WELCOME

SHOULD U.S. RAISE ITS

DEBT CEILING?DEBT CEILING?

THE FLOW

• The Current Scenario

• How did they reach here

• Why do you need debt ceiling?

• The Criticality of the situation• The Criticality of the situation

• Issues if they raise and if they don’t raise

the ceiling

• Open Forum

CURRENT SCENARIO

• US $14.29 trillion

•• 96% of GDP

• AAA rating since 1917

Have High Debt and High Rating

Why US has been able to raise so much money

THE DOLLAR

• Largest industrial base and surplus of dollar

backed by Gold post 2nd world war.

•1971: The Dollar was fixed as Reserve Currency.

• 1973 oil crisis: Increase in US treasury bills

held by central governments

•As a result demand for Dollar increased in the

world arena.

WHO IS HOLDING THIS DEBT

DEBT CEILING

DEBT CEILING

• Limits the amount of public debt that

can be outstanding.

• Prevents the U.S. Treasury from

issuing new debt once the limit has

been reached.

IMPORTANCE OF DEBT

CEILINGCEILING

IMPORTANCE OF DEBIT CEILING

• Provides Congress with the strings to

control the federal purse

• A form of fiscal accountability

• Compels Congress and the President to

check their debt borrowings

But you can always increase it

The REASONS

From a forecast annual surpluses of

$850 billion for 2009–2012 to deficit reality of

$1,215 billion

How serious is this issue of Debt ceiling

Default in

payment

Default in

paymentEmployment

EmploymentDefault in

payment

Inflation

EmploymentDefault in

payment

Rate

Exchange

RateInflation

Employment

GDP

Default in

payment

Inflation

Rate

Exchange

Rate

Employment

GDP

Default in

payment

National

Inflation

Rate

Exchange

Rate

National

Income

Employment

GDP

Default in

payment

National

Inflation

Rate

Exchange

Rate

National

Income Stock Market

EmploymentDefault in

payment

National

GDP

Dollar Value

Inflation

Rate

Exchange

Rate

National

Income Stock Market

Employment

Interest National

GDP

Default in

payment

Dollar Value

Inflation

Interest

Rates

Rate

Exchange

Rate

National

Income Stock Market

IF THEY DON’T RAISE THE

DEBT CEILINGDEBT CEILING

• Decrease in Expenses

• Effect on Stock Market

• Sky High mortgage and Interest rate

• Treasury Bond Collapse

BUT WHAT IF THEY RAISE

THE DEBT CEILINGTHE DEBT CEILING

Dollar weakens

Imports

• Imports become dearer.

• End up paying more money for same quantity

of goods purchased.of goods purchased.

• Pace of economic growth rate slows down.

Exports

• Exports become cheaper.

• Importer country ends up buying same

amount of goods for a lesser price.amount of goods for a lesser price.

• As a result of increase in exports, the trade

deficit might decrease.

INFLATION

• As imports get dearer, inflation increases.

• Prices of goods increases.•

INTEREST RATES

• As a result of increase in inflation, the interest

rates will go up.

• Investor confidence will go down.• Investor confidence will go down.

• As a result the investment in the economy will

go down.

CAPITAL FLIGHT

• Flow of funds or investments from develop to

developing countries.

• Increases unemployment in the country.• Increases unemployment in the country.

CAPITAL FORMATION

• Investments and capital formation are

positively correlated.

• As investments go down rate of capital • As investments go down rate of capital

formation goes down.

• Hence government needs money to initiate

investments and growth in the economy.