THE U.S. DEBT CRISISBanaresBatanCalanocGuerreroYear IV-A

WHAT IS THE U.S. DEBT CRISIS?

-> The U.S. debt crisis since 2008 refers to the high levels of debt incurred by the American consumers (mainly real estate loans), the failure or collapse of banks affected, and the high level of debt incurred by the U.S. Government in its effort to help the banks, to stimulate the economy, and to prevent a total economic collapse or depression.

HISTORY• After the U.S. stock market collapse of 2001, the U.S.

Federal Reserve lowered interest rates to as low as 1% to prevent a recession.

• Low interest rates made credit easy.• Banks started to lend money aggressively especially in the

real estate sector.• People borrowed money to buy real estate with the

intention of selling their properties at higher prices. • Prices of real estate kept going up and people borrowed

even more hoping to make more money. • This became the “Housing Bubble”.• Eventually, the bubble burst.

HISTORY• Bubble burst The U.S. economy started slowing down. • More people getting unemployed + Losing jobs + more

people unable to pay their loans= more banks getting into trouble.

• Banks began to fail or collapse. Big financial institutions became bankrupt. The shares of these financial institutions crashed. The stock market collapsed.

• The U.S. economy went into a recession. Other countries around the world, especially in Europe, were also affected.

HISTORY• To prevent a Great Depression and a collapse of the U.S.

and the global economy, the U.S. government decided to bail out many of the affected banks. This involved hundreds of billions of dollars.

• To finance this bail-out, the U.S. Government had to borrow money even from overseas. This caused the U.S. Government debt to skyrocket.

TIMELINE• Midterm elections 2 Nov 2010Republicans win control of the House of Representatives, aided by the burgeoning Tea Party movement that promises to scale back government spending. President Obama's Democrats lose six Senate seats and 63 House seats. Obama describes it as a 'shellacking.‘• Midterm elections 2 Nov 2010Republicans win control of the House of Representatives, aided by the burgeoning Tea Party movement that promises to scale back government spending. President Obama's Democrats lose six Senate seats and 63 House seats. Obama describes it as a 'shellacking.'• Obama tax cuts: good for shares, bad for bonds 8 Dec 2010Extending tax cuts and allowing the deficit to remain high may by an economic masterstroke by US President Barack Obama – working to drive up growth and ramp American equity prices. But it brings with it a threat to the US bond market as investors seek out assets offering greater risk.

TIMELINE• Schroders’ Jones: US housing and credit bubble will take

several years to unwind 10 Dec 2010Schroder US Mid Cap fund manager Jenny Jones remains cautious on the prospects for the US as her worries over US housing and the ability of the US consumer to spend its way out of the slowdown persist. • Obama Signs Bill To Extend Bush Tax Cuts 17 Dec 2010In a display of compromise, President Obama signs into law a $858 billion tax cut bill despite the misgivings of members of both parties. Many see this as a capitulation to the right.• 'Gang of six' meet for first time 3 Jan 2011Six Republican and Democratic senators begin cross-part talks on a long-term deficit reduction deal• Republican House approves bill with massive spending cuts 19

Feb 2011After an all-night session, House Republicans passed legislation that would slash $60 billion in government spending until September. The bill is defeated a month later by the Democratic-controlled Senate.

TIMELINE• US avoids possible government shutdown 9 Apr 2011Obama and congressional leaders almost cause a first government shutdown since 1995 after much bickering. Finally agree on a budget for the fiscal year that cuts $38 billion from previous year's level.• IMF: US debt problems could spark fresh global economic

crisis 13 Apr 2011The International Monetary Fund warns that the US lacks a 'credible strategy' to deal with its debt and unless it finds one soon the global economy could find itself contending with another crisis.• S&P downgrade could finally see the US get its house in

order 18 Apr 2011The lack of a clear US strategy to deal with its ballooning debt problem prompts Standard & Poors' to downgrade the nation but economists, while not surprised by the move, hope it will see the nation get a grip on its yawning deficit.

TIMELINE• US is short sellers' top pick as QE2 unwinds 28 Apr 2011With the end of QE2 in sight, sentiment surrounding the US starts to shift. Investors are moving their money from the developed to the emerging markets and taking increasingly bearish punts on the US.• US GDP growth slows to 1.8% as energy costs weigh 28 Apr 2011US GDP growth slows over the first quarter to 1.8% following a marked fall in public sector employment and soaring energy prices and a spate of adverse weather.• Upbeat US jobs figures lift FTSE and global markets 6 May 2011Better-than-expected US job figures triggers a recovery in global markets and sees the FTSE 100 approach the 6,000 mark.• Boehner calls for huge spending cuts 9 May 2011House speaker John Boehner unveils a staunchly conservative plan to offset a debt ceiling hike with spending cuts of a huge amount. This sounds the warning shot for the battle to come, putting House Republicans on a collision course with Democrats who want much smaller spending cuts.

TIMELINE• US hits $14.3tn debt ceiling 16 May 2011US government hits its $14.3 trillion debt ceiling, triggering the long drawn out debate that has a August 2 deadline.• US House votes against raising debt ceiling 31 May 2011House of Representatives rejects a first measure to raise the debt ceiling. The vote is staged by Republicans to show the White House and Democrats that they will not support a debt ceiling increase unless it is accompanied with spending cuts.• Treasuries soar and Dow plunges on US jobs shock 3 Jun 2011US economy only manages to add 54,000 jobs in May raising fresh concerns about the health of the US economy as its second bout of quantitative easing draws to a close.• Can ailing US wave goodbye to QE? 8 Jun 2011Only three weeks before QE2 comes to an end and the US economy does not exactly find its self in rude health.• Cantor Quits Biden’s Debt Ceiling Talks 23 Jun 2011Talks between senior Republicans and vice president Joe Biden collapse after the Democrats press for $400 million in new revenue by closing tax breaks for the wealthy.

TIMELINE• Obama and Boehner discuss 'grand bargain‘ 3 Jul 2011Over the July 4 weekend, Obama and Boehner discuss deal that would save $4 trillion over 10 years through a tax code change and trims to benefits.• Obama invites politicians to White House 5 Jul 2011Obama invites both Democratic and Republican leaders from both chambers to the White House for a meeting on the 7th to discuss deficit reduction and the need to raise the federal debt ceiling.• Boehner pulls out of debt deal 9 Jul 2011Boehner says the grand bargain out of each because the GOP will not accept the tax increases that the Democrats want. He calls on a new package that relies mainly on spending cuts.• Moody's puts US on review for downgrade 13 Jul 2011US may lose its top-notch credit rating in the next few weeks if lawmakers fail to increase the country's legal borrowing limit and the government misses debt payments.

TIMELINE• S&P official warns of pre-default downgrade 14 Jul 2011Standard & Poor says there is a one-in-two chance it could cut the US credit rating if talks don't reach a conclusion.• Gang of Six emerges with a plan 19 Jul 2011The 'gang of six' emerges with a plan that mixes savings and new revenues. Obama likes it but it eventually fails.• Obama and Boehner meet again 21 Jul 2011Obama and Boehner meet again to discuss a $3 trillion deficit-cutting deal. Many Democrats are angry that it goes not contain tax increases, although the president says some will be part of the deal.• Obama-Boehner talks collapse 22 Jul 2011Boehner halts the talks over revenue increases, sparking a fresh round of paranoia as August 2 looms nearer.• Geithner in 24-hour warning 25 Jul 2011US Treasury secretary Tim Geithner says next 24 hours are critical after talks between the Democrats and Republicans on the US debt ceiling broke down again.• Obama addresses the nation 25 Jul 2011Obama makes a late-night statement to the nation from the White House.

TIMELINE• FTSE falls, gold soars as US moves closer to default 25 Jul 2011Stock markets drop and gold reaches a new record high after US congress fails to reach a deal on the debt limit, elevating concerns that the country is heading for a default with little over a week left to find agreement• Obama taunts and cajoles, but still no debt deal 26 Jul 2011Another day passes in Washington without a deal to raise the debt ceiling as the nation edges ever closer to a default. • Lagarde warns US on default 27 Jul 2011IMF boss Christine Lagarde warns the US to sort out its debt crisis with the clock ticking down on the deadline to raise the nation's $14.3 trillion deadline• Republican hopes to vote on debt deal collapse 29 Jul 2011The Republican leader of the House of Representatives John Boehner proves unable to secure the support of his own caucus to vote on a plan to raise the US debt ceiling.• Obama unveils deal with Congress leaders 1 Aug 2011At the eleventh-hour Obama finally reaches a deal on the debt crisis

TIMELINE• Stuart Thomson: US may (just about) keep top rating 1 Aug 2011Ignis chief economist Stuart Thomson believes ratings agencies will 'grudgingly' allow the US to keep its AAA-status after president Obama unveiled his eleventh debt solution package.• Capital Economics: US may downgrade by end of the week 1 Aug

2011Markets may have breathed a sigh of relief at Barack Obama's eleventh hour solution to the debt crisis but the world's biggest economy is far from out of the woods.• US debt-limit bill heads to Senate 2 Aug 2011Senate set to vote on the deal at 16:00 GMT, hours after it passed the House of Representatives.• Senate waives through debt ceiling plan 2 Aug 2011Senate waives through a plan to trim the US deficit by $2.4 trillion (£1.48 trillion) over the next 10 years, narrowly staving off the country's first-ever default.TIMELINE FROM: http://citywire.co.uk/wealth-manager/us-debt-crisis-timeline/a513113

LATEST DEVELOPMENTS

• The U.S. unemployment rate continues to be quite high, although the unemployment rate has slightly gone down lately to less than 9%. The U.S. recession (periods of negative growth) has ended, but the growth rate continues to be low.

• Because of the U.S. Government’s huge borrowings, its credit rating was lowered for the first time in history from triple A (the highest rating) to AA+.

LATEST DEVELOPMENTS• Europe continues to suffer from the effects of the financial

crisis and economic slowdown. Many European countries, like Greece, Spain and Italy, are suffering from their own debt crisis, very high unemployment, and negative or very low economic growth. There is a lot of social unrest (strikes, violent protests).

• Politically, the once very popular Obama is in danger of losing in the next presidential election. Leaders of many of the affected countries in Europe were forced to resign.

Terms• Debt Ceiling: the amount of money a government is permitted to

borrow. • House of Representatives: the lower legislative body of a government

that has the authority to make and revise laws. It is part of Congress.

• Congress: The national legislative body of the United States, consisting of the Senate and the House of Representatives.

• Treasury Department: promotes economic growth through policies to support job creation, investment, and economic stability. Treasury also oversees the production of coins and currency, the disbursement of payments to the public, revenue collection, and the funds to run the federal government.

• Deficit: a shortfall in economic revenues.

Financial• The US expects an annual collection of at least 170 billion dollars in

revenues along with 300 billion dollars worth of expenditures. This is considered normal since the US government never had a problem with borrowing money in order to pay for the deficit (a shortfall in revenue). Not only that, there are many people who are willing to lend the US government money because it is seen as a safe investment.

• However, the US government’s debt rose within the last 4 years and is reported to be more than 14 trillion dollars. With the government and its politicians still continuing their debates as to what solution should be made, there has been a lack of focus as to where the current funds that the US government is still in possession of should go.

• If this lack of focus continues, Treasury department will not be able to pay its bills. This will results in a financial panic not only in their local economy but also in the global economy, seeing as many people all over the world either receive payments from the US government or have lent/invested a huge sum of money to it.

Political• With the US debt crisis being the biggest economic problem that the

country is currently suffering from, the US government needs to take action and come up with a solution that will benefit the good of the entire population. However, no concrete solution was decided upon because of the unresolved debates that have been going on in the White House, resulting in the indecisiveness as to whether or not the US debt ceiling will be increased in order for the government to have enough funds to meet its obligations every month.

• The problem is that the House of Representatives, which consists of Republicans, are committed to balancing the budget of the US government by reducing the funds of government activities and spending (particularly the military funding) while Congress, which consists of the Democrats, are in favor of increasing the debt ceiling.

• Because of this, the US government has made no significant progress as a unified institution. It can be expected that the US government will allow both political and economic uncertainty to continue for as long as the members within government don’t cooperate with one another and come up with a unified solution.

Social• With the US debt crisis still continuing, majority of the US

population is currently suffering from problems like unemployment, increased taxes, reduced benefits, lowered wages, delayed retirements and etc.

• These people are living in both political and financial insecurity, which will only increase their doubt and distrust with the government and their plans. This can result in the development of anti-government and protest groups, demanding for the government to make concrete solutions to the economic issues that need immediate attention.

• Another possible result can be an increase in the number of migrants in the US population. These migrants have most likely lost hope in the possible improvement of the US economy that seems to only worsen with time.

Will they be able to pay it back?

US DEBT CRISIShttp://www.youtube.com/watch?v=Jjv-MtGpj2U•Debt is too big•Solution: cut off defense and all spending

in the US government so that you can equalize income and expense

How it affects Philippines•OFW’s lose their jobs (ex. Maryland

teachers, state-run hospitals, schools, etc)•America buys less of exported goods (export

market)•Cannot invest in Philippines (no money) –

Foreign Direct Investments (FDI)•Hard to get jobs. Laborers have no choice:

work more; salary does not increase•Tourist-related assets (e.g. hotels, airline,

tollway) will be less used less foreigners

We are not gravely affected

•Stock market– around 4-5 countries only were above zero (positive) in return such as the US, Philippines, Indonesia, etc.

Sources•http://seekingalpha.com/article/97427-the

-dummy-s-guide-to-the-u-s-financial-crisis•http://citywire.co.uk/wealth-manager/us-d

ebt-crisis-timeline/a513113

•Youtube.com•Interview with Melchor Guerrero (studied

Economics in University of Berkeley; subscribes to the Economist magazine; is fond of Economics)