Archive | March, 2009

Sitting on Debt Dynamite

25 Mar

Glancing through Mankiw’s blog, I came across a startling fact- the US govt is expected to cumulatively borrow $9.3 trillion over the next decade. To put that into perspective, India’s GDP stands at about a trillion USD. Roughly thus, the US govt will borrow an amount equal to one India GDP every year.

US Fiscal Deficit

US Fiscal Deficit

The Congressional Budget Office, an independent body which has a mandate to provide the congress with “objective, nonpartisan, and timely analyses to aid in economic and budgetary decisions on the wide array of programs covered by the federal budget”, also estimates that the national debt to GDP ratio in the US would exceed 82 per cent by 2019, which is double the last year’s level.

National Debt to GDP

National Debt to GDP

The US fiscal deficit is expected to be $1.85 trillion in the present fiscal. The US GDP approximately stands at $14 trillion. That would put the current fiscal deficit at about 13 per cent of the GDP.  The only time the US government ran a deficit as large as this was before World War II.

The situation is startling indeed. And has resulted in some very uncomfortable questions doing the rounds. The venerable US govt treasury bills, branded the ‘safest asset in the world’, suddenly does not seem so safe now. The possibility of the US govt defaulting on its debt  is now at least being considered if not expected.

The foreign holding of US treasuries has throw in another aspect. Look at the pie chart below-

Foreign Ownership of US Treasuries

Foreign Ownership of US Treasuries

Around 28 per cent of the outstanding US treasuries is owned by “Foreign and International” entities – read this as the central banks of countries like Japan, China and India. And the spiraling US debt has made at least one creditor nation wary of the “safe investment” branding.  China, which recently surpassed Japan as US’s largest creditor (China holds $696 billion in U.S. treasury debt, more than Japan’s holdings of $578 billion. Foreign holdings of U.S. Treasury debt in the previous year stood at $3.1 trillion), expressed concerns regarding the ability of the US government in meeting it’s debt obligations. Wen Jiabo, the Chinese premier, recently said that China is “worried” about its holdings of  US treasuries and wants assurances from the US that the investment is safe. “I request the U.S. to maintain its good credit, to honor its promises and to guarantee the safety of China’s assets,” Wen said at a press briefing in Beijing.

I am still finding it difficult to digest the above. Nobody questions the safety of US treasuries. Or so I believed. The situation has come to this pass that a developing nation, one-fifth the size of the US economy, is counseling the US administration to honor it’s debt obligations!! The future holds very important questions in light of the above. Is the appetite for US treasuries falling? If yes, what implications does this hold for the US government in raising finance to get it’s economy out of recession? What are the implications for the value of the dollar-the world currency? And lastly, which asset will now take the place as the “safest asset in the world”? Questions worth pondering on…

Published by Ravi Saraogi

Funny One Liners

15 Mar

Indian Elections

The race for the Lok Sabha elections is heating up… Which basically means that you can treat yourselves to some awesome one liners that will make you marvel at the creativity of our politicians…. Some really nice ones have started filtering in.. Check them out

“Kamal ho ya Haathi, bhai behen ka sathi…. “

Amar Singh, General Secteray, Samajwadi Party, on the possibility that Advani might choose Mayawati as his Deputy if he happens to be the Prime Minister. Kamal = Lotus (BJP’s mascot), Haathi = Elephant (BSP’s mascot)

“Chadh gundon ki chathi par, mohar lagao hathi par”

Bahujan Samaj Party’s (BSP) election signature

To which, it’s principal opponent, Samajwadi Party (SP) replies,

“Gunde chadh gaye hathi par, goli lagegi chhati par”

Really nice. And to imagine this is only the beginning 🙂