The US Economy in Peril

8/3/2019 The US Economy in Peril

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The Present Economic Crisis of the US: An AnalysisDr. Jatindra Nath Saikia

The US Economy, which is one of the biggest in the world, is facing a serious crisis at

present. The United States, which dominates almost all the nations of the world in

different ways, are struggling to recover itself from the unprecedented debt crises.

But the crisis has not occurred all of a sudden. The US economy has been

experiencing recession since long though the country did not focus that. In this

article, an analysis has been made about the present crises, the reasons of the crisesand its impact on Indian economy. The information that are used in this article have

been collected from different websites. Primary Data, collected by interacting with a

few Economists of the United States, have also been incorporated in this article. Now

let us see the history of the US recession which has close link with the present crisis.

A depression occurred in the country in the years between 1807 and 1814, and that

was called the Depression of 1807. This depression was primarily caused by the

Embargo Act of 1807, signed into effect by then President Thomas Jefferson. This act

destroyed a good part of the shipping related industries, and it was fought hard bythe Federalists, who allowed smuggling to take effect in New England as a result of

the Act.

The Panic of 1819 soon followed. This was considered the first major financial crisis

to unveil itself before the relatively new U.S. economy. This panic brought with it

widespread foreclosures, failing banks, huge unemployment rates, and a gigantic

slump in manufacturing and agriculture that caused havoc among Americans. This

recession also marked the end of great economic expansion that had taken place

following the War of 1812.

Economic recessions in America continued with the Panic of 1837. This recession

can really be attributed to failing banks, and to the lack of confidence people had in

paper currency, which was becoming popular at the time. Banks stopped paying out

in gold and silver, which really took its toll on American confidence.
http://recession.org/history/depression-1807http://recession.org/history/panic-1819http://recession.org/history/panic-1837http://recession.org/history/panic-1837http://recession.org/history/panic-1819http://recession.org/history/depression-1807


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The Panic of 1857 followed not long after. With the failure of the Ohio Life Insurance

and Trust Company (which at the time was one of the biggest in the United States)

came the explosion of a European confidence bubble in the U.S. This greatly affected

the railroads and U.S. banks, causing over 5,000 businesses in America to fail in the

first year of the panic alone. Unemployment rose, and protest meetings becamepopular.

Recessions continued to plague not only America, but the rest of the world as well.

Considered part of the natural cycle of the modern economic system, no one can

really escape recession in the long run. Countries like Germany, the U.K., China, and

Japan have all had trouble with recessions. In fact, economists say that Germany is in

for what might be the biggest recession in all of German history not too far down the

road. Japanese economic recession has also played a huge part in their history.

Japanese recession, just like economic recessions in America, can be linked to thedreadful cycle of imbalanced inflation, money supply, and interest rates that keep

things in balance, rolling, and functioning properly.

In the year 2001, the early 2000s recession hit America. The collapse of the dot.com

bubble was truly the cause of these recessions, as well as the attacks that occurred

on September 11th on the World Trade Center Towers in New York City. Accounting

scandals also ran rampant, contributing to the overall downward financial spiral

that America faced. Everyone remembers the attacks on Americas soil, and nobody

will forget how, despite economic trouble, the attacks brought Americans together,

more united than ever. And with that kind of perseverance, America was led out of

that struggle to a new future of prosperity.
http://recession.org/history/panic-1857http://recession.org/history/early-2000s-recessionhttp://recession.org/history/early-2000s-recessionhttp://recession.org/history/panic-1857


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And lastly, America has been hit by what has been called the Late 2000s recession.

The collapse of the housing market really set this one off on a bad note, and it,

coupled with bank collapses in the U.S. and Europe, have caused consumer

confidence and credit availability to plummet to new lows. Hopefully, things will

turn around. But for now, the modern economic cycle again comes around to purgeitself of the problems put on it by humanity, and unfortunately, that purge is known

to us as recession. Now let us discuss the reasons for the crisis in the light of the

discussion made by Dr Kurt Richebcher (The Daily Reckoning, UK Edition, available

at http://www.dailyreckoning.co.uk)

The US economic recovery since November 2001 has been found to be the weakest

in the whole postwar period. Just a few reports composed by the Economic Policy

Institute in Washington are mentioned below:

First, inflation-adjusted hourly and weekly wages today are below where they were

at the start of the recovery in November 2001; second, median household income

(inflation adjusted) has fallen five years in a row and was 4% lower in 2004 than in

1999; third, total jobs since March 2001 (the start of the recession) are up 1.9% and

private jobs 1.5% (at this stage of previous business cycles, jobs had grown 8.8%);

fourth, the unemployment rate is low only because several million people have

given up to look for a job. Some of the important points in this regard are mentioned

below:

First, job growth has steeply fallen during the last three months, from 200,000 in

February to 75,000 in May; second, all the job growth has come from the artificialnet birth/death model, implying that it is booming among small new firms not

captured by the payroll survey, while slumping in existing firms; third, private

household indebtedness since 2000 has soared by 70%. This compares with an

overall increase in real disposable personal income by 12%.
http://recession.org/history/late-2000s-recessionhttp://recession.org/history/late-2000s-recession


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According to the popular GDP accounts, US consumer spending in the first quarter

has burst by a record rate of 5.2%. That is the fact on which everybody happily

focuses. Few people realize, first of all, that this is an annualized figure. The true

increase against the prior quarter was 1.3%.

By these figures, measuring spending and income growth from month to month,consumer spending in the US in the first quarter has increased 0.6%, or 2.4%

annualized, less than half the 5.2% as reported in the GDP accounts. As we have

stressed several times before, the big difference between the figures arises from the

fact that the GDP measures changes in averages. The big increase in consumer

spending happened in reality in November/December 2005, resulting in a large

"overhang" for the following quarter. To detect a recent change in trend, it is

necessary to focus on the changes from month to month, as above. For May, reported

retail figures showed an increase by 0.1% before inflation. With a monthly inflation

rate of 0.3%, total real spending should be at a minus.

This sudden weakness in US consumer spending has an obvious reason. The

spending bubble on consumer durables - that is, on autos and housing durables - is

going bust. It was largely spending borrowed from the future to be implicitly

followed by payback time. For the US, this rapid, steep decline in the growth of

consumer spending is the first decisive consideration to expect in the United States

impending serious recession; and remarkably, this is happening with record credit

growth and even before the housing bubble is truly bursting.

That this most important fact goes completely unnoticed says something about the

depth of research done by many. Moreover, this sharp slowdown in consumer

spending strikingly conforms to the downward shift in the growth of real disposable

personal incomes. In 2005, it was already down to 1.3%. So far in 2006, it is zero.

Under these miserable US income conditions, the strength of future consumer

spending manifestly depends on the possibilities of ever-higher cash-out mortgage

refinancing against rising house prices. It hardly requires any intelligence to have

realized by now that this is flatly impossible.


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Looking at the accelerating credit expansion, the country, as a matter of fact, more

than doubtful that the slowdown in the US economy and the housing bubble has

anything to do with the Feds rate hikes. What crucially matters for both is the

current credit expansion, and that keeps accelerating. But the problem is that more

and more credit creates less and less economic activity, as measured by GDP. Theunrecognized problem in the United States is that economic growth driven by a

housing bubble is extremely credit and debt intensive. It needs, firstly, heavy

borrowing to drive up the house prices and, secondly, further heavy borrowing to

turn the resulting capital gains into cash. Put this together with minimal or now zero

real disposable income growth and the country has something like a credit Moloch

devouring credit and leaving less and less for economic growth.

The US economys extraordinary debt addiction has other reasons unrelated to the

housing bubble. One is the huge trade deficit, and the other is extensive and rapidly

increasing Ponzi finance.

The large and growing income losses from the trade deficit would have pulled the US

economy into recession long ago. It has not happened because the Greenspan Fed,

by way of loose and cheap money, provided for a compensating increase in domestic

demand through additional credit creation. It succeeded, true, but the thing to see is

the additional credit and debt creation. This was justified with low inflation rates.

Ironically, the import boom in the trade deficit has been very helpful in suppressing

US inflation.

In essence, the trade deficit alters the US economys structure in a negative way. The

losing manufacturing area is the sector with the highest rate of capital formation,

and therefore also the highest rate of productivity growth. For good reasons, it also

pays the highest wages. Consider that US manufacturing lost 3 million jobs in the

past few years. To be sure, the trade deficit is not its only reason, but

unquestionably a major one.

Apart from the US economys unusually high addiction to credit and debt growth in

relation to GDP growth, there is another evil factor - Ponzi finance. Principally, every

increase in spending brings about an equivalent increase in incomes. But this is not

true in three cases of spending: first, spending on existing assets; second, spendingon imports; and third, Ponzi finance.

Ponzi finance means that lenders simply capitalize unpaid interest rates. Ponzi

finance creates credit, but it is bare of any demand and spending effects in the

economy. In the conventional American view, balance sheets of private households

are in their very best shape because increases in asset values have vastly outpaced

the sharp increases in debts.


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With such great optimism about the US economy still prevailing, it is a safe

assumption that lenders have been more than happy to capitalize unpaid interest

rates as new loans. As widely reported, lending standards have been extremely lax

for years.The crucial difference is in the horrible difference between runaway debt growth

and nonexistent real disposable income growth as the income component from

which debt service has to be paid. In 2000, consumer debt growth of 8.6% compared

with real disposable income growth of 4.8%. During the first quarter of 2006,

private household debt growth of 11.6%, annualized, compared with zero real

disposable income growth. Under these conditions, the only question is the severity

of the impending debt crisis.

With stagnant real disposable income and double-digit debt growth, the American

consumer is caught in a vicious debt trap.

The current economic crises, which left a lot of people without jobs; made

companies to go bankrupt or cut the jobs, shut the plants and factories; plunged

stocks; caused oil and real estate prices to fall; made countries to fall into recession;

decreased consumer spending and raised panic among businessmen and workers, is

effecting almost everyone and everything in the world negatively Bush and the 20

other Pacific Rim leaders in the Asia-Pacific Economic Cooperation forum predicted

that within 18 months they can overcome the financial crisis. President elected

Obama encouraged Americans and said that the help is underway indicating on anambitious economic plan which is intended to keep or create more than 2 million

jobs. However there are a lot of economists who believe that the new economic plan

of Obama which is based on the increase of government spending and put a huge

debt to the country will lead dollar to collapse and the country to a huge economic

depression

As stated above, the crisis is very serious and no one can predict the exact date when

it will be over or how big the negative consequences will be.


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Indian economy will surely be affected by this crisis since Indian economy has been

integrated with the US and other Economies in the world. At present the Indian

Exporters are worried that the debt crisis in the Western world will hit demand and

lead to a payments problems. Europe and the US account for a third of Indias

exports. In the back drop of the crisis in the two regions, the Commerce Departmentis planning to fast tract with the Finance Ministry on extending tax sops and other

incentives to exporters. S.P. Agarwal, the President of the Delhi Exporters

Association has stated as we dont know whether to accept orders coming from the

US and the European Unions. There is a probability that those might be cancelled

mid-stream or our buyers may not be in a position tp pay us after receiving goods.

(Economic Times, August 8, 2011).

After the formation of the WTO, Indian economy has been very closely associated

with the rest of the world. In this regard, after Dr. Manmohan Sing, the formerFinance Minister and present Prime Minister of India (He declared the New

Economic policy, in 1991), the former Finance Minister and the Present Home

Minister, P. Chidambaram is the next one to try his level best to integrate Indian

Economy with other economies of the world.


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In his Key Note Address at the India-Europe Investment Forum in London on 27th

June 2007, Chidambaram declared as follows:

I thank you for the opportunity to address the India-Europe Investment forum. The

linkages between Europe and India go back a long way. In recent years to be more

exact, since 1991 India has embarked on a voyage of self-discovery and, in theprocess, has reached out to the other countries of the world in order to explore

opportunities for trade and investment. Our engagement has produced splendid

results. We have strengthened old linkages and established new connections. The

time is now ripe to renew and reinforce these linkages and take our partnership to a

new and higher level.

Let me begin by congratulating the representatives of the countries of the European

Union on the historic treaty that the 27 nations concluded at the Brussels summit

three days ago. Your leaders have shown great courage, wisdom and foresight. The

European Union is poised to become a stronger economic union and a major driver

of global growth.

Indias relations with Europe have expanded over the years to cover many areas of

mutual interest, including trade, investment and development cooperation. Let me

take trade first: Trade with the European Union has grown impressively over the

years. Indias exports to the EU stood at US$23.8 billion in the eleven months from

April 2006 to February 2007 and accounted for 21 per cent of our total exports.

Indias imports from the EU during the same period stood at US$24 billion and

accounted for 15 per cent of our total imports. Among the major commodities

exported to the EU were textiles and related products, engineering goods, chemicals

and gems and jewellery. The major commodities imported from the EU were pearls,

precious and semi-precious stones, non-electrical machinery, electronic goods, iron

and steel and chemicals.

Now, let us look at investment: The European Union is Indias largest source of

foreign direct investment (FDI). EU has accounted for 25.3 per cent of total FDI

inflows between August 1991 and December 2006. The investment has mostly been

in the power, telecommunications and transport sectors. India is a signatory to the

Multilateral Investment Guarantee Agreement (MIGA). We have also signed bilateralinvestment promotion and protection agreements with 19 of the 27 EU

countries

But if we look at China, it will be a something different picture. The country's

economy has continued to grow quickly despite the global recession. This has some

observers wondering whether China's authoritarian political system has given it an

advantage in promoting economic development.


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Scholars such as Wang Zhengxu, a senior research fellow at England's University of

Nottingham, see a pattern. "In the early stage of economic takeoff, you normally

need a strong government that can mobilize resources, that can concentrate

government priority to the sectors that are important for the economy," he says. "In

that case, a one-party or a more centralized system will have an advantage."(http://www.npr.org)

The Gross Domestic Product (GDP) in China expanded 2.20 percent in the second quarter of

2011 over the previous quarter. Historically, from 2011 until 2011, China's average

quarterly GDP Growth was 2.15 percent reaching an historical high of 2.20 percent in June

of 2011 and a record low of 2.10 percent in March of 2011. China's economy is the second

largest in the world after that of the United States. During the past 30 years China's

economy has changed from a centrally planned system that was largely closed to

international trade to a more market-oriented that has a rapidly growing private sector. A

major component supporting China's rapid economic growth has been exports growth. Thispage includes: China GDP Growth Rate chart, historical data, forecasts and news. Data is

also available for China GDP Annual Growth Rate, which measures growth over a full

economic year (www.tradingeconomics.com/china/gdp-growth)

India is to some extent in a safer position than others (exceptchinas) because of its

strong Monetary policy and vast domestic market. First of all Indian Government

must control the parallel economy that is very big in size. Steps must be taken by the

Government to bring back the money that is deposited secretly by the corrupted

Ministers, bureaucrats, Businessmen etc in Swize Banks and other Banks of differentcountries. If corruption can be controlled, Indias economy will be one of the

strongest in the world.

Dr. Jatindra Nath Saikia is an Associate Professor, Department of

Human Resource Management, Golaghat Commerce College,

Golaghat, Assam)

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The US Economy in Peril