be that nation."

• Obama focused for more funding for early childhood


education programs that have shown results.

• Obama focused for performance based pay to the
teachers

• Increase in grants for poor students and new tax


credits for families paying tuition.

• Increasing the hours of instruction, possibly by
expanding the academic year, which currently
runs from late August or early September until
early June at most schools.

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OBAMA’S POLICY “TEXTILE”

• Initiatives to curtail the currency


manipulation by the Chinese
to increase exports and daunt
the imports.

• Impose a program to monitor
the textile, and apparel
imports from China, once the
safeguards are removed, and
increase the funds and
enforcements of policies
regarding unfair trade
practices.

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OBAMA’S “ANTI-TERROR POLICY”

• Obama has announced plans to close the detention


facility at Guantanamo Bay in Cuba that was
opened by the Bush administration to hold terrorism
suspects

• He has announced to take the US Troops from IRAQ.

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OBAMA’S “TAX POLICY”

• To get people spending again, 95% of


working families will receive a
$1,000 tax cut

– first stage of a middle-class tax cut.


• Tax cut for company who do not


employ foreign workers.

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American Recovery and Reinvestment
Plan

• Doubling the production of alternative energy


in the next three years.

• Modernizing more than 75% of federal
buildings and improve the energy
efficiency of two million American homes,
saving consumers and taxpayers billions
on our energy bills.

• Making the immediate investments
necessary to ensure that within five years,
all of America’s medical records are
computerized.


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Cont..

• Equipping tens of thousands of schools,


community colleges, and public
universities with 21st century classrooms,
labs, and libraries.

• Expanding broadband across America, so
that a small business in a rural town can
connect and compete with their
counterparts anywhere in the world.

• Investing in the science, research, and
technology that will lead to new medical
breakthroughs, new discoveries, and
entire new industries.
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Outcome of London G 20 summit

 Leaders of the world’s largest


economies have agreed a $1.1
trillion package of measures to
restore growth and jobs and
rebuild confidence and trust in the
financial system

 To restore growth in jobs, that we


will take essential action to
rebuild confidence and trust in
our financial system

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Cont..

• Principles to reform the global


banking system

• Bringing the shadow banking system
including hedge funds, within the
global regulatory net

• New international accounting
standards, resist protectionism

• Regulation of credit rating agencies

• An end to tax havens that do not
transfer information on request.

• New financial
11/29/2009 stability board
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Cont..

• Equipping tens of thousands of schools,


community colleges, and public
universities with 21st century classrooms,
labs, and libraries.

• Expanding broadband across America, so
that a small business in a rural town can
connect and compete with their
counterparts anywhere in the world.

• Investing in the science, research, and
technology that will lead to new medical
breakthroughs, new discoveries, and
entire new industries.

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s dollar efficient to serve as a reserve
currency?
• With the Fed creating billions of new currency, there is widespread fear that
it may lose its value against other currency

• The situation may go worse if emerging economies lose their faith in the
dollar and start selling US treasuries to support their local economy

• RBI has warning this issue for nearly two years.



• The imbalances which have arisen because of US spending for beyond its
means, continues to exist

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Solution for the problem
• According to economist like Roast,
the American households need to
deleverage and start saving

• This may be bad news for china and
other Asian economies which are
looking for revival of American
demand to boost their industrial
demand

• Revival of demand from emerging


markets such as China and India.

• Investment in the infrastructures.


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RECOMMENDATIONS
 We think the economy will start to recover if

1. The conflict in Iraq continues to wind down


with no threat of moving into Pakistan or
Iran.
2.
3. Gasoline prices stay where they are now
WITHOUT anymore drastic decline.
4.
5. Detroit gets a bailout with extremely heavy
oversight written into the package
6.

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RECOMMENDATIONS

 3. Reasonable tariffs are placed on non-


necessary imports such as Flat panel TVs,
Foreign cars with US retail values of over
30,000 dollars, High-priced clothing, clothing
whose companies cannot prove human rights
standards are being met etc...
1.
4. Obama's administration starts to lean on
the banks part of the 700 Billion Bailout for
documentation and receipts
1.
5. The government starts loaning money and
giving tremendous tax breaks to business that
produce material goods and imports in order
to raise the value of the dollar

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THANK YOU

PRESENTED BY:
Neeleema
Nikhil
Nivedita
Preetam
Pranav
Prabhas
Parashar
Rahul

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