Economic Crisis

ECONOMIC CRISIS IN USA AND EUROZONEREASONS AND SOLUTIONS

INTRODUCTION:The term economic crisis is applied broadly to a variety of situations in which some financial

assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries,

many financial crises were associated with banking panics, and many recessions coincided with

these panics. Other situations that are often called financial crises include stock market crashes

and the bursting of other financial bubbles, currency crises, and sovereign defaults. Financial

crises directly result in a loss of paper wealth but do not necessarily result in changes in the real

economy.

Negative GDP growth lasting two or more quarters is called a recession. An especially

prolonged or severe recession may be called a depression, while a long period of slow but not

necessarily negative growth is sometimes called economic stagnation. Some economists argue

that many recessions have been caused in large part by financial crises. One important example is

the Great Depression, which was preceded in many countries by bank runs and stock market

crashes. The subprime mortgage crisis and the bursting of other real estate bubbles around the

world also led to recession in the U.S. and a number of other countries in late 2008 and 2009.

Some economists argue that financial crises are caused by recessions instead of the other

way around, and that even where a financial crisis is the initial shock that sets off a recession,

other factors may be more important in prolonging the recession. In particular, Milton Friedman

and Anna Schwartz argued that the initial economic decline associated with the crash of 1929 and

the bank panics of the 1930s would not have turned into a prolonged depression if it had not been

reinforced by monetary policy mistakes on the part of the Federal Reserve.

Common Causes and consequences of financial crisis:1. Strategic complementarities in financial markets:

It is often observed that successful investment requires each investor in a financial market to

guess what other investors will do. In many cases investors have incentives to coordinate their

choices. For example, someone who thinks other investors want to buy lots of Japanese yen may

expect the yen to rise in value, and therefore has an incentive to buy yen too. Economists call an

incentive to mimic the strategies of others strategic complementarity.

2. Leverage:

Leverage, means borrowing to finance investments, is frequently cited as a contributor to

financial crises. When a financial institution (or an individual) only invests its own money, it can,

in the very worst case, lose its own money. But when it borrows in order to invest more, it can

potentially earn more from its investment, but it can also lose more than all it has. Therefore

leverage magnifies the potential returns from investment, but also creates a risk of bankruptcy.

Since bankruptcy means that a firm fails to honour all its promised payments to other firms, it

may spread financial troubles from one firm to another. The average degree of leverage in the

economy often rises prior to a financial crisis.

3. Asset-liability mismatch:

Another factor believed to contribute to financial crises is asset-liability mismatch, a

situation in which the risks associated with an institution's debts and assets are not appropriately

aligned. For example, commercial banks offer deposit accounts which can be withdrawn at any

time and they use the proceeds to make long-term loans to businesses and homeowners. The

mismatch between the banks' short-term liabilities (its deposits) and its long-term assets (its

loans) is seen as one of the reasons bank runs occur (when depositors panic and decide to

withdraw their funds more quickly than the bank can get back the proceeds of its loans). In an

international context, many emerging market governments are unable to sell bonds denominated

in their own currencies, and therefore sell bonds denominated in US dollars instead. This

generates a mismatch between the currency denomination of their liabilities (their bonds) and

their assets (their local tax revenues), so that they run a risk of sovereign default due to

fluctuations in exchange rates.

4. Uncertainty and herd behavior:

Many analyses of financial crises emphasize the role of investment mistakes caused by lack

of knowledge or the imperfections of human reasoning. Behavioral finance studies errors in

economic and quantitative reasoning. Historians, notably Charles P. Kindleberger, have pointed

out that crises often follow soon after major financial or technical innovations that present

investors with new types of financial opportunities, which he called "displacements" of investors'

expectations. Early examples include the South Sea Bubble and Mississippi Bubble of 1720,

which occurred when the notion of investment in shares of company stock was itself new and

unfamiliar, and the Crash of 1929, which followed the introduction of new electrical and

transportation technologies. More recently, many financial crises followed changes in the

investment environment brought about by financial deregulation, and the crash of the dot com

bubble in 2001 arguably began with "irrational exuberance" about Internet technology.

5. Regulatory failures

Governments have attempted to eliminate or mitigate financial crises by regulating the

financial sector. One major goal of regulation is transparency: making institutions' financial

situations publicly known by requiring regular reporting under standardized accounting

procedures. Another goal of regulation is making sure institutions have sufficient assets to meet

their contractual obligations, through reserve requirements, capital requirements, and other limits

on leverage.

6. Contagion

Contagion refers to the idea that financial crises may spread from one institution to another,

as when a bank run spreads from a few banks to many others, or from one country to another, as

when currency crises, sovereign defaults, or stock market crashes spread across countries. When

the failure of one particular financial institution threatens the stability of many other institutions,

this is called systemic risk.

One widely cited example of contagion was the spread of the Thai crisis in 1997 to other

countries like South Korea. However, economists often debate whether observing crises in many

countries around the same time is truly caused by contagion from one market to another, or

whether it is instead caused by similar underlying problems that would have affected each

country individually even in the absence of international linkages.

7. Recessionary effects

Some financial crises have little effect outside of the financial sector, like the Wall Street

crash of 1987, but other crises are believed to have played a role in decreasing growth in the rest

of the economy. There are many theories why a financial crisis could have a recessionary effect

on the rest of the economy. These theoretical ideas include the 'financial accelerator', 'flight to

quality' and 'flight to liquidity', and the Kiyotaki-Moore model. Some 'third generation' models of

currency crises explore how currency crises and banking crises together can cause recessions.

List of recessions in the United StatesIn the United States, the unofficial beginning and ending dates of national recessions have

been defined by an American private nonprofit research organization known as the National

Bureau of Economic Research (NBER). The NBER defines a recession as "a significant decline

in economic activity spread across the economy, lasting more than a few months, normally

visible in real gross domestic product (GDP), real income, employment, industrial production,

and wholesale-retail sales".

There have been as many as 47 recessions in the United States since 1790 (although

economists and historians dispute certain 19th-century recessions). Cycles in agriculture,

consumption, and business investment, and the health of the banking industry also contribute to

these declines. U.S. recessions have increasingly affected economies on a worldwide scale,

especially as countries' economies become more intertwined.

Early recessions and crises

Attempts have been made to date recessions in America beginning in 1790. These periods of

recession were not identified until the 1920s. To construct the dates, researchers studied business

annals during the period and constructed time series of the data. The earliest recessions for which

there is the most certainty are those that coincide with major financial crises.

Name Characteristics

Copper Panic of

1789

Loss of confidence in copper coins due to debasement and counterfeiting led to

commercial freeze up that halted the economy of several northern States and was not

alleviated until the introduction of new paper money to restore confidence.

Panic of 1797

Just as a land speculation bubble was bursting, deflation from the Bank of

England (which was facing insolvency because of the cost of Great Britain's

involvement in the French Revolutionary Wars) crossed to North America and

disrupted commercial and real estate markets in the United States and the Caribbean,

and caused a major financial panic. Prosperity continued in the south, but economic

activity was stagnant in the north for three years. The young United States engaged in

the Quasi-War with France.

1802–1804 A boom of war-time activity led to a decline after the Peace of Amiens ended the war

Name Characteristics

recessionbetween the United Kingdom and France. Commodity prices fell dramatically. Trade

was disrupted by pirates, leading to the First Barbary War.

Depression of

1807

The Embargo Act of 1807 was passed by the United States Congress under

President Thomas Jefferson as tensions increased with the United Kingdom. Along

with trade restrictions imposed by the British, shipping-related industries were hard

hit. The Federalists fought the embargo and allowed smuggling to take place in New

England. Trade volumes, commodity prices and securities prices all began to

fall. Macon's Bill Number 2 ended the embargoes in May 1810, and a recovery

started.

1812 recession

The United States entered a brief recession at the beginning of 1812. The decline was

brief primarily because the United States soon increased production to fight the War

of 1812, which began June 18, 1812.

1815–21

depression

Shortly after the war ended on March 23, 1815, the United States entered a period of

financial panic as bank notes rapidly depreciated because of inflation following the

war. The 1815 panic was followed by several years of mild depression, and then a

major financial crisis – the Panic of 1819, which featured widespread foreclosures,

bank failures, unemployment, a collapse in real estate prices, and a slump

in agriculture and manufacturing.

1822–1823

recession

After only a mild recovery following the lengthy 1815–21 depression, commodity

prices hit a peak in March 1822 and began to fall. Many businesses failed,

unemployment rose and an increase in imports worsened the trade balance.

1825–1826

recession

The Panic of 1825, a stock crash following a bubble of speculative investments in

Latin America led to a decline in business activity in the United States and England.

The recession coincided with a major panic, the date of which may be more easily

determined than general cycle changes associated with other recessions.

Name Characteristics

1828–1829

recession

In 1826, England forbade the United States to trade with English colonies, and in

1827, the United States adopted a counter-prohibition. Trade declined, just as credit

became tight for manufacturers in New England.

1833–34

recession

The United States' economy declined moderately in 1833–34. News accounts of the

time confirm the slowdown. The subsequent expansion was driven by land

speculation.

Free Banking Era to the Great Depression

In the 1830s, U.S. President Andrew Jackson fought to end the Second Bank of the United

States. Following the Bank War, the Second Bank lost its charter in 1836. From 1837 to 1862,

there was no national presence in banking, but still plenty of state and even local regulation, such

as laws against branch banking which prevented diversification. In 1863, in response to financing

pressures of the Civil War, Congress passed the National Banking Act, creating nationally

chartered banks. There was neither a central bank nor deposit insurance during this era, and thus

banking panics were common. Recessions often led to bank panics and financial crises, which in

turn worsened the recession.

Name Characteristics

1836–1838

recession

A sharp downturn in the American economy was caused by bank failures and

lack of confidence in the paper currency. Speculation markets were greatly

affected when American banks stopped payment in specie (gold and silver

coinage). Over 600 banks failed in this period. In the South, the cotton market

completely collapsed.

Name Characteristics

late 1839–late 

1843 recession

This was one of the longest and deepest depressions. It was a period of

pronounced deflation and massive default on debt. The Cleveland Trust

Company Index showed the economy spent 68 months below its trend and only

9 months above it. The Index declined 34.3% during this depression.

1845–late 1846

recession

This recession was mild enough that it may have only been a slowdown in the

growth cycle. One theory holds that this would have been a recession, except

the United States began to gear up for the Mexican–American War, which

began April 25, 1846.

1847–48

recession

The Cleveland Trust Company Index declined 19.7% during 1847 and 1848. It

is associated with a financial crisis in Great Britain.

1853–54

recession

Interest rates rose in this period, contributing to a decrease in railroad

investment. Security prices fell during this period. With the exception of falling

business investment there is little evidence of contraction in this period.

Panic of 1857

Failure of the Ohio Life Insurance and Trust Company burst a European

speculative bubble in United States' railroads and caused a loss of confidence

in American banks. Over 5,000 businesses failed within the first year of the

Panic, and unemployment was accompanied by protest meetings in urban areas.

This is the earliest recession to which the NBER assigns specific months (rather

than years) for the peak and trough.

1860–61

recession

There was a recession before the American Civil War, which began April 12,

1861. Zarnowitz says the data generally show a contraction occurred in this

period, but it was quite mild. A financial panic was narrowly averted in 1860 by

the first use of clearing house certificates between banks.

1865–67

recession

The American Civil War ended in April 1865, and the country entered a lengthy

period of general deflation that lasted until 1896. The United States

occasionally experienced periods of recession during the Reconstruction era.

Production increased in the years following the Civil War, but the country still

had financial difficulties. The post-war period coincided with a period of

Name Characteristics

some international financial instability.

1869–70

recession

A few years after the Civil War, a short recession occurred. It was unusual since

it came amid a period when railroad investment was greatly accelerating, even

producing the First Transcontinental Railroad. The railroads built in this period

opened up the interior of the country, giving birth to the Farmers' movement.

The recession may be explained partly by ongoing financial difficulties

following the war, which discouraged businesses from building up

inventories. Several months into the recession, there was a major financial

panic.

Panic of

1873and the 

Long

Depression

Economic problems in Europe prompted the failure of Jay Cooke & Company,

the largest bank in the United States, which burst the post-Civil War speculative

bubble. The Coinage Act of 1873 also contributed by immediately depressing

the price of silver, which hurt North American mining interests. The deflation

and wage cuts of the era led to labor turmoil, such as the Great Railroad Strike

of 1877. In 1879, the United States returned to the gold standard with

the Specie Payment Resumption Act. This is the longest period of economic

contraction recognized by the NBER. The Long Depression is sometimes held

to be the entire period from 1873–96.

1882–85

recession

Like the Long Depression that preceded it, the recession of 1882–85 was more

of a price depression than a production depression. From 1879 to 1882, there

had been a boom in railroad construction which came to an end, resulting in a

decline in both railroad construction and in related industries, particularly iron

and steel. A major economic event during the recession was the Panic of 1884.

1887–88

recession

Investments in railroads and buildings weakened during this period. This

slowdown was so mild that it is not always considered a recession.

Contemporary accounts apparently indicate it was considered a slight recession.

1890–91

recession

Although shorter than the recession in 1887–88 and still modest, a slowdown in

1890–91 was somewhat more pronounced than the preceding recession.

Name Characteristics

International monetary disturbances are blamed for this recession, such as

the Panic of 1890in the United Kingdom.

Panic of 1893

Failure of the United States Reading Railroad and withdrawal of European

investment led to a stock market and banking collapse. This Panic was also

precipitated in part by a run on the gold supply. The Treasury had to issue bonds

to purchase enough gold. Profits, investment and income all fell, leading to

political instability, the height of the U.S. populist movement and the Free

Silver movement.

Panic of 1896

The period of 1893–97 is seen as a generally depressed cycle that had a short

spurt of growth in the middle, following the Panic of 1893. Production shrank

and deflation reigned.

1899–1900

recession

This was a mild recession in the period of general growth beginning after 1897.

Evidence for a recession in this period does not show up in some annual data

series.

1902–04

recession

Though not severe, this downturn lasted for nearly two years and saw a distinct

decline in the national product. Industrial and commercial production both

declined, albeit fairly modestly. The recession came about a year after a 1901

stock crash.

Panic of 1907

A run on Knickerbocker Trust Company deposits on October 22, 1907, set

events in motion that would lead to a severe monetary contraction. The fallout

from the panic led to Congress creating the Federal Reserve System.

Panic of 1910–

1911

This was a mild but lengthy recession. The national product grew by less than

1%, and commercial activity and industrial activity declined. The period was

also marked by deflation.

Recession of

1913–1914

Productions and real income declined during this period and were not offset

until the start of World War I increased demand. Incidentally, the Federal

Reserve Act was signed during this recession, creating the Federal Reserve

Name Characteristics

System, the culmination of a sequence of events following the Panic of 1907.

Post-World

War I recession

Severe hyperinflation in Europe took place over production in North America.

This was a brief but very sharp recession and was caused by the end of wartime

production, along with an influx of labor from returning troops. This, in turn,

caused high unemployment.

Depression of

1920–21

The 1921 recession began a mere 10 months after the post-World War I

recession, as the economy continued working through the shift to a peacetime

economy. The recession was short, but extremely painful. The year 1920 was

the single most deflationary year in American history; production, however, did

not fall as much as might be expected from the deflation. GNP may have

declined between 2.5 and 7 percent, even as wholesale prices declined by

36.8%. The economy had a strong recovery following the recession.

1923–24

recession

From the depression of 1920–21 until the Great Depression, an era dubbed

the Roaring Twenties, the economy was generally expanding. Industrial

production declined in 1923–24, but on the whole this was a mild recession.

1926–27

recession

This was an unusual and mild recession, thought to be caused largely

because Henry Ford closed production in his factories for six months to switch

from production of the Model T to the Model A. Charles P. Kindleberger says

the period from 1925 to the start of the Great Depression is best thought of as a

boom, and this minor recession just proof that the boom "was not general,

uninterrupted or extensive".

Great Depression onward

Recessions may be viewed as undesirable, some people benefit from them. Modern

recessions tend to create monetary winners and losers by rapidly shifting assets. Recessions harm

middle-class and lower earners the most, and upper earners may lose small businesses and have

greater assets at risk. But wealthy individuals and cash-rich companies can benefit dramatically

from the results of a recession by buying commercial properties at tremendous discounts and

waiting just a few years for property values to return, multiplying their wealth. Large

corporations benefit by eliminating or absorbing competitors and by trimming labor and other

costs. The overall result is a transfer of assets from the general populace to the wealthy.

Following the end of World War II and the large adjustment as the economy adjusted from

wartime to peacetime in 1945, the collection of many economic indicators, such as

unemployment and GDP, became standardized. Recessions after World War II may be compared

to each other much more easily than previous recessions because of these available data.

NameGDP

declineCharacteristics

Great

Depression

Aug 1929 –

Mar 1933

−26.7%

Stock markets crashed worldwide. A banking collapse took place in

the United States. Extensive new tariffs and other factors contributed

to an extremely deep depression. The United States did remain in a

depression until World War II. In 1936, unemployment fell to 16.9%,

but later returned to 19% in 1938 (near 1933 levels).

Recession of

1937–1938−18.2%

The Recession of 1937 is only considered minor when compared to

the Great Depression, but is otherwise among the worst recessions of

the 20th century. Three explanations are offered for the recession: that

tight fiscal policy from an attempt to balance the budget after the

expansion of the New Deal caused recession, that tight monetary

policy from the Federal Reserve caused the recession, or that

declining profits for businesses led to a reduction in investment.

Recession of

1945−12.7%

The decline in government spending at the end of World War II led to

an enormous drop in gross domestic product, making this technically

a recession. This was the result of demobilization and the shift from a

wartime to peacetime economy. The post-war years were unusual in a

number of ways (unemployment was never high) and this era may be

considered a "sui generis end-of-the-war recession".

Recession of

1949

−1.7% The 1948 recession was a brief economic downturn; forecasters of the

time expected much worse, perhaps influenced by the poor economy

in their recent lifetimes. The recession also followed a period of

NameGDP

declineCharacteristics

monetary tightening.

Recession of

1953−2.6%

After a post-Korean War inflationary period, more funds were

transferred to national security. In 1951, the Federal

Reserve reasserted its independence from the U.S. Treasury and in

1952, the Federal Reserve changed monetary policy to be more

restrictive because of fears of further inflation or of a bubble forming.

Recession of

1958−3.7%

Monetary policy was tightened during the two years preceding 1957,

followed by an easing of policy at the end of 1957. The budget

balance resulted in a change in budget surplus of 0.8% of GDP in

1957 to a budget deficit of 0.6% of GDP in 1958, and then to 2.6% of

GDP in 1959.

Recession of

1960–61−1.6%

Another primarily monetary recession occurred after the Federal

Reserve began raising interest rates in 1959. The government

switched from deficit (or 2.6% in 1959) to surplus (of 0.1% in 1960).

When the economy emerged from this short recession, it began the

second-longest period of growth in NBER history. The Dow Jones

Industrial Average (Dow) finally reached its lowest point on Feb. 20,

1961, about 4 weeks after President Kennedy was inaugurated.

Recession of

1969–70−0.6%

The relatively mild 1969 recession followed a lengthy expansion. At

the end of the expansion, inflation was rising, possibly a result of

increased deficits. This relatively mild recession coincided with an

attempt to start closing the budget deficits of the Vietnam War (fiscal

tightening) and the Federal Reserve raising interest rates (monetary

tightening).

1973–75

recession

−3.2% A quadrupling of oil prices by OPEC coupled with high government

spending because of the Vietnam War led to stagflation in the United

States. The period was also marked by the 1973 oil crisis and

NameGDP

declineCharacteristics

the 1973–1974 stock market crash. The period is remarkable for rising

unemployment coinciding with rising inflation.

1980

recession−2.2%

The NBER considers a very short recession to have occurred in 1980,

followed by a short period of growth and then a deep recession.

Unemployment remained relatively elevated in between recessions.

The recession began as the Federal Reserve, under Paul Volcker,

raised interest rates dramatically to fight the inflation of the 1970s.

The early '80s are sometimes referred to as a "double-dip" or "W-

shaped" recession.

Early 1980s

recession−2.7%

The Iranian Revolution sharply increased the price of oil around the

world in 1979, causing the 1979 energy crisis. This was caused by the

new regime in power in Iran, which exported oil at inconsistent

intervals and at a lower volume, forcing prices up. Tight monetary

policy in the United States to control inflation led to another

recession. The changes were made largely because of inflation carried

over from the previous decade because of the 1973 oil crisis and the

1979 energy crisis.

Early 1990s

recession−1.4%

After the lengthy peacetime expansion of the 1980s, inflation began to

increase and the Federal Reserve responded by raising interest rates

from 1986 to 1989. This weakened but did not stop growth, but some

combination of the subsequent 1990 oil price shock, the debt

accumulation of the 1980s, and growing consumer pessimism

combined with the weakened economy to produce a brief recession.

Early 2000s

recession

−0.3% The 1990s were the longest period of growth in American history. The

collapse of the speculative dot-com bubble, a fall in business outlays

and investments, and the September 11th attacks, brought the decade

of growth to an end. Despite these major shocks, the recession was

NameGDP

declineCharacteristics

brief and shallow. Without the September 11th attacks, the economy

might have avoided recession altogether.

The U.S. economic crisis

United States debt-ceiling crisis of 2013The 2013 United States debt-ceiling crisis is part of an ongoing political debate in the United

States Congress about federal government spending, the national debt and debt ceiling. The 2013

crisis began in January 2013 and ended on October 17, 2013 with the passing of the Continuing

Appropriations Act, 2014, though the debate continues.

After the passing in early January 2013, the American Taxpayer Relief Act of 2012 to avert

the projected fiscal cliff, political attention shifted to the debt ceiling. The debt ceiling had

technically been reached on December 31, 2012, when the Treasury Department commenced

"extraordinary measures" to enable the continued financing of the government.

The debt ceiling is part of a law (Title 31 of the United States Code, section 3101) created by

Congress. According to the Government Accountability Office, "The debt limit does not control

or limit the ability of the federal government to run deficits or incur obligations. Rather, it is a

limit on the ability to pay obligations already incurred." It does not prohibit Congress from

creating further obligations upon the United States. The ceiling was last set at $16.4 trillion in

2011.

On January 15, 2013, Fitch Ratings warned that delays in raising the debt ceiling could result

in a formal review of its credit rating of the U.S., potentially leading to it being downgraded from

AAA. Fitch cautioned that a downgrade could also result from the absence of a plan to bring

down the deficit in the medium term. Additionally, the company stated that "In Fitch's opinion,

the debt ceiling is an ineffective and potentially dangerous mechanism for enforcing fiscal

discipline."

Debt ceiling suspension

In mid-January, Paul Ryan, Chairman of the House Budget Committee, floated the idea of a

short-term debt ceiling increase. He argued that giving Treasury enough borrowing power to

postpone default until mid-March would allow Republicans to gain an advantage over Obama

and Democrats in debt ceiling negotiations. This advantage would be due to the fact that

postponing default until mid-March would allow for a triple deadline to be in March:

the sequester on March 1, the default in the middle of the month, and the expiration of the

current continuing resolution and the resulting federal government shutdown on March 27. This

was supposed to provide extra pressure on the Senate and the President to work out a deal with

the Republican-led House.

Shortly after that, the House learned that the Senate had not passed an independent budget

plan since April 2009. House Republicans quickly came up with an idea that would suspend the

debt ceiling enough to allow time for both chambers of Congress to pass a budget.

On February 4, 2013, President Obama signed into law the "No Budget, No Pay Act of

2013", which suspended the U.S. debt ceiling through May 18, 2013. The bill was passed in the

Senate one week previously by a vote of 64-34, with all "no" votes from Republican

senators, who were critical of the lack of spending cuts that accompanied an increase in the limit.

In the House, the bill passed the week before by a vote of 285-144, with both parties voting in

favor. In the House a provision was attached by Republican representatives that mandates the

temporary withholding of pay to members of Congress if they do not produce a budget plan by

April 15. Pay would be reinstated once a budget was passed or on January 2, 2015, whichever

came first. Under the law, the debt ceiling would be set on May 19, 2013 to a level "necessary to

fund commitment incurred by the Federal Government that required payment."

Developments during suspension

On March 1, the sequester, cutting $1.2 trillion over the next decade, went into effect after

the parties failed to reach a deal. On March 21, the House passed a FY 2014 budget that would

balance the United States budget in 2023. This was a shorter period than envisaged in their 2013

budget, which balanced in 2035, and the 2012 budget, which balanced in 2063. It passed the

House on a mostly party-line 221-207 vote. However, later that day, the Senate voted 59-40 to

reject the House Republican budget. On March 23, the Senate passed its own 2014 budget on a

50-49 vote. The House refused to hold a vote on the Senate budget. On April 10, the President

released his own 2014 budget, which was not voted on in either house of Congress. Throughout

March and April, there were several developments that reduced the sequester's impact. The bill

that extended the government's continuing resolution to September 30 lessened the sequester's

effect on defense, and later bills removed furloughs for air traffic control and food service

industries.

Debt ceiling reached again

On May 19, the debt ceiling was reinstated at just under $16.7 trillion to reflect borrowing

during the suspension period. As there was no provision made for further commitments after the

ceiling's reinstatement, Treasury began applying extraordinary measures once again.

Despite earlier estimates of late July, Treasury announced that default would not happen "until

sometime after Labor Day". Other organizations, including the Congressional Budget

Office (CBO), projected exhaustion of the extraordinary measures in October or possibly

November.

On August 26, 2013, Treasury informed Congress that if the debt ceiling was not raised in

time, the United States would be forced to default on its debt sometime in mid-October.

On September 25, Treasury announced that extraordinary measures would be exhausted no later

than October 17, leaving Treasury with about $30 billion in cash, plus incoming revenue, but no

ability to borrow money. The CBO estimated that the exact date on which Treasury would have

had to begin prioritizing/delaying bills and/or actually defaulting on some obligations would fall

between October 22 and November 1.

Resolution

On October 16, the Senate passed the Continuing Appropriations Act, 2014, a continuing

resolution, to fund the government until January 15, 2014, and suspending the debt ceiling until

February 7, 2014, thus ending both the United States federal government shutdown of 2013 and

the United States debt-ceiling crisis of 2013.

It set up a House-Senate budget conference to negotiate a long-term spending agreement, and

strengthened income verification for subsidies under the Patient Protection and Affordable Care

Act. The Senate vote was 81-18 in favor, with 1 member absent due to illness. The House passed

the bill unamended later that day, by a vote of 285-144, with 3 members absent due to illness.

The President signed the bill early the next morning on October 17. Under the resolution, the

debt ceiling debate and partial government shutdown were postponed, with federal workers

returning to work on October 17.

On January 14, 2014, the House and the Senate Appropriations Committees agreed on a

spending plan that would fund the federal government for two years. A bill extending the

previous continuing resolution through January 18 was also passed.  On January 16, 2014,

Congress passed a $1.1 trillion appropriations bill that will keep the federal government funded

until October 2014. President Obama signed the appropriations bill into law on January 18.

On February 7, 2014, the debt limit suspension expired and treasury began applying

extraordinary measures once again, warning that such measures would not last beyond February

27 due to large tax refunds that would need to paid during February. On February 11th, after

finding insufficient support for various conditions for increasing the debt ceiling, the house

passed a bill suspending the debt ceiling without conditions through March 15, 2015. The senate

passed the bill unamended on February 12, 2014, and it was signed by the president on February

15th.

Three Solutions To The Debt Crisis That Don’t Require Raising The Debt Ceiling

Based on the following premises:

1. The national debt is not an obligation to pay value; it is an obligation to pay money.

2. The government has the authority to create unlimited money out of thin air. The Federal

Reserve was created by the government, and derives its authority to create unlimited money from

the government.

3. The government can make, change or ignore any rule they want as long as they declare

national security.

There are at least three ways for congress to “pay their bills on time” and not become “a

deadbeat nation” that don’t require borrowing any more money and would spare the American

people another crisis over the debt ceiling.

Inflation without negative consequences

“Inflation is bad because it raises the price of goods and services”, but the price increase is

offset by the fact that there’s more money available to buy these goods and services in the first

place. “But inflation is bad because it devalues the money!” but there’s more devalued money

than there was before, so the overall value in the economy stays the same. It’s called equilibrium.

Inflation with positive effects

It may be difficult to know how much money to send everybody if you don’t have a way of

knowing exactly how much they have. But if you have a rough idea of how many dollars there

are in existence, then it would be easy to think of everybody as a single sum of money for the

purposes of the formula, then divide the result by the number of people and pay everyone that

same amount.

Debt forgiveness via National Security

If the government became insolvent during an economic depression and could no longer pay

welfare and social security, the American people might become so poor and hungry that it might

cause riots, which would make us vulnerable to terrorism. Therefore, if the government can

declare national security to override the Constitution, then the government can also declare

national security to forgive their own debt.

Hence it can be said that the government has other choices. They don’t have to increase the

national debt in order to avoid default. They want to raise the national debt and they’re using

default as an excuse. It is never in anybody’s interest to owe somebody else if it can be helped,

because the borrower becomes servant to the lender. Therefore the national debt, and the

government’s inevitable default, is both proof of the infiltration.

POSSIBLE SOLUTIONS:

Reversing the Trend: Some Suggestions for Action

Access to markets must be conditioned on a strategic analysis of our own national needs first

and foremost. As things stand, sovereign rights to be handed to domestic markets to international

bodies like the World Trade Organization and are committed to disastrous “one-way free trade”

agreements such as Value Added Tax regulations and NAFTA. We are in a dramatically different

position from emerging low-wage markets. The policies should carefully protect the wealth and

resources rather than simply provide the lowest consumer cost regardless of the impact on the

industries and workers. Promoting open markets and economic growth abroad will not alone

rebalance America’s trade accounts and domestic industrial collapse. Our industries have been so

disarmed and dismantled and hence now there is a lack of knowledge, capacity, and investment

capital to facilitate self -sustaining production.

Key Solutions

Drastic action is needed to restore the economic and financial independence and must begin

immediately to rebuild industries. The first essential is that government should ensure that it is

once again profitable to produce most goods and services in American factories employing

American workers. Policies must be established that prevent other countries from hindrances to

US. The sale of key assets to foreign entities has to be halted. It is also a must to close

opportunities for foreign corporations to compete unfairly against the homeindustries.

Immediate move to curb out-of -control spending on unnecessary programs and initiatives

that are being financed by foreign debt is also necessary. Instituting policies to cut back

consumption and particularly consumption of imported products are to be considered. Individuals

and companies are to be allowed to make profit by selling out the United States.

The stimulation for new policies must come directly from the broad American public. Voters

must use all reasonable methods to pressure elected officials. Without direct and immediate

action, there will soon be little left to save.

Defense

Industries, assets, resources, and companies need to be protected from foreign countries and

corporations seeking to gain control of key industrial processes and technologies. This would

include preventing the sale of strategic US domestic companies to foreign companies and

eliminating off shore outsourcing except in extreme circumstances.

Fair Trade

The trade treaties should protect the country from predatory foreign countries and companies

seeking to weaken or destroy American industry. Tariffs should be erected where needed and

where practical. Experience has shown that it is f utile to expect other countries to adopt our

policies on, f or instance, f air and free competition. The most obvious tool is tariffs on their

exports.

Domestic Industry Competitiveness

In addition to establishing protection for industry and country, companies with the national

interest should be properly aligned by changing the incentive system within which they operate.

The tax structure should be changed to encourage industrial revival, particularly in industries

which have been hit worst by unfair foreign competition. One simple but highly effective

measure would be to shorten the depreciation schedules on capital investment and research

spending. Meanwhile capital gains taxes should be increased to discourage short-term thinking

and reduce the incentive f or entrepreneurs to cash out.

Suggestions:

• Appointing an economic minister, a major cabinet post, to develop an industrial policy that

would:

1. Create conditions to make manufacturing competitive and profitable through tax changes and

subsidies where needed.

2. Protecting economy from foreign predatory practices.

3. Creating an industrial research and development division similar to government sponsored

National Institute of Health (NIH) in medicine or the Apollo project.

• Changing the tax structure for selecting industries that are vital to strategic American interests –

steel, transportation, cement and others.

• Controlling the balance of trade deficit. The majority of this money leaves the economy and

never returns. The money that does return is the means through which foreign companies are able

to accumulate funds to purchase the best companies.

• Amending or getting out of the agreement with the WTO. It places the domestic trade laws in

the hands of an undemocratic organization whose decisions have been consistently and unfairly

adjudicated.

• Eliminating the foreign Value Added Tax (VAT) discrepancy. It unjustifiably subsidizes foreign

exports, while simultaneously penalizing the exports to them.

• Faster depreciation on capital equipment investment – it will lessen the need to outsource

manufacturing.

• Free trade has been a disaster. It must be replaced with intelligent trade that prevents foreign

predatory practices and better serves U.S. interests.

The Eurozone economic crisis causes and solutions:

The Eurozone crisis is an ongoing financial crisis that has made it difficult or impossible for

some countries in the euro area to repay or re-finance their government debt without the

assistance of third parties. Public debt $ and %GDP (2010) for selected European countries

Government debt of Eurozone, Germany and crisis countries compared to Eurozone GDP. The

European sovereign debt crisis resulted from a combination of complex factors, including the

globalisation of finance; easy credit conditions during the 2002–2008 period that encouraged

high-risk lending and borrowing practices; the 2007–2012 global financial crisis; international

trade imbalances; real-estate bubbles that have since burst; the 2008–2012 global recession; fiscal

policy choices related to government revenues and expenses; and approaches used by nations to

bail out troubled banking industries and private bondholders, assuming private debt burdens or

socialising losses.

One narrative describing the causes of the crisis begins with the significant increase in

savings available for investment during the 2000–2007 period when the global pool of fixed-

income securities increased from approximately $36 trillion in 2000 to $70 trillion by 2007. This

"Giant Pool of Money" increased as savings from high-growth developing nations entered global

capital markets. Investors searching for higher yields than those offered by U.S. Treasury bonds

sought alternatives globally. The temptation offered by such readily available savings

overwhelmed the policy and regulatory control mechanisms in country after country, as lenders

and borrowers put these savings to use, generating bubble after bubble across the globe. While

these bubbles have burst, causing asset prices (e.g., housing and commercial property) to decline,

the liabilities owed to global investors remain at full price, generating questions regarding the

solvency of governments and their banking systems.

Rising household and government debt levels

In 1992, members of the European Union signed the Maastricht Treaty, under which they

pledged to limit their deficit spending and debt levels. However, a number of EU member states,

including Greece and Italy, were able to circumvent these rules, failing to abide by their own

internal guidelines, sidestepping best practice and ignoring internationally agreed standards. This

allowed the sovereigns to mask their deficit and debt levels through a combination of techniques,

including inconsistent accounting, off-balance-sheet transactions as well as the use of complex

currency and credit derivatives structures.

The complex structures were designed by prominent U.S. investment banks, who received

substantial fees in return for their services. The adoption of the euro led to many Eurozone

countries of different credit worthiness receiving similar and very low interest rates for their

bonds and private credits during years preceding the crisis. As a result, creditors in countries with

originally weak currencies (and higher interest rates) suddenly enjoyed much more favourable

credit terms, which spurred private and government spending and led to an economic boom. In

some countries such as Ireland and Spain low interest rates also led to a housing bubble, which

burst at the height of the financial crisis. Commentators such as Bernard

The average fiscal deficit in the euro area in 2007 was only 0.6% before it grew to 7% during the

financial crisis. In the same period, the average government debt rose from 66% to 84% of GDP.

Government's mounting debts are a response to the economic downturn as spending rises and

tax revenues fall, not its cause. Government deficit of Eurozone compared to USA and UK

Either way, high debt levels alone may not explain the crisis. The budget deficit for the euro area

as a whole is much lower and the euro area's government debt/GDP ratio of 86% in 2010 was

about the same level as that of the US. Moreover, private-sector indebtedness across the euro area

is markedly lower than in the highly leveraged Anglo-Saxon economies.

Trade imbalances

During the crisis, from 1999 to 2007, Germany had a considerably better public debt and

fiscal deficit relative to GDP than the most affected eurozone members. In the same period, these

countries (Portugal, Ireland, Italy and Spain) had far worse balance of payments positions.

Whereas German trade surpluses increased as a percentage of GDP after 1999, the deficits of

Italy, France and Spain all worsened.

A trade deficit can also be affected by changes in relative labour costs, which made southern

nations less competitive and increased trade imbalances. Since 2001, Italy's unit labour costs rose

32 % relative to Germany's. Greek unit labour costs rose much faster than Germany's during the

last decade. However, most EU nations had increases in labour costs greater than Germany's.

Those nations that allowed "wages to grow faster than productivity" lost competitiveness.

Germany's restrained labour costs, while a debatable factor in trade imbalances, are an important

factor for its low unemployment rate. More recently, Greece's trading position has improved; in

the period 2011 to 2012, imports dropped 20.9% while exports grew 16.9%, reducing the trade

deficit by 42.8%.

Structural problem of Eurozone system

There is a structural contradiction within the euro system, namely that there is a monetary

union (common currency) without a fiscal union (e.g., common taxation, pension, and treasury

functions). In the Eurozone system, the countries are required to follow a similar fiscal path, but

they do not have common treasury to enforce it. That is, countries with the same monetary

system have freedom in fiscal policies in taxation and expenditure. So, even though there are

some agreements on monetary policy and through the European Central Bank, countries may not

be able to or would simply choose not to follow it. This feature brought fiscal free riding of

peripheral economies, especially represented by Greece, as it is hard to control and regulate

national financial institutions. Furthermore, there is also a problem that the Eurozone system has

a difficult structure for quick response. Eurozone, having 17 nations as its members, require

unanimous agreement for a decision making process. This would lead to failure in complete

prevention of contagion of other areas, as it would be hard for the Eurozone to respond quickly to

the problem.

In addition, as of June 2012 there was no "banking union" meaning that there was no

Europe-wide approach to bank deposit insurance, bank oversight, or a joint means of

recapitalisation or resolution (wind-down) of failing banks. Bank deposit insurance helps avoid

bank runs. Recapitalisation refers to injecting money into banks so that they can meet their

immediate obligations and resume lending, as was done in 2008 in the U.S. via the Troubled

Asset Relief Programme.

Monetary policy inflexibility

Membership in the Eurozone established a single monetary policy, preventing individual

member states from acting independently. In particular they cannot create Euros in order to pay

creditors and eliminate their risk of default. Since they share the same currency as their

(eurozone) trading partners, they cannot devalue their currency to make their exports cheaper,

which in principle would lead to an improved balance of trade, increased GDP and higher tax

revenues in nominal terms. In the reverse direction moreover, assets held in a currency which has

devalued suffer losses on the part of those holding them.

Loss of confidence

Sovereign CDS prices of selected European countries (2010–2013). The left axis is in basis

points; a level of 1,000 means it costs $1 million to protect $10 million of debt for five years.

Prior to development of the crisis it was assumed by both regulators and banks that sovereign

debt from the Eurozone was safe. Banks had substantial holdings of bonds from weaker

economies such as Greece which offered a small premium and seemingly were equally sound. As

the crisis developed it became obvious that Greek, and possibly other countries', bonds offered

substantially more risk. Contributing to lack of information about the risk of European sovereign

debt was conflict of interest by banks that were earning substantial sums underwriting the bonds.

The loss of confidence is marked by rising sovereign CDS prices, indicating market expectations

about countries' creditworthiness. Furthermore, investors have doubts about the possibilities of

policy makers to quickly contain the crisis. Since countries that use the euro as their currency

have fewer monetary policy choices (e.g., they cannot print money in their own currencies to pay

debt holders), certain solutions require multi-national cooperation. Further, the European Central

As of June, 2012, many European banking systems were under significant stress, particularly

Spain. A series of "capital calls" or notices that banks required capital contributed to a freeze in

funding markets and interbank lending, as investors worried that banks might be hiding losses or

were losing trust in one another. In June 2012, as the euro hit new lows, there were reports that

the wealthy were moving assets out of the Eurozone and within the Eurozone from the South to

the North. Between June 2011 and June 2012 Spain and Italy alone have lost 286 bn and 235 bn

euros. Altogether Mediterranean countries have lost assets worth ten per cent of GDP since

capital flight started in end of 2010. Mario Draghi, president of the European Central Bank, has

called for an integrated European system of deposit insurance which would require European

political institutions craft effective solutions for problems beyond the limits of the power of the

European Central Bank.

On 5 December 2011, S&P placed its long-term sovereign ratings on 15 members of the

eurozone on "CreditWatch" with negative implications; S&P wrote this was due to "systemic

stresses from five interrelated factors: 1) Tightening credit conditions across the eurozone; 2)

Markedly higher risk premiums on a growing number of eurozone sovereigns including some

that are currently rated 'AAA'; 3) Continuing disagreements among European policy makers on

how to tackle the immediate market confidence crisis and, longer term, how to ensure greater

economic, financial, and fiscal convergence among eurozone members; 4) High levels of

government and household indebtedness across a large area of the eurozone; and 5) The rising

risk of economic recession in the Eurozone as a whole in 2012. Currently, we expect output to

decline next year in countries such as Spain, Portugal and Greece, but we now assign a 40%

probability of a fall in output for the eurozone as a whole."

SOLUTIONS FOR EUROZONE CRISIS:

European fiscal union

Increased European integration giving a central body increased control over the budgets of

member states was proposed on June 14, 2012 by Jens Weidmann President of the Deutsche

Bundesbank, expanding on ideas first proposed by Jean-Claude Trichet, former president of the

European Central Bank. Control, including requirements that taxes be raised or budgets cut,

would be exercised only when fiscal imbalances developed. This proposal is similar to

contemporary calls by Angela Merkel for increased political and fiscal union which would "allow

Europe oversight possibilities."

European bank recovery and resolution authority

European banks are estimated to have incurred losses approaching €1 trillion between the

outbreak of the financial crisis in 2007 and 2010. The European Commission approved some €4.5

trillion in state aid for banks between October 2008 and October 2011, a sum which includes the

value of taxpayer-funded recapitalizations and public guarantees on banking debts. This has

prompted some economists such as Joseph Stiglitz and Paul Krugman to note that Europe is not

suffering from a sovereign debt crisis but rather from a banking crisis.

On 6 June 2012, the European Commission adopted a legislative proposal for a harmonized

bank recovery and resolution mechanism. The proposed framework sets out the necessary steps

and powers to ensure that bank failures across the EU are managed in a way which avoids

financial instability. The new legislation would give member states the power to impose losses,

resulting from a bank failure, on the bondholders to minimize costs for taxpayers. The proposal is

part of a new scheme in which banks will be compelled to “bail-in” their creditors whenever they

fail, the basic aim being to prevent taxpayer-funded bailouts in the future. The public authorities

would also be given powers to replace the management teams in banks even before the lender

fails. Each institution would also be obliged to set aside at least one per cent of the deposits

covered by their national guarantees for a special fund to finance the resolution of banking crisis

starting in 2018.

Eurobonds

A growing number of investors and economists say Eurobonds would be the best way of

solving a debt crisis, though their introduction matched by tight financial and budgetary

coordination may well require changes in EU treaties. On 21 November 2011, the European

Commission suggested that eurobonds issued jointly by the 17 euro nations would be an effective

way to tackle the financial crisis. Using the term "stability bonds", Jose Manuel Barroso insisted

that any such plan would have to be matched by tight fiscal surveillance and economic policy

coordination as an essential counterpart so as to avoid moral hazard and ensure sustainable public

finances.

Germany remains largely opposed at least in the short term to a collective takeover of the

debt of states that have run excessive budget deficits and borrowed excessively over the past

years, saying this could substantially raise the country's liabilities.

European Monetary Fund

On 20 October 2011, the Austrian Institute of Economic Research published an article that

suggests transforming the EFSF into a European Monetary Fund (EMF), which could provide

governments with fixed interest rate Eurobonds at a rate slightly below medium-term economic

growth (in nominal terms). These bonds would not be tradable but could be held by investors

with the EMF and liquidated at any time. Given the backing of all eurozone countries and the

ECB "the EMU would achieve a similarly strong position vis-a-vis financial investors as the US

where theFed backs government bonds to an unlimited extent." To ensure fiscal discipline despite

lack of market pressure, the EMF would operate according to strict rules, providing funds only to

countries that meet fiscal and macroeconomic criteria. Governments lacking sound financial

policies would be forced to rely on traditional (national) governmental bonds with less favorable

market rates.

The econometric analysis suggests that "If the short-term and long- term interest rates in the

euro area were stabilized at 1.5% and 3%, respectively, aggregate output (GDP) in the euro area

would be 5 percentage points above baseline in 2015". At the same time sovereign debt levels

would be significantly lower with, e.g., Greece's debt level falling below 110% of GDP, more

than 40percentage points below the baseline scenario with market based interest levels.

Furthermore, banks would no longer be able to unduly benefit from intermediary profits by

borrowing from the ECB at low rates and investing in government bonds at high rates.

Drastic debt write-off financed by wealth tax

Overall debt levels in 2009 and write-offs necessary in the Eurozone, UK and U.S. to reach

sustainable grounds.

According to the Bank for International Settlements, the combined private and public debt of

18 OECD countries nearly quadrupled between 1980 and 2010, and will likely continue to grow,

reaching between 250% (for Italy) and about 600% (for Japan) by 2040. A BIS study released in

June 2012 warns that budgets of most advanced economies, excluding interest payments, "would

need 20 consecutive years of surpluses exceeding 2 per cent of gross domestic product - starting

now - just to bring the debt-to-GDP ratio back to its pre-crisis level".  The same authors found in

a previous study that increased financial burden imposed by aging populations and lower growth

makes it unlikely that indebted economies can grow out of their debt problem if only one of the

following three conditions is met.

government debt is more than 80 to 100 percent of GDP;

non-financial corporate debt is more than 90 percent;

private household debt is more than 85 percent of GDP.

The first condition, which was suggested by an influential paper written by Kenneth

Rogoff & Carmen Reinhart has been disputed due to major calculation errors. In fact, the average

GDP growth at public debt/GDP ratios over 90 percent is not dramatically different than when

debt/GDP ratios are lower.

The Boston Consulting Group (BCG) added to the original finding that if the overall debt

load continues to grow faster than the economy, then large-scale debt restructuring becomes

inevitable. To prevent a vicious upward debt spiral from gaining momentum the authors urge

policy makers to "act quickly and decisively" and aim for an overall debt level well below 180

percent for the private and government sector. This number is based on the assumption that

governments, nonfinancial corporations, and private households can each sustain a debt load of

60 percent of GDP, at an interest rate of 5 percent and a nominal economic growth rate of 3

percent per year. Lower interest rates and/or higher growth would help reduce the debt burden

further.

To reach sustainable levels the Eurozone must reduce its overall debt level by €6.1 trillion.

According to BCG this could be financed by a one-time wealth tax of between 11 and 30 percent

for most countries, apart from the crisis countries (particularly Ireland) where a write-off would

have to be substantially higher. The authors admit that such programs would be "drastic",

"unpopular" and "require broad political coordination and leadership" but they maintain that the

longer politicians and central bankers wait, the more necessary such a step will be. Instead of a

one-time write-off, German economist Harald Spehl has called for a 30-year debt-reduction plan,

similar to the one Germany used after World War II to share the burden of reconstruction and

development. Similar calls have been made by political parties in Germany including

the Greens and The Left.