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Unformatted text preview: CHAPTER 13 FEDERAL DEFICITS AND THE NATIONAL DEBT THE FALL, 2010 1 DEFICITS VS. DEBT A budget deficit: Excess of government expenditures over tax collections in a given year given Financed by borrowing Financed borrowing Measured on an annual basis Measured annual The national debt: The national Sum of all previous bonds sold and Sum not yet repurchased. Measured at a point in time. Measured 2 U.S. TREASURY FINANCES BUDGET U.S. DEFICITS “Refunding” of existing of national debt: Sells new bonds to pay off old bonds as they become due due Interest paid with currentyear tax receipts The Historical Record: Deficits expanded rapidly after Deficits 1969 1969 Surpluses in 1999 and 2000 3 Deficits every year since. THE NATIONAL DEBT Year Year 1791 $.075 1865 $2.7 1900 $1.3 1930 $16.2 $ 97.0 -------------------------------------------------------------1945 $259 $1,430 $1,430 -------------------------------------------------------------1960 $287 $ 970. 1970 $371 $ 956. -------------------------------------------------------------1980 $914 $1,109 ---------------------------------------------1985 $1,827 $1,698 -------------------------------------------------------------1990 $3,163 $2,420 -------------------------------------------------------------1995 $4,921 $3,229 2000 $5,629 $3,269 2002 $5,664 2003 $6,783 2004 $7,379 2005 $7,933 $4,062 2006 $8,500 2007 (9/14) $9,017 $4,473 2008 $10,000 2009 (3/32) $11,000 4 2010 $12,500 National Debt (Billions) National Real GDP (1983 base year) MEASURES TO BALANCE THE MEASURES FEDERAL BUDGET FEDERAL Gramm-Rudman-Hollings Gramm-Rudman-Hollings approach: approach Mid-1980s Mid-1980s Automatic expenditure cuts if Automatic budget not balanced budget Equal % reduction in all Equal items items Debt interest excluded Social Security Social excluded excluded Recession waiver Recession 1986-1993 time line for debt. Year Target Actual 1986 $176 $221 1988 $144 $155 1990 $100 5 $221 BALANCING THE BUDGET (continued) The Debt-Ceiling limit approach: Congress sets limit to size of debt. This limits the size of deficits This Debt ceiling raised each year (Note: Debt including March, 2006 raised to $9 trillion). trillion). Fiscal crisis when Congress refuses to Fiscal raise debt ceiling (House Republicans “Contract with America” in 1996 nearly shut down the Federal Government) 6 BALANCING THE BUDGET The line item veto approach Before 1997, president had to approve Before or veto entire bill or Selective vetoes permitted under the Selective new legislation Too early to tell if President could Too have used the line item veto in ways that would reduce the deficit that Has been declared unconstitutional by Has the Supreme Court the Recently re-introduced by President Recently Bush Bush 7 THE EFFECTS OF THE THE NATIONAL DEBT NATIONAL 1. How large is the debt? It depends on what you wish to measure. measure. 2. Is there a “payoff” burden? Maybe, but hard to determine. determine. 3. Is there an “interest cost” 3. burden? burden? Probably yes. 4. Is there a “crowding out” 4. burden? Yes, but size uncertain Yes, 8 5. Can the federal government 5. HOW LARGE IS THE DEBT? HOW A. A. Adjustments for inflation B. Adjustments for size of GDP C. Adjustments for capital C. expenditures that create real assets assets D. Adjustments for debt held by D. federal agencies (e.g., social security, medicare) security, 9 E. Adjustments for internal vs. E. THE NATIONAL DEBT Real GDP (1983 base year) Year Year National Debt (Billions) National 1791 1835 1850 1865 1900 $.075 $.000 $.000 $.063 $2.7 $1.3 1930 $16.2 $ 97.0 -------------------------------------------------------------- 1945 -------------------------------------------------------------1960 $287 $ 970. $259 $1,430 $1,430 1970 $371 $ 956. -------------------------------------------------------------- 1980 ---------------------------------------------- 1985 -------------------------------------------------------------- 1990 -------------------------------------------------------------- 1995 $4,921 2000 2002 2003 2004 $5,629 $5,664 $6,783 $7,379 2005 2006 $7,933 $8,500 $4,062 2007 2007 2009 (3/26) $9,017 $9,017 11,000 $4,473 $914 $1,109 $1,827 $1,698 $3,163 $2,420 $3,229 $3,269 10 EXHIBIT 4: National Debt as a Percentage of GDP: 1930 – 2007, P. 335 Source: Economic Report of the President, 2004, http://www.access.gpo/eop/index.html, Tables B-78, and B-79. 11 IS THERE A PAYOFF BURDEN? Who owns the national debt? Federal Reserve, Federal Federal agencies, & State & agencies, Local Governments 52% Business firms & Business Individuals 26% Foreigners 22% ----------TOTAL 100% 100% INTERNALLY HELD: (about 75% INTERNALLY today) today) EXTERNAL HELD: (about 25% 12 today) today) IS THERE AN INTEREST COST BURDEN? Federal Interest as a Percentage of GDP: 1940-2007. P. 339 Source: Economic Report of the President, 2004, http://www.access.gpo/eop/index.html, Tables B-1 and B-80. 13 DO BUDGET DEFICITS CROWD DO OUT PRIVATE INVESTORS? HH Interest Rates S1 Bus Bus. + Gov’t D1 D2 Dollars 14 EXHIBIT 8 Zero, Partial and Complete “Crowding Out” P. 342 15 THE “BANKRUPTCY” ISSUE Can an increasing national debt force the U.S. government into bankruptcy? 1. 1. The power to tax The 2. 2. The ability to “refund” the debt The 3. 3. The ability to print money The 4. 4. The authority to repudiate the The debt. debt. 5. 5. So, Bankruptcy is not the issue. 16 END OF CH 13 END LECTURE LECTURE Questions? 17 CHAPTER 14 CHAPTER MONEY AND THE FEDERAL RESERVE SYSTEM SYSTEM Spring, 2009 18 18 LINKING THE “REAL” AND LINKING FINANCIAL SECTORS OF THE ECONOMY ECONOMY Equilibrium in the market for Equilibrium goods and services requires AD = AS AS AD depends in part on AD Investment expenditures. (Ch. 10) 10) Investment expenditures Investment depend on the rate of interest. (Ch. 9) (Ch. Interest rate determined in Interest financial sector of the economy (Ch. 16) (Ch. 19 GRAPH OF EQUILIBRIUM INTEREST GRAPH RATE: RATE: Determined in the Money Market Interest Rate Money Supply Determined. by FED Equilibrium rate of interest. i(e) Demand for Money Money 20 THE EFFECTS OF CHANGES IN THE MONEY SUPPLY, P. 385 (Ch. 16) MONEY Figure 26.3 (Macro 16.3) IMPACT OF CHANGE IN INTEREST IMPACT RATE ON INVESTMENT EXPENDITURES EXPENDITURES Interest Rate i(1) i(2) I(p) I(p) 22 THE EFFECT OF EXPANSIONARY MONETARY POLICY ON AGGREGATE DEMAND , P. 387 DEMAND Figure 26.5 (Macro 16.5) WHAT FUNCTIONS DOES MONEY WHAT PERFORM? PERFORM? Barter economy: Barter Goods/services exchanged Goods/services for other goods and services Principle of the “double Principle coincidence” of wants Barter is inefficient and Barter limits specialization Money-using economy Money-using Goods sold for money Money used to buy other Money goods “Single coincidence” of Single wants Money increases the Money efficiency of specialization and exchange 24 and WHAT FUNCTIONS DOES MONEY WHAT PERFORM? PERFORM? Page 2 Functions of money Functions Medium of exchange Medium Unit of account Store of value Store What constitutes the money What supply? Coins Currency Checkable deposits Travelers’ checks Why credit cards are not Why money money Short-term loans Must ultimately paid in Must money; cannot serve as a 25 store of value store THREE DEFINITIONS OF THE THREE MONEY SUPPLY MONEY M1: The narrowest definition M1: Currency Traveler’s checks Coins Checkable deposits Checkable Focuses on “medium of Focuses exchange” definition of money money M2: An intermediate M2: definition definition Includes M1 plus savings Includes deposits + small time deposits (less than $100,000) + money market acc’ts. acc’ts. M3: Broadest definition M3: 26 Includes M2 plus large time Includes WHAT BACKS THE MONEY WHAT SUPPLY? SUPPLY? The Bi-Metallic Standard: 1792-1900 (Note: De facto gold standard (Note: over much of this period. Silver Certificates continued to be produced until 1963.) The Gold Standard: 1900-1934 The Gold Exchange Standard (and The fixed exchange rates) : 1934-1971 fixed Inconvertible paper standard (and Inconvertible floating Exchange Rates): 1971floating present Result: no precious metals Result: backing for our money supply today. 27 THE FEDERAL RESERVE SYSTEM: Some U.S. banking history Financial panics in U.S. before 1913 Financial in: 1817, 1857, 1873, 1893, 1907 Little federal involvement in Little banking prior to 1913: banking First and Second U.S. Banks National Banking Acts of 1862 & National 1864 1864 State banks very independent State No national monetary policy No Panics created shortage of Panics reserves reserves A lender of the last resort was lender needed. needed. 28 STRUCTURE OF THE FEDERAL STRUCTURE RESERVE SYSTEM (THE “FED”) RESERVE Board of Governors Board 7 in number with 14 year in terms Appointed by President President Congress advises and Congress consents Federal Advisory Council Federal 12 Fed District Bank 12 Presidents Presidents Open Market Committee 7 members of Board of members Governors + 5 members of Federal Adv. Council Federal 12 Federal Reserve Districts 29 THE TWELVE FEDERAL RESERVE DISTRICTS, P. 350 DISTRICTS, Figure 24.2 (Macro 14.2) The Organization of the Federal Reserve System, P. 351 System, Figure 24.3 (Macro 14.3) TRADITIOINAL FUNCTIONS OF TRADITIOINAL THE FEDERAL RESERVE SYSTEM THE Controlling the money supply Controlling Changes in reserve req. Changes in discount rates Changes Open market operations Clearing checks Supervising and regulating Supervising member banks member Maintaining and circulating Maintaining currency currency Maintaining Federal Maintaining 32 THE U.S. BANKING THE REVOLUTION REVOLUTION Prior to 1980s Prior Banks offered checking accounts Not permitted to pay interest Not on checking accounts Savings and Loans offered Savings savings accounts Not permitted to offer Not checking account services Maximum interest rates Maximum established by law to subsidize housing industry subsidize FED had direct control only over FED commercial banks that were members of the FED members 33 THE U.S. BANKING REVOLUTION (continued) Monetary Control Act of 1980 Authority of FED over Authority nonmember banks was greatly expanded (6000 to 15000 banks) 15000 FED sets reserve FED requirements for all financial institutions financial All depository institutions All are able to borrow reserves from the FED from Other measures to increase Other competition in finance industry 34 Eliminated all interest rate Eliminated THE U.S. BANKING REVOLUTION (continued) 1. The FED regulates and 1. controls commercial banks. 2. But a shadow banking system has developed over the past decade. 3. Investment banks grew rapidly and were not subject to FED regulation. A. A. B. C. D. Lehman Brothers Bear Stearns J.P. Morgan 35 Merrill Lynch WHAT DO INVESTMENT BANKS WHAT DO? DO? 1. They do not accept 1. deposits and make loans like commercial banks. 2. Assist firms in raising 2. capital for acquisitions and mergers. 3. Investment management 3. and consulting advice. and 4. Buying, selling and 4. reselling financial products including mortgages and credit default swaps. 36 HOW ARE INVESTMENT BANKS HOW REGULATED? REGULATED? 1. They are not regulated by 1. the FED the 2. They technically are 2. regulated by the SEC regulated 3. There is no clearinghouse or 3. national reporting system for credit default swaps. Very little information is available. little 4. There is little required 4. reporting so no one knows 37 what the balance sheets of WHAT HAPPENED (1)? 1. 1. Congress and the financial services industries encourages subprime mortgage lending. subprime 2. Thousands of mortgages 2. “bundled” together and resold in pieces called “collaterized debt obligations) obligations) 3. They “hedged” their bets by 3. purchasing a form of insurance called “credit default swaps.” These were outlawed in 1933 but reauthorized by Congress (under pressure from the financial services industry) in 1999. 38 WHAT HAPPENED(2)? 1. 1. Sellers of CDSOwere not required to hold “reserves” against possible losses. 2. Purchasers of subprime mortgages purchased a large number of CDS from the same firms. These firms did not have sufficient reserves to meet their obligations. 3. The federal government began to step in to “bail out” failing firms because of the fear of system-wide financial collapse. 39 4. Problem worsened when the WHAT HAPPENED(3)? 1. 1. Federal government has bailed out: A. Bear Stearns and others A. B. AIG (largest insurer of subprime B. loans) loans) C. Fannie Mae essentially C. nationalized nationalized D. Freddie Mac essential nationalized D. E. FED has begun to loan directly to private firms rather than banks or financial services firms. 40 END OF CHAPTER 14 LECTURE QUESTIONS????????? 41 ...
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This note was uploaded on 01/12/2012 for the course ECN 211 taught by Professor Kingston during the Spring '08 term at ASU.

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