American Economic Crisis
America is about to drown. America only has money until June 1 to pay its bills. After that, all the money will be gone, and Joe Biden is worried about it. so much that he cancelled the quad meeting. He went to America to personally solve this crisis. What is happening in America? What difference does it make to the whole world, and is the American debt ceiling in trouble?
America’s money is over
India’s economy is about $30 trillion, and that of America is $23 trillion. Economically, America is eight times bigger than India. but even this much money falls short for them. why? Because of a simple formula, savings are equal to income minus expenses. If you earn millions and spend billions, then how on earth are you going to save? The economy of a country seems complex, but it does run on this simple logic. Let us understand how. The US runs on a budget deficit. That is, their government spends more money than it earns through taxes or other means. Where does this extra money come from? They also have to take out loans. have to borrow money. Why does the government do this? The government is not stupid. But to control the economy, you have to balance it. On one side of the scale, there is economic growth. On the other side, there is inflation. If you want to focus on growth, inflation will increase. Things will be expensive. If you want to control inflation, you have to put a speed limit on growth. Remember this example. What exactly is happening? We’ll come to that later, but let’s understand some terms first. The US’s finance ministry is called the Treasury Department. Their parliament is called the Congress. Their Rajya Sabha is called the Senate. All the laws are collectively made by Congress. Consider the White House the PMO. Finally, the central bank of the US is called the Federal Reserve.
Now let’s get to the point. The expenses of the USA are much higher than their tax revenues. The US pays this difference with loans. The government’s expenses are determined by some laws that Congress has already passed. like military spending, Medicaid, social security benefits, etc. Similarly, they have created a system for debt called the debt ceiling. It says that, well, you need money to run the economy, so you can borrow money up to this limit. If you reach that limit and want to cross it, then you have to get permission. This debt ceiling has been increased 78 times since 1960. The most debt was taken on during the presidency of Barack Obama. That’s $7.6 trillion in debt. After that comes Donald Trump, who borrowed $6.7 trillion. In just one year of the presidency, Biden has increased the debt by $2.5 trillion. In January 2023, the USA hit its debt ceiling. The debt then was $31 trillion. According to estimates, the US government had money in the bank to spend until August or September. The USA’s tax returns are usually due in April. This year, their tax revenues were less than expected. Basically, their tax revenue was less than what was predicted. Less money came in. The US government spends $17 billion every day to keep its government functioning. That’s why experts believe that the US government’s entire budget will probably exhaust itself in June itself.
America’s unlimited money
There’s a website called US Debt Clock. It shows real-time figures about US debt, tax revenue, and spending. According to this website, the national debt of the USA is $31 trillion. America is the top economy in the world. This economy has one such superpower that no other country has. That superpower is the ability to borrow unlimited money. America knows that it can take as many loans as it wants; there is no one to ask it. because the US dollar is the reserve currency of the world. This is printed by the USA’s Federal Reserve. 80% of the world’s trade is in the US dollar. Now what’s the difference between the US dollar and other currencies? If India prints unlimited money, then buying dollars will become difficult for us. That’s why we have to carefully decide, in monetary policy, how much money should be in circulation. but America just doesn’t have this limitation. because the whole world sees the US dollar as a stable currency. So far, we have seen three things that make the US currency different from other currencies.
- Doller is used in world trade.
- Central banks keep their forex reserves majorly in US dollar.
- The perceived value of the dollar is more than a piece of paper.
Well, how did America get this superpower? The thing is, in 1973, a deal was made between America and Saudi Arabia. It is called a “petrodollar agreement. from where America’s journey to become a superpower started. This agreement, as such, was simple. The money for oil will be given in dollars. Now think: will a country like Saudi Arabia, or any other big country, keep millions of dollars tied up in the vault? not at all. They have to invest that money somewhere. And where do they invest? back in America by buying Treasury bills and bonds. Saudi Arabia sells oil to America and earns money in dollars. It gives this dollar back to America with the promise that you will give me Treasury bills and also pay interest on them. That is why dollars and Treasury bills are also in constant demand. Many foreign countries hold Treasury bills. Among the $31 trillion in American debt, 25% is held by other countries. that is, paying, then this money is pending. According to the data for January 2023, Japan is the largest holder of US debt, worth $1.1 trillion. The second-largest holder is China. holding $860 billion. India also holds treasury bonds worth $232 billion. This is only 25%. From whom was the remaining 75% loan taken? from the American public. In a way, if you look at it, for Native Americans, they are just aliens. The other government departments, such as Social Security Trusts and the Federal Reserve, hold around $6.8 trillion in debt. The remaining debt is held by the American public. that is, American companies, mutual funds, investors, etc.
What if America runs out of money?
few days ago. The news came out that both political parties in America have agreed that they will increase the debt ceiling. The Congress has yet to vote on this. There was going to be a similar crisis in 2021. Even then, they increased the debt ceiling. And even now, they will increase the debt ceiling. There are no two views on this. So far, America has never defaulted. Even after this, it will never do so. Even in 2011, America’s money was on the verge of exhaustion. stock markets had crashed by some 20%. For the first time after World War 1, global trust in America was shaken. Political and financial risks had increased. Because of this, the American rating was downgraded from AAA to AA. Imagine if a child from first grade to eighth grade stood first every year and suddenly came fifth. There would be chaos in the house, just as in the financial markets. Stock markets crashed by 20%. As they say, history may not repeat itself, but it does rhyme. Stock markets will fall, and global trust in America will dip. The economy will be at risk. All this is going to happen due to the government’s mistakes. Why does the government make such useless decisions? Isn’t there any logic behind their decisions?
In the beginning, we talked about this scale with you. where there is growth on one side and inflation on the other side. When the COVID pandemic came, people sat at home. and America printed $3 trillion in the years 2020. Our GDP for one year is about $3 trillion. and so much money was printed by America overnight. And what did they do with the money? They divided it into groups. so that people don’t come on the road in the short term. In fancy language, this is called quantitative easing. But basically, this is a roundabout. because people get short-term relief. the economy comes back on track. but in the long term, increases. The cost of living increases. because people have money, but things are limited. There is unlimited paper for spending. but limited paper for wiping. The US government’s budget deficit is quite high.
In 2019, the budget deficit was 4.6% of the GDP. In 2020, it turned 15%. In 2021, it reached 16.7%. Imagine America as a car that, due to the pandemic, broke down on the road. To keep it running, the government kept pushing it repeatedly. thought that when the mechanic shop comes, there won’t be a need to push it. The mechanic shop didn’t come, but it reached a chasm ahead, before which it was necessary to stop the car. If you keep pushing it, then the car will fall into the chasm. Now, the American economy car needs to be pushed from the other side.
What will happen now?
Just like great political time passes in India, it happens in America too. The Democratic Party is in power, and the Republican Party is in opposition. To increase the debt ceiling, the Republican Party’s support is necessary. and political drama will continue between these two, the Republican Party says. Reduce the expenses. The Democratic Party believes that elections are due next year. If expenses are reduced before that, unemployment will increase. So, this drama will continue. But both parties know that America cannot default on its debt payments. cannot become Sri Lanka. In this whole situation, American stock markets will fall. Investors will panic and withdraw money from other countries. This will impact global financial markets. If America’s money gets over, then it will not be able to pay. It will give first preference to debt holders. The government expenses will come later. So, the employees or retired people will have a financial strain. Military pensions will be stopped. Existing military personnel will get salaries and benefits. To go with that, the risk-free image of America will receive a big jolt. But all this is hypothetical. The consequences of a default are not the ones that the USA wants to bear. The students who are going to go to America in the next few years need to remember that the American dream they are looking for is no longer perfect.
Lessons for India
Now that we understand this whole Ramayana, let’s understand who Ram is. What is the point of this blog? What lessons should India learn from this? And what difference does it make to us? Whenever a country passes through an economic crisis, we don’t need to be happy at all. because India? too, is always just a few steps away from an economic crisis. We are not in the states of Pakistan and Sri Lanka because some industries, some states, and some big companies are there that are running India’s growth engine. India is a big country. It is an emerging economy that is dependent on services. one such sector that adapted well to the pandemic. But if we don’t learn the lesson of financial responsibility, we too will move towards economic downfall. In the long term, America did harm to keep its people happy; in the short term, India does the same in many states. Recently, there were elections in Karnataka, where in total, 64,000 crores of rupees of subsidies and benefits were offered to the common people of Karnataka. It is a thought-provoking thing: how will the government play for their subsidies? We have not used the example of Karnataka here to target a political party. When it comes to freebie politics, all political parties are equally responsible. Giving free electricity and free food does not solve economic problems. Instead, economic problems rise. We must definitely understand this. Traditional economics says that developing countries like ours should run a deficit budget. That is, they should spend more and fill the gap by borrowing. This logic is fine, but where the money is spent, does the country benefit from it or not?
In our budget blog, we said that the biggest part of our budget is interest payments. In 2023–24, we will pay Rs. 10 lakh crores only on interest payments. Availing a loan is like stealing money from future earnings. Not increasing the payment capacity of the country after taking loans only creates problems in the future. Where does money come from and how much does it cost? This is very important not just for the center but even for states. so that no one drowns in debt. It is important for everyone to keep an eye on these finances, but we only focus on spending and not on revenue. we borrow 40% of our budget. Still, there is hardly any discussion on this. How can the country reduce its forex reserve deficit, its current account deficit, and its budget deficit? There are no concrete policy actions on this.