m4l1 - Accounting&Finance...

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David Robinson © D. Robinson, 2008 Fall 2008 Module 4 Accounting & Finance   Lecture 1: Intro to the US Financial System
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An Introduction to Financial  Markets We’ve been overspending How mortgages are supposed to work
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Balance of Payments
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1. Our trade in goods is out of  balance Source: Economic Policy
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1. Our trade is out of balance
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1. Our trade is out of balance $1 trillion in foreign  currency  reserves
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1. Our trade is out of balance At this point,  we should be broke: too many of our dollars have been spent in China If we have no dollars left,  we simply stop buying from abroad
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1. Our trade is out of balance But wait! Our dollars are coming back to us!
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Our dollars are coming back to  us 1. China (Japan and Korea) are buying  huge amounts of US Treasury debt 2. The US government now has the dollars 3. What happens to those dollars? If my tailor kept  loaning me  money, I’d buy  more suits [Foreign Affairs, 2006]
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This is not costless . .  China (Korea and Japan) are buying huge  amounts of US Treasury debt 1. At some point, we have to pay back all  the money we’ve borrowed 2. There’s a huge strategic vulnerability:  China could cut us off within a week.  Interest rates would rise substantially (to  woo Europeans to buy our debt instead) You!
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OK, now China has the bonds, US governments has the dollars Game  over? Not quite . .  .
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The Federal Government is  Vastly Overspending
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3. The Federal Budget is  Completely out of Control What have we been  spending on?
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This note was uploaded on 02/12/2010 for the course UGBA 10 taught by Professor Xuanmingsu during the Spring '08 term at University of California, Berkeley.

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m4l1 - Accounting&Finance...

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