After a long time I am going to write a post on the world economy. Earlier I have written few posts on the topics sovereign debt problem, recession and sub-prime crisis, etc. It received lot of interests from the readers. I felt it is the right time to come up with some global topics which would provide exposure to the current situation of the global economy. There are number of burning issues like US debt ceiling, euro zone crisis, china currency war with dollar,etc.
This article explains the most discussed topic US debt ceiling and how the global economy would be impacted. It is important for every one of us to have the minimum knowledge on the status on global economy which would directly affect the Indian markets. Also, the recent developments shows that countries like USA, UK and Europe are struggling to handle their huge debts which would be result in the defaults.
Let’s jump into the article and will look more detail on US debt ceiling and possible outcome of the issue. You can share your thoughts in the comments section. Please subscribe to our future articles here.
What is US debt ceiling problem?
The current situation of the US government is that it has reached the maximum limit it can borrow from others. The limit is set as $14.3 trillion. According to the reports, the limit has been already reached and they have the time till August 2, 2011 to increase the limit. If the US govt. want to get more loans, first it needs to increase the debt ceiling for $14.3 trillion with approval from the parliament.
The debt ceiling was created after the World War I. This has been increased several times and it is not the first time to increase the limit. But, now the debt which US has is the highest in the history. US govt. never had this much debt in their balance sheet. It creates the problem for them to raise it again to borrow more loans.
If the US govt. failed to complete the deal, there won’t be any money left with the US treasury to spend on the welfare schemes and pay the pension to the govt. employees. It ultimately need to cut all the expenses and stop the projects. It would drastically affect US economy and then spread to the world economy. It is expected that at least some temporary solution to be decided on the coming week. Everyone on the wall street are nervous about the situation and eagerly waiting for the positive outcome.
History of US Debts
The following picture ( source: firstpost )explains the historical data on how the huge debt is accumulated over the years. The existing debt has been increased quickly after the 2008 financial crisis.
The following picture( Source: NyTimes ) explains the creditors who has contributed the debt.
Deadlock with Congress
Since the current debt of the country is very high, it is also a not good idea to increase the debt ceiling without a proper strategy to cut the govt. spending and increase the taxes to reduce the debt burden in the future. Note that, US govt. has to pay the interest for the whole debt on the specified date with bond holders. When the debt amount is getting increased, the interest outgo also will get increased. This would make the things worse if there is no significance increase in the income of the govt.
Keeping the above problems in mind, the current opposition party ( Democrats ) leader John Boehner is not approving the Obama’s plan to pass the debt ceiling bill. It needs to get the approval in the Congress. As of writing this article, till there is deadlock over the issue and no significance progress. If the ruling govt. increases the limit without approval from the opposition party, it would become problem for Obama’s administration. (Read: Fed Readies Guidance for Banks in Case Aug. 2 Debt-Ceiling Deadline Missed)
Gold rush and US debt rating
If you look into the recent rally on the gold prices, it is mounting the all time high of $1,637.50 an ounce. The investors are worried about the future of dollar and want to park their money in the safest place. There are no other best alternative for the dollar (few investors buying into Japan’s Yen) then Gold. The gold rally will continue for the next couple of years till the issue on US debt and Euro zone problems are solved. But, the current level on Gold is at all time high, investors should be careful on investing on the gold.
Every govt. has its rating for their debts. For example, when US govt. needs to borrow money from other countries, they will issue the bonds of short term and long term. This bonds will carry the interest rates associated with it. China has bought more than $750 billion worth of US bonds. It means that China is the largest lender for US govt. as of now. The second largest lender is Japan. US govt. needs to repay the loan on the maturity of the bonds and have to give the interest amount on specified date. If the repay capacity of the loan become difficult for the borrower, in this case its US govt., the rating agencies will cut the rating. Currently countries like USA has the top rating of AAA.
If the rating is downgraded, it would increase the interest rates on the bond prices and getting more money would be costlier for the governments.
Global Impact
Any bad news from the western countries, directly impact all the countries because most of the countries heavily depend on the US for import and export. For instance, China is the largest exporter for US. If any slow down on the economy would directly impact the China’s exports and it would collapse their GDP growth. US consumers has the highest spending habits, there are no other country to replace the USA at any time. So, the impact can not be avoided and every one has to go through the tough times ahead.
Summary
The above sections explained the real scenario of the US debt problem and its consequences. If the result is negative, it would shake the global economy and would lead to another recession. This time it will be bigger than the 2008 crisis. We have to wait and watch for the proceedings. I will come up with few more articles on the burning global issues. If you have any ideas, please post it in the comments section.
Please subscribe to our future articles here.
July 31, 2011 at 9:13 am
vry vry nice article…
July 31, 2011 at 8:19 pm
Hi,
Awesome post and good analysis.
It is very informative and people really gain a good knowledge after reading this post. I like all your articles and am a consistent reader of your blog…
Nice work …good going
July 31, 2011 at 11:06 pm
hiee….
very informative and very clearly xplained..
keep dis work gng….. all d best:)
August 1, 2011 at 2:52 am
Hi,
Thank you for the comments. It looks like Obama has done the deal to increase the debt limit:
http://www.guardian.co.uk/world/2011/aug/01/us-debt-crisis-deal-reached-obama
Everything will be for temporary solution.
Thanks,
Krishna
August 1, 2011 at 10:59 pm
Thanks Krishna,
Article is very timely and informative…
If you can post little earlier it will be more useful.
Regards
Joy
August 2, 2011 at 1:31 am
Very well explained.. many thanks
August 4, 2011 at 2:17 am
why borrow , if you can not repay. hail us hovt.
August 11, 2011 at 3:39 am
Dear Sir I have two questions:
1. What impact will it have on India because as per the the above article India is not a lender to US ?
2. Why we need to buy gold from IMF, we have our own gold mines ?
August 12, 2011 at 4:43 am
Hello B Singh,
1. India did not give much loans to US. But, slowdown US would affect the Indian economy.
2. We need to have some reserve, it will be on gold or currency. Since the dollar value is reducing, India bought gold.
Thanks,
Krishna
August 12, 2011 at 10:12 am
The article is quite good. But, the US, being the largest country in terms of economy is such a unique country which gives it several advantages over others which no other countries can have due to the following factors:
1) Its currency is an international currency that boost its acceptability for other countries.
2) The US economy is too bigh to fall, which means that i it is left to fall, it might create a phenomenon like a dominoes effect for the world economies at large.
3) Us economy’s credibility, though at some point of time could have been suspected, has paased the test of time for so many years. This let many to believe that the Us will again stand the test of time again. so many other points are there, but I leave them for other times
August 12, 2011 at 7:26 pm
Hello Samuel,
I would agree with your points as US is the biggest economy to fall. If US economy is falling, it would lead to the depression because of its size.
Coming to the global currency, US is getting more advantage because of its dollar as the global currency. The worrying thing is global currency must be more stable. If US can solve the problems they can sustain their super power image.
This problem can be solved only through the unity of all the economies. Nowadays every country depends on others.
Thanks,
Krishna
August 14, 2011 at 9:34 am
excellent article(s).
August 16, 2011 at 7:24 am
Very information and love it. Simple and strong content. I seriously had a doubt about all these terms and now I am crystal clear.
Thanks a ton for sharing the information.
August 16, 2011 at 7:07 pm
Hello Suresh,
Thank you for the comments.
Thanks,
Krishna
August 20, 2011 at 2:10 am
Nicely written in smooth language..
August 27, 2011 at 1:55 pm
Very good article I am just 12 years old and I understood everything properly. The use of graphs is also excellent. A very neat crisp and informative article. Keep on posting!
August 27, 2011 at 5:38 pm
Hello Nihar kantipudi,
It is great to see you are learning in very young age. Keep reading my articles.
Thanks,
Krishna
September 23, 2011 at 11:38 am
It is a very nice article. your style of presentation is very attractive to the readers.
September 23, 2011 at 6:59 pm
Hello Swaminathan,
Thank you for the comments.
- krishna
September 24, 2011 at 3:37 am
hi,
all ur posts are sooo goood.
never knew economics would be too simple like this.
can u post articles on about black money, hawala transactions and basel committes. Heard these terms lot of times, but the concept is not clear.
Thanks in advance.
Keep on posting
September 24, 2011 at 8:21 pm
Hello Thenmozhi,
Thanks.
I will keep note of your suggestions. Today I am writing about the recent rupee depreciation against dollar. Please read it.
- krishna
January 2, 2012 at 4:35 am
Nice article…easy to understand….
This is a valuable website..Keep up your good work…..
January 8, 2012 at 7:07 am
nice job
easy to understand article
July 10, 2012 at 2:20 am
One of the best article indeed.
This is the first time, I’m able to see this site. Really wonderful.
Easy to read and easy to understand.
Thanks a lot .
July 10, 2012 at 4:21 am
Hello Jayakumar,
Thank you for reading my blog!
Thanks,
Krishna