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Sunday, May 22, 2011

Increasing US Debt- a Step towards Recession

The fact of which whole world is afraid of is US debt and which is increasing by leaps and bounds. By the time of this write-up, it was 14.35 billion $ (USD), which is mind-boggling 97.61 percent of US federal GDP.

Nearly two-third of this debt is public debt that is money borrowed from people, business houses, and other nation’s governments who bought treasury bills, treasury notes and bonds from US treasury department.
I have discussed treasury products in detail here.
Rest of the debt is owned by US govt. itself where govt owes to social security and other trust funds running in the surplus.
Few major nations who own US treasury instruments are PRC (People’s Republic of China) and Japan, as these counties have faith in US economy.

Us government is expending more and more money and cutting taxes every year has resulted in Accumulation of budget deficits over years and which brought US in such a critical situation.
Perceiving oncoming threat debt holders sought larger interest payments which aggravated the debt burden.
Defence spending and various economic stimulus and bailout packages are few names accountable for this debt imbroglio.
Now you shall ask me why countries like China and Japan went for US treasury products despite looming risk of default.
And the answer lies in the Chinese economy being export-oriented economy, and for an export oriented economy local currency should be competitive against world’s reserve currency so that it is favourable for exporters.
To get rid of local currency China chose the option to buy US treasury products.
Similarly Japan buys US treasury products for export boost.
To cope up with burgeoning debt, US shall keep dollar low or go for the devaluation.
This devaluation shall impact those nations who are holders of US treasury products as they shall get less return (in their currency) and this shall result in more investment in their own countries instead of buying US treasury products.
Lesser demand for US treasury product shall result in higher interests in US which are a step towards recession.

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