How it Happened and What Can be Done Updated Nov 2012 Pat Obi 1 - PowerPoint PPT Presentation

The U.S. Debt Crisis: How it Happened and What Can be Done Updated Nov 2012 Pat Obi 1

OUTLINE 1. 2007 Mortgage crisis 2. Federal budget 3. Debt buildup 4. The debt crisis 5. Failed attempts by Congress 6. Suggested path to debt elimination Pat Obi, Purdue University Calumet 2

Perspective… Our total debt as of … June 2002 = $6.13Tr [as % of GDP: 60%] GDP = Gross Domestic Product, measure of the size of our economy. A Debt/GDP ratio of 100% means we owe as much as we produce. June 2012 = $15.86Tr [as % of GDP: 103%] Pat Obi, Purdue University Calumet 3

When the bottom fell out… 2007 Mortgage Crisis 2008 Financial Crisis Pat Obi, Purdue University Calumet 4

Median Home Price: 1990-2008 Data source: U.S. Census. www.census.gov/const/uspricemon.pdf $280,000 $260,000 g = 60% $240,000 $220,000 g = 17% $200,000 $180,000 g = 9% $160,000 Focus Point $140,000 $120,000 $100,000 Jan-90 Jul-90 Jan-91 Jul-91 Jan-92 Jul-92 Jan-93 Jul-93 Jan-94 Jul-94 Jan-95 Jul-95 Jan-96 Jul-96 Jan-97 Jul-97 Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Pat Obi, Purdue University Calumet 5

Household Debt v. Disposable Income (in billions of $) 16,000 The level and rate of growth of household Household Debt 14,000 g = 11% debt exceeded how much American households earned in income during the 12,000 6-year period before the housing market collapse in 2007. 10,000 8,000 Disp. Income 6,000 g = 5% 4,000 2,000 0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Sources: Bureau of Economic Analysis (income); Federal Reserve Flow of Funds (household debt)

What went wrong between 2000 and 2007 1. Steep jump in household debt to $14Tr 2. Decline in mortgage underwriting standards 3. Rising default risk in the mortgage market 4. Complex Wall Street financial derivatives 5. Unsustainable home and stock price levels • 2008 Stock market plunge = -40% • Household wealth loss of > $13Tr, 2007-2008 • Financial crisis – from 2008 Pat Obi, Purdue University Calumet 7

My scholarly contributions with respect to the 2008 Financial Crisis • Obi, Pat, Jeong- gil Choi, and Shomir Sil (2010). “A Look Back at the 2008 Financial Crisis: The Disconnect between Credit and Market Risks,” Czech Journal of Economics and Finance . 60(5): 400-413. • Obi, Pat, Saul Lerner, and Shomir Sil (2010). “The 2008 Global Financial Crisis: A Discussion of Causes, Consequences, and Remedies,” Journal of Global Commerce Research , 2(4): 1-11. • Obi, Pat, Paolo Miranda, and Shomir Sil (2011). “An Inquiry into the Time Series Dynamics of Short-Term Interest Rates and Stock Returns,” Journal of Business and Economic Studies , 17(1): 16-28. • Obi, Pat, Job Dhubihlela, and Jeong-Gil Choi (forthcoming 2012). “Equity Market Valuation, Systematic Risk, and Monetary Policy,” Applied Economics . Pat Obi, Purdue University Calumet 8

Government bailouts =  National debt SIGNED BAILOUT LEGISLATION DATE BY AMOUNT 1. Econ Stimulus Act, 2008 2/13/2008 Bush $152B 2. Emergency Econ Stabilization Act , 2008 9/28/2008 Bush $700B 3. American Recovery and Reinvestment Act, 2009 2/17/2009 Obama $787B TOTAL $1.6Tr 9

A Look at our Federal Budget Pat Obi, Purdue University Calumet 10

Tax Receipts – Fiscal Year 2011 ($Billions) Pat Obi, Purdue University Calumet 11 Source: CBO Historical Tables

Spending – Fiscal Year 2011 ($Billions) Pat Obi, Purdue University Calumet Source: CBO Historical Tables 12

Budget Deficits and Surpluses (bill of $) Source: CBO and OMB 4000 Bush Jr 3000 Carter -$3,537 Clinton Bush Sr -$253B $63B -$1,036B Reagan -$1,412B 2000 Spending 1000 Revenue s Obama -$3,689 0 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 -1000 Deficit (negative) means Federal government Deficit/Surplus spent more money than was received in tax revenues. Surplus is the opposite. -2000

Our National Debt Pat Obi, Purdue University Calumet 14

U.S. National Debt since 1790 Data source: Department of the Treasury 16,000,000,000,000 Our national debt rose sharply after 1980, and has continued to rise 14,000,000,000,000 steadily since then. 12,000,000,000,000 10,000,000,000,000 8,000,000,000,000 6,000,000,000,000 4,000,000,000,000 2,000,000,000,000 0 1790 1795 1800 1805 1810 1815 1820 1825 1830 1835 1840 1845 1850 1855 1860 1865 1870 1875 1880 1885 1890 1895 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 15

U.S. Debt in Recent Years ($ Tr) Source: Department of the Treasury 16,000,000,000,000 14,000,000,000,000 Carter (D) Reagan (R) Bush Sr (R) Clinton (D) Bush Jr (R) 12,000,000,000,000 $206B $1.71Tr $1.44Tr $1.06Tr $3.57Tr  33%  159%  41%  42%  63% 10,000,000,000,000 Dessert - Cruise and Storm $500B stimulus in Obama (D) Pershing missiles (Iraq) 1993 to fight 8,000,000,000,000 $4.92Tr - Star wars recession  46% - Reduced tax rates but 6,000,000,000,000 eliminated many - $800B personal tax stimulus deductions - Two separate - War on tax rebates Terror 4,000,000,000,000 - War on Terror (Iraq + (Iraq) Afghan.) - TARP ($700B) 2,000,000,000,000 0 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 16

The National Debt Components 1. Intragovernmental debt: Money borrowed from other government agencies, e.g. Social Security Trust Fund (SSTF) and Medicare Trust Fund (MTF) 2. Federal Reserve. Money borrowed from the Fed. 3. Debt held by the public: Money borrowed from U.S. citizens, foreigners, corporations, state and local governments, and others. Pat Obi, Purdue University Calumet 17

Our Money Lenders Source: U.S. Department of Treasury, Ownership of Federal Securities, Table OFS-2: www.fms.treas.gov/bulletin/b2012_3ofs.doc Secondary source: http://www.gao.gov/special.pubs/longterm/debt/debtbasics.html Total Federal Debt = $15.6Tr [March 2012] Intra-govt + Fed = $6.4Tr Foreigners = $5.14Tr [41%] [33%] U.S. investors = $4.05Tr [26%] Pat Obi, Purdue University Calumet 18

Our Money Lenders? Source: U.S. Department of Treasury, Ownership of Federal Securities, Table OFS-2: www.fms.treas.gov/bulletin/index.html Secondary source: http://www.gao.gov/special.pubs/longterm/debt/debtbasics.html 7,000 6,000 Intra-gov + Fed Res Debt Ownership (in billions of $) 5,000 4,000 Foreign investors 3,000 U.S. Investors 2,000 Foreigners now lend more to the 1,000 U.S. government than Americans 0 Mar-01 Jul-01 Nov-01 Mar-02 Jul-02 Nov-02 Mar-03 Jul-03 Nov-03 Mar-04 Jul-04 Nov-04 Mar-05 Jul-05 Nov-05 Mar-06 Jul-06 Nov-06 Mar-07 Jul-07 Nov-07 Mar-08 Jul-08 Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11 Pat Obi, Purdue University Calumet 19

U.S. International Trade Source: US Census Bureau, Foreign Trade Division. www.census.gov/foreign-trade/statistics/historical/index.html Source file: “US Intl Trade” in Research folder 3,500,000 We buy more from other countries (mostly 3,000,000 China) than they buy from us. That creates Imports a ‘current account deficit.’ Foreigners then 2,500,000 use their surplus $$$ to buy U.S. Treasury bonds (meaning they lend the $$$ right 2,000,000 back to our government – so as to earn interest on their surplus funds) 1,500,000 Millions of $ 1,000,000 Exports 500,000 0 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 -500,000 -1,000,000 Current account balance -1,500,000 20

The Big Question… Has our debt reached a crisis point? • One way to consider this question is to line up our debt against our nation's ability to pay • The ability to pay is tied to the size of our economy – measured by GDP Pat Obi, Purdue University Calumet 21

Our Economy Pat Obi, Purdue University Calumet 22

U.S. Economy since Market Crash of 1929 (bill of $) Source: Department of Commerce 18,000 16,000 Our economy has grown steadily over 14,000 the years – on average, about 6% per GDP year since after WWII - until the housing 12,000 market collapse in 2007. 10,000 8,000 6,000 4,000 2,000 0 1929 1931 1933 1935 1937 1939 1941 1943 1945 1947 1949 1951 1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 23