Cross Border Government And The Modern International Finance System Essay

“Ten Trillion and Counting,” presented by Frontline provides quite a picture of America’s national debt as it surpasses the trillion dollar mark. They ponder the financial well being of current and future retirees while also exposing on how America got into this mess, and what the Obama administration plans to do during his term. America is able to close the gap year to year in its national budget by selling bonds and T-bills. Foreigner countries who continually purchase these obligations are beginning to grow. Much like the Bush administration, the Obama administration has started borrowing big with plans to cut the budget years down the road. It is clear for anyone to see that this borrowing and the future promises of cutting cannot go

Australia’s net foreign debt to GDP ratio has grown dramatically during the period of globalisation. After rapid growth in the 1980s’ foreign debt stabilised at roughly 35% of GDP, this was party due to a higher level in asset sales being used to fund the CAD instead of increased debt. Debt began to increase again the late 1990’s, this was due to a decrease in the value of the Australian dollar, because most of our debt had been borrowed in foreign currency’s, the depreciation increased the Australian dollar value of our foreign debt. The slower rate of growth in debt and overall liabilities in the past few years reflect the lower level of current account deficits. The growth in net foreign debt has eased slightly since the global financial crisis of 2008-09 but is now around 50% of GDP.

Operating in an international economy is a must for every nation. However in order to keep an economy out of long term debt the foreign sector need to be as balanced as possible. As shown in the circular flow model (figure 2) too many imports can lead to major leakages in our economy causing foreign debt to rise. To slow rising foreign debt the causes need to be considered:

2. The government asks for loans from international banks on credit of the U.S. and the debt must be paid

Furthermore, when the government borrows all this money another problem is created called “crowding out.” The interest rates are increased because of the deficit spending from the borrowing. Hence, the financing needed by private businesses is more difficult as well as the purchasing of new equipment or construction of new factories. Government borrowing deteriorates the strength of the economy as well as builds debt. Private spending decreases when government spending increases. Stimulation from government into the economy should only occur once it has been given a chance to recover on its own and failed.

An open market purchase of government securities  An increase in the discount rate  A cut in the required reserve ratio 14. Deficits may be desirable in the short run if they  help to stabilize the economy when the economy falls below potential output  increase savings necessary for future investment and growth  increase savings necessary for future consumption and demand  help to stabilize the economy when the economy is above potential output 15. If for a country, the quantity of its currency demanded exceeds the quantity supplied, then there is a  balance of payments surplus 

The current economic event on the increase in the National government debt has become of interest to the public and the decision makers. This paper looks at the economic event as per Stephen Dinan’s article in The Washington Times dated on June 16, 2015, in regards to the impact of the increasing national debt to the general economic growth in America. The proportion of the United States ' National debt is increasing in comparison to the National GDP. It is evident from the past years that the United States ' Treasury has been borrowing a lot of funds from its citizens and foreign investors to help fund wars promote the economic development of the country, and save the financial systems as well. This paper will explain and demonstrate an in-depth economic analysis of the USA National debt vital to cope up with this worrying trend in the economy.

Compared with the domestic supply, the cost of borrowing from the world will lower. So, this country prefer borrow money from the world supply. In conclusion , the money will flow from the lower interest rate country to the higher interest rate country.

However, to some, it is considered a controversial political issue a negative expenditure by the federal government and sees as an effect to citizens and the loanable market. The excessive government spending lead to a budget deficit the opposite of deficit spending. Assume an individual spends excessively, there is the tendency of borrowing from someone to continue the spending. Today, several countries borrow from wealthy nations because of their economy's strength. Deficit spending does not allow saving or interest earned due to debt. For instance, most lending from another country comes with a high-interest rate. It also leads to lower economic growth. The spending can sometimes be beyond what is available in the yearly budget considered

Furthermore, the federal government has an “artificially designated borrowing threshold beyond which the government is not authorized to borrow funds” in order to manage over spending that is contributing to the fiscal deficit and this threshold is referred to as the national debt ceiling (Ross, 2015). The federal government has the ability to raise its own debt ceiling if needed with the approval of congress. This practice is largely in place because the federal government has the authority to print money and issue currency in order to help regulate the economy whereas this is out of state and local government’s jurisdiction of fiscal power. When the federal government is approaching its debit ceiling, it will then borrow money in the form of treasury bonds in order to help balance the deficit spending. These treasury bonds are purchased by individuals, corporations, and other countries like China amongst other entities (Ross, 2015).

A distinction is made between gross and net foreign debt. Gross foreign debt is the total amount of borrowing from non-residents. Net foreign debt is equal to gross foreign debt minus the sum of lending by residents of Australia to non-residents and official reserve assets held by the Reserve Bank. Net foreign debt is the preferred number to look at as it takes into consideration the possible positive impacts that the debt could mean such as borrowings for investment purposes. Gross foreign debt is normally focused by government oppositions to degrade the current government’s schemes. Another differentiation in looking at debt is between the private and public sector. Governments are no different to an individual or family, if you spend more than you earn then you will need to draw from your savings, if you don’t have enough savings you have to borrow. Despite claims that the government is forcing Australia into debt, after the mass spending during WW2 stopped government debt has fallen significantly with the current public sector only holding about 28.6% of Australia’s $955 billion net foreign debt (figures 1 & 8). This relatively low percentage means that while the government is in debt to other countries, as

Ample of the U.S. debt is internal debt, several debate that repayment excludes the export of economic resources over seas. Repayment of internal debt represents redistribution of purchasing power from certain groups of citizens who pay taxes while other individuals in the past where creditors to the federal government. The central government borrows money from its citizens which makes opportunity cost inevitable consumption and investment in the country rather than than foreign sources (Hyman, 2008, p496-497).

The European sovereign debt crisis, which 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 (Haidar, Jamal Ibrahim, 2012), had already badly hurt the economies in “PIIGS”, Portugal, Ireland, Italy, Greece and Spain. This financial contagion continues to spread throughout the euro area, and becomes a dangerous threat not only to European economy, but also to global economy.

During the 1980s, the Baker and Brady Plans were initiated to alleviate developing countries debts. The former plan called upon financial institutions to increase lending to developing countries by up to 50% and the latter plan sought to annul debt through collaboration with private-sector lenders. Developing countries’ debt problems became known as debt overhang whereby the “presence of existing ‘inherited’ debt” exacerbated the debtor countries’ economic hardships. While the Baker Plan was largely ineffective, the Brady Plan helped revive the Third World debt market and the composition of capital flows in the Brady countries shifted away from the public sector to the private sector in the form of foreign direct investment (FDI) and equity.

a. Would both types of bonds, par and discount provide debt reduction to the emerging country?