The way it should be

"It should not escape notice that gold and silver after circulating in every other quarter of the globe, come at length to be absorbed in Hinduston"

                         ~Francois  Bernier

US Vs Rest of the world, debt crisis..

Posted by VASUDEVA REDDY on Friday, August 19, 2011 Under: economic articles

Are you the one among the millions of people who wants to work in United States to bring some dollars to your own country? Then, think twice.. if not act wise.. Just read the article, you’ll come to know what those two statements mean to you…

United States, a paradise for millions non-Americans, is now suffering from the problem which it hasn’t dreamt of. That is the debt. American debt value is more than that of any country’s GDP, even United States’. The growth rate of American debt is higher than that of growth rate of, world’s fastest growing economy, china. What happened to US? Why the story has come for this much distance? I just tried to answer those few questions in the best possible way to me.



America’s expenses have been more than that of their incomes from several decades, even the same with India. To say, americans never earned more than their expenses level after dollar became the world reserve currency. (see my article on World debt crisis to know how dollar became reserve currency). The gap had increased more and more as the time passes. For any country, if the expenses are more than that of incomes they will face a financial deficit; the story is same even with the supreme power. As they were facing deficit, they need some external money to compensate their extra incomes.  For that thing, they have introduced US treasury bills, which was the most attractive and safest investment to the rest of the world. As dollar became the reserve currency, every country was in a need of getting more and more dollars to make payments for imports. Being the economically very sound country US was able to get whatever the amount they wanted for very low rates, even zero percent interest rates for short term investments. Literally the entire world has poured their money into US. To pay the interests as they promised, US started borrowing more and more money from the world. It has caught in a vicious circle. The total external debt started to increase more and more.


 

Had been a developed economy the growth rate was more or less stagnant (it was some 4% on an average for the last 20 years), while the population was increasing simultaneously the expenditure. The situation of the US was pretty cool until the period of Clinton, who left the US treasury with surplus. But the scene has changed completely after that when GW Bush took over the charge from Clinton.  In early 2000’s, dot-com bubble has shaken the world, particularly US. After that subprime crisis had played a devastating role in the world economy, originated and grew up in US. In addition to that, US have participated in two wars in that decade. Now the entire world is suffering from the shockwaves of those incidents.

For an example of spending, US military budget for the fiscal year was $737 billion, which is more than that of any country GDP( apart from the top 16 economies in the world). To meet their obligations, America minted more and more money which leaded the country to inflation. America looked richer to the world nations and the nations which were invested in America looked poorer. This made the imports of America cheaper, caused the negative affect on their own manufacturing sector. US manufacturing companies moved their bumps to other nations to cut down their production costs which caused to raise the unemployment levels. American Government started to give unemployment compensation which caused more spending on the budget.


 

When the debt level reached to US GDP level, US were in dilemma whether to borrow more or to go for default. Finally they went for borrowing more. Even the entire world wished not to default, as every country has invested more or less amounts in US treasury bills. If US were defaulted, the world economic collapse would have happened. As the world nations has no other alternative of investments they have to invest in dollar.

The only way that US can repay back their loans is by increasing taxes or reducing the spending. As the later one is very difficult in American context, which will lead to unemployment, the only choice left over is increasing tax rates.

Here you may get some doubt, how a rating agency can dictate the world supreme power?  The answer to this question is very simple. The better the rating of a nation, the cheaper the interest rates they’ll provide. Just imagine why people are saving their money in the banks, which will provide max of 10% interest rate, while one can earn more money through the investments in stocks and other alternatives. The reason is risk factor. Here also the thing is same. Credit rating companies rate the countries according to their credit worthiness. AAA rated country is very reliable and there will be a very minute chance of getting defaulted. Credit rating of a country is like a investing guideline for the nations. Even after Standard &Poor (S&P) degraded US credit worthiness level to AA+ from AAA, entire world is ready to invest in US, at very cheaper interest rates. Because, the worthiness is not lies on the ratings but it depends on the perception.

So guys, if you are planning to work in US, you must think twice. The more you’ll work, the more you’ll pay to US government in the form of taxes. Even If you are planning to work in your own country also, there will be problems with the globalized economies.

 

In : economic articles 


Tags: us debt ceiling united states treasury credit rating 

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