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
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