Governmental Financial Dependency

Governmental Financial Dependency

Introduction

In the financial world, there are number of issues that have significance importance such as project's rate of return and risks associated to it but the most important issue is the liquidity issue. The main cause of global financial crises was the illiquid markets and financial institutions. It has been shown that the issue of liquidity is not only important or crucial for the private companies but it is equally important for the public companies. This repot will focus on the article “How intergovernmental financial dependency affects us all”. The report will analyze this article by highlighting the important points made by the author of this article. The report will also present more facts that will support the idea of the author.

Discussion

In the article, it is clearly indicated that the debt held by public or government companies has been increased to enormous level. The debt held by public or government companies amounted to $ 7,583 billion in 2009 which has been increase to $9,060 billion in the year of 2010. This showed that the government or public companies have taken huge loans from state or commercial banks. The researchers and theorists claimed that this actually makes the public companies weak because these companies started relying on these debts. When many of the public companies started taking debt from each other and from state and commercial bank then this will cause liquidity issues (Rajan & Zingales, 2001).



Public Held Debt

The balance of publicly held debt at September 30, 2010, is $9.06 trillion dollars, or 62 percent of the U.S. Gross Domestic Product. This shows that the government majorly relies on borrowing and loans. The portion of public held debt is huge which also cause problems for the banks and for the private institutions. When the government borrows large sums of money from the state bank or central bank then the central bank is expected to witness liquidity issues. This compels the central bank to give money from its reserves or to print new currency. In either case, the actions of central bank will affect the economy of the country because if the central bank chooses the first option of lending money out of its reserves then the central bank will witness decline in its reserves which is considered as deteriorating for the economy (Eaton, Muntaner, Bovasso & Smith, 2001).

The stakeholders of the country consider the reserves of the central bank as life blood because if it declines then the country is expected to witness huge exchange rate issues and inflation. This will also affect the trade of the country. It has been seen that any country which has issues of reserves also witness steep decline in exchange rate. On the other hand, the central bank has option of printing money so that it can save its reserves. When the central bank issue new currency it majorly affects the inflation because the new release of currency actually increase the purchasing power of the every ...