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Thread: Question about the US economy

  1. #1
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    Question Question about the US economy

    I just heard at the news that Us is about to be, maybe, in a very deep financial problem if from here to maximum the 2nd of August, politicians over there don't make an agreement all together.

    What could happen?

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    I know I'll get blasted by Blog Trolls, but here's my understanding of the issue:

    The U.S. needs congress to approve a limit to the debt they are willing to carry, now set at 14 trillion or so. That amount will be reached on August 2nd. Congress needs to pass a new law raising the debt limit or the U.S. runs out of cash to pay interest (bonds, etc), social programs & everything else. The Republicans control congress & the Democrats control the senate. Both need to approve a law then the president needs to sign or veto.
    The Democrats are not willing to cut too much on social programs & would raise taxes or at least close some tax loopholes. The Republicans would cut anything ('cept military) but never raise taxes.
    They have raised the debt limit 20 times in the last 30 years. They pretty much have to or the whole economy will tank (again). Both sides are trying to get the best deal possible (for them) but in the end, neither wants to be blamed for a government shut-down.
    They had a deal until a few hours ago, when Boehner (Republican house leader) pulled out, he'll come back asking for more Republican stuff.

    Seems to me the Democrats don't play the game as well as the Republicans (usually) so in the end, Obama will have to bend over...

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    Thank you for your answer avgjoe.

    But what could happen if all Republicans and the Democrats aren't able to make the deal together?

    What will be next?

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    THe last shut-down (nov. 1995 & dec. 95-jan 6th '96) was under Bill Clinton, with Gingrich as Republican Leader, much the same situation as now. The shut-down lasted a total of 25 days:

    A 2010 Congressional Research Service report summarized other details of the 1995-1996 government shutdowns, indicating the shutdown impacted all sectors of the economy. Health and welfare services for military veterans were curtailed; the Centers for Disease Control and Prevention stopped disease surveillance; new clinical research patients were not accepted at the National Institutes of Health; and toxic waste clean-up work at 609 sites was halted. Other impacts included: the closure of 368 National Park sites resulted in the loss of some seven million visitors; 200,000 applications for passports and 20,000 to 30,000 applications for visas by foreigners went unprocessed each day; U.S. tourism and airline industries incurred millions of dollars in losses; more than 20% of federal contracts, representing $3.7 billion in spending, were affected adversely.[6]

    Other effects include higher interest rates (less people wanting to buy U.S.Debt raises the cost of borrowing)
    A weaker U.S. Dollar.
    More uncertainty in the U.S. economy,
    Potential for another recession...
    Last edited by avgjoe; 07-22-2011 at 08:52 PM.

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    There is enough tax revenue to pay the debt payments. But past August 2, there will not be enough money to pay the entire US budget. It's up to the President and the Treasury Secretary to prioritize what gets paid. By law and the Constitution they have to pay bond holders first. Then they would prioritize all other payments, including government employees.

    The problem is both the Debt ceiling and the amount of the debt. Both Moody's and Standard and Poors, both rating agencies, have been warning the US to lower its debt. Either or both agencies could lower the credit rating of the US to less than AAA. If that happens, any interest rate the US pays would be higher, which would cost the US more in debt payments and a higher debt.

  6. #6
    Quote Originally Posted by daydreamer41 View Post
    There is enough tax revenue to pay the debt payments. But past August 2, there will not be enough money to pay the entire US budget. It's up to the President and the Treasury Secretary to prioritize what gets paid. By law and the Constitution they have to pay bond holders first. Then they would prioritize all other payments, including government employees.

    The problem is both the Debt ceiling and the amount of the debt. Both Moody's and Standard and Poors, both rating agencies, have been warning the US to lower its debt. Either or both agencies could lower the credit rating of the US to less than AAA. If that happens, any interest rate the US pays would be higher, which would cost the US more in debt payments and a higher debt.
    U deserve the benefit of doubt in that you only told a part of the statement issued from Moody's and somewhat of a distinct glaring omission.

    Moody's suggests U.S. eliminates debt ceiling

    http://in.reuters.com/article/2011/0...58311220110718

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    Hello Maria,

    I'll let the experts explain it:

    S&P special report examines potential effects of US debt debate

    http://www.reuters.com/article/2011/...76K1ZA20110721

    (The following statement was released by the rating agency)

    July 21 - Following the placement of the United States rating on CreditWatch with negative implications on July 14, Standard & Poor's Ratings Services analysts have examined the potential effects of three hypothetical outcomes of the current debate over the U.S.'s fiscal stance and the government debt ceiling on the corporate, financial institutions, public finance, and structured finance sectors. As a result, we published the following articles:

    -- "The U.S. Debt Ceiling Standoff Could Reverberate Around The Globe--With Or Without A Deal,"

    -- "Most Corporate Borrowers Remain Unaffected By The U.S. Debt Debate--For Now,"

    -- "The Implications Of The U.S. Debt Ceiling Standoff For Global Financial Institutions,"

    -- "Where U.S. Public Finance Ratings Could Head In The Wake Of The Federal Fiscal Crisis," and

    -- "What If Analysis: The Potential Impact To Structured Finance Securities Of The U.S. Debt Ceiling Standoff."

    The projections by sector build on the points explained in Standard & Poor's July 14 research update on the United States. Financial institutions would see the greatest impact under one of the hypothetical scenarios, in which The White House and Congress cannot agree to raise the debt ceiling by their Aug. 2 deadline, and the Treasury begins to sharply reduce spending to preserve cash for debt service. Such measures could conclude, if the standoff persisted for just a short while, with the Treasury missing an interest payment or failing to pay off maturing debt--i.e., a default.

    We still believe that the risk of a payment default is small, though increasing, but such a scenario would see financial institutions experience the largest number of ratings changes among the sectors reviewed in these articles. This is not only because we could revise the U.S. rating to 'SD', but also because we could expect a systemic and global macroeconomic disruption. "This hypothetical scenario could look similar to the fall of 2008, when a loss of investor confidence and a flight to quality brought the global funding markets to a temporary standstill," said Standard & Poor's Senior Director Damien Magarelli.

    "The U.S. financial sectors that would be at the greatest risk would be those with business models that depend at least partially on short-term funding. These include banks, funds, finance companies, exchanges and clearinghouses, broker-dealers, and life insurers."

    Depending on how these issues are resolved, the current impasse could potentially--though not inevitably--cause widespread negative rating actions among U.S. public finance issuers in all sectors: states, local governments, affordable housing finance entities, not-for-profit health care entities, public utilities, obligations secured by federal lease payments, and higher education and other not-for-profit entities that rely on significant federal funding.

    "The impact under the various scenarios will vary from sector to sector: what happens to the states won't be the same as what happens, say, to not-for-profit health care providers," said Standard & Poor's Managing Director Steven Murphy. "We believe that for public finance issuers, the least disruptive situation would be characterized by raising the debt ceiling, combined with a lack of drastic changes in federal spending.

    While the sovereign rating is lowered in that scenario, the credit profiles of public finance issuers would remain relatively unaffected because there would be no dramatic changes in federal outlays." Generally, a change in the credit rating or outlook on a sovereign issuer doesn't necessarily lead to a change in ratings or outlooks on similarly rated nonfinancial corporate borrowers in that country. However, the ratings assigned to corporate borrowers may be affected by the U.S. debt debate depending upon the depth and length of the standoff.

    "We would generally expect a more pronounced effect in a scenario involving a failure to raise the debt ceiling--especially if a delay persists long enough that the Treasury defaults on any of its obligations," said Standard & Poor's Managing Director John Bilardello. "Nor do we believe the consequences would be limited to the U.S. Rather, we would expect the reverberations to be deep and wide."

    Given the likelihood, in our view, that a selective default, were it to occur, would persist for only a short time, we expect that ratings actions on structured finance securities would be limited to those with payments due in the near term and those that fail to make payments within any grace period, in accordance with our criteria.

    "In that situation, we would likely lower our ratings on these to 'D (sf)' until the relevant payment defaults were cured," said Standard & Poor's Senior Director Robert Chiriani. "If a government default persisted, we would also use that same approach in rating transactions exposed to maturing U.S. obligations such as defeased securities, for example."


    In short there would be economic and political disruption in the U.S., and likely to affect the world too. Unfortunately the practical concerns are affected by political disagreements. As avgjoe said: "THe last shut-down (nov. 1995 & dec. 95-jan 6th '96) was under Bill Clinton, with Gingrich as Republican Leader, much the same situation as now. The shut-down lasted a total of 25 days." Back then the majority of the public blamed the Republicans for the impasse and it hurt them politically and was part of the reason Clinton was re-elected in 1996. This time the issues will again be a political football by both sides for leverage...most unfortunately.

    Cheers,

    Merlot

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    Quote Originally Posted by James Joyce View Post
    U deserve the benefit of doubt in that you only told a part of the statement issued from Moody's and somewhat of a distinct glaring omission.

    Moody's suggests U.S. eliminates debt ceiling

    http://in.reuters.com/article/2011/0...58311220110718
    The statement about removing the debt ceiling was the latest statement by Moody's given the situation the last few months.

    Both Moody's and S&P have given US warnings on the size of the debt previously.

    The problem with an unlimited debt, it will grow so large that it could never be paid. The debt ratio to GDP is not quite the same level as at the end of World War II, but it's less than 10 percent difference from today to the end of WWII. At the end of World War II, the US had a much healthier economy and manufacturing base. Today, the US has a high unemployment rate and a low growth rate, much lower than post WWII.

  9. #9
    All you need to know is that it's a great time to be visiting the US of A. Will be heading there this week and I was really happy with the exchange rate I got a few days ago... Not that I'll be spending major dough with everything paid off by the corporation but still... more in my pocket to buy the extra cool stuff!

  10. #10
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    Thank you for all your answers.

    I am totally not a specialist in economy, but it seems to be a bit dangerous for the economy of Canada the situation of the US. Am I wrong? US are our fist customer for our primary products.

    And, another question, but more general: It seems that every countries in the world have a "national dept". My question could seem simple, but, to whom they owe their dept?
    US owe their dept to who? Canada owe their dept to who?
    Last edited by Maria Divina; 07-23-2011 at 02:52 PM.

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    The US and most every other country sell Bonds, US Treasury Bonds in the case of the US, to any one willing to buy the bonds.

    US Treasury Bonds are held by other governments and individuals. China, Japan, Russia, UK, Canada, Switzerland, etc. hold US treasury bonds. China and Japan are on the top of the list. Individual companies or Oil exporters also use treasuries to trade Oil.

    Individuals also buy treasury bonds as a temporary place to put money. US Treasuries can be bought in different terms. You can buy a Treasury from 4 weeks, 13 weeks, 26 weeks, 1 year, 3 years, 10 years or 30 years. The US owes the debt holder the money for these bonds or Treasury bills at the end of the term of the bond.

    The way treasury bills work is you pay the face value amount of the bond minus the interest given for the bond. For example, if you buy a $10,000 1 year bond that pays 2 percent interest per year ($200). You would pay $9,800 for the bond. At the end of the year, you would get $10,000 from the government.

    For longer term bonds, there is a trading market. If you hold a bond and you want your money before it reaches the end of the term, you can sell the bond on the open market. Depending on the interest rates at the time, the money you receive may be less or more than the face value of the bond depending on the interest rate of the bond that you are holding and the current interest rates and the trend of the interest rates.

    If you are holding a 30 year old bond that has 5 percent interest rate, and interest rates suddenly start to go up to 10 percent, the value of that bond will be much less than the face value of the bond. That's because you could go out and get a better interest rate and with that bond you would be stuck with a lower interest rate bond.

    Interest rates on bonds are determined by auctions that the Treasury department holds. The interest rates are usually a little higher than the Federal Reserve bank sets interest rates thru policy. This interest rate is the rate it is willing to loan money to the member banks. The longer the term of the bond, usually the interest rate of the bond is higher.

    Canada has Government of Canada marketable bonds, Government of Canada real return bonds, and Government of Canada Treasury bills.

    http://www.bankrate.com/finance/savi...#ixzz1SxKtJDwB

  12. #12
    There is another possibility and it might sound very wild. But the Central Bank will most likely have to increase the money supply to cover this debt thus inflation goes up. This has been the continuing trend for many years. Debt is constantly increasing, money supply increases, and inflation goes up. If nothing is done the inevitable will be that everyone will go bankrupt.
    There is no knowledge that is not power.

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    Cloud, are you referring to hyperinflation? Hyperinflation happened in Germany before World War II.

    The hyperinflation scenario is possible if the government takes over a larger part of the economy such as increasing entitlements and and the number of people receiving those entitlements and the money is pumped through the economy. There needs to be a mechanism to increase velocity of the dollar thru the economy for hyperinflation to happen. If there is low velocity of the currency thru, the opposite happens - deflation.

    What happens is that the dollar loses its value as you say - inflation goes up - and it reaches a point where the loss of purchasing power is significant daily. People rush to buy whatever goods they can find before the next day. This is followed by supply problems as businesses have a hard time procuring the goods and materials to sell or manufacture because of the increasing cost of purchasing before they sell the product. The government increases the money supply to meet the demand of money because of inflation and eventually the economy collapses and the currency becomes worthless. It's a vicious cycle.

    Hyperinflation does happen to currencies. Zimbabwe is the latest example. Bolivia and Argentina were minor versions.

  14. #14

    Cool

    Quote Originally Posted by daydreamer41 View Post
    There needs to be a mechanism to increase velocity of the dollar thru the economy for hyperinflation to happen. If there is low velocity of the currency thru, the opposite happens - deflation.
    Yup this is exactly what I described. Since money is legal tender which means it is worthless and a abstract concept. By controlling money supply they can control the value of money. The thing is that the Central Bank loans us this currency and it has an immediate debt attached to it. How to pay off this debt? Increase money flow and then even more debt. It is a vicious cycle.

    Quote Originally Posted by daydreamer41 View Post
    The government increases the money supply to meet the demand of money because of inflation and eventually the economy collapses and the currency becomes worthless. It's a vicious cycle.
    It is not the government. It is the Federal Reserve or the Central Bank that does this. The Central Bank controls the supply and circulation of money. Keep in mind they are in no way affiliated with the government. They increase money supply because of the debt but but it causes inflation and the value of money decreases to the point it is worthless and one looses purchasing power.

    Quote Originally Posted by daydreamer41 View Post
    Hyperinflation does happen to currencies. Zimbabwe is the latest example. Bolivia and Argentina were minor versions.
    This will be the result of every country if nothing is done about it and I doubt anything will be done about it. The system we have is designed to create debt. At the end everyone eventually goes bankrupt.
    There is no knowledge that is not power.

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    Quote Originally Posted by CLOUD 500 View Post
    Yup this is exactly what I described. Since money is legal tender which means it is worthless and a abstract concept. By controlling money supply they can control the value of money. The thing is that the Central Bank loans us this currency and it has an immediate debt attached to it. How to pay off this debt? Increase money flow and then even more debt. It is a vicious cycle.
    A currency does not necessarily have to have debt associated with it. The Federal Government is borrowing money issuing bonds for money that it spends and does not get from tax dollars. If a government spends exactly what it receives in tax revenue, then there is no debt. Prior to the Great depression of the 1930's, there were more surplus years than deficits. Most of the deficits occurred when the US had long wars, like World War 1, the Civil War, the War of 1812.

    Quote Originally Posted by CLOUD 500 View Post
    It is not the government. It is the Federal Reserve or the Central Bank that does this. The Central Bank controls the supply and circulation of money. Keep in mind they are in no way affiliated with the government. They increase money supply because of the debt but but it causes inflation and the value of money decreases to the point it is worthless and one looses purchasing power.
    The officers of the Federal Reserve Bank is appointed by the President and approved by Congress. The Fed regulates the money supply based on the US budget, the state of the economy, etc.


    Quote Originally Posted by CLOUD 500 View Post
    This will be the result of every country if nothing is done about it and I doubt anything will be done about it. The system we have is designed to create debt. At the end everyone eventually goes bankrupt.
    I have to agree that this is the direction we are heading for. Governments create the debt, not the system. For the first 130 years of the US, most of the years did not have a deficit. The last 80 years, the majority of the years had deficits. Governments around the world have been operating this way to fund social programs. It's gotten out of control.

    Like you said, eventually the whole world economy will collapse. When and how it is triggered is not known.

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