The U.S. Economy vs the Global Economy

Introduction

The US economy is in a recession. The US economy is headed for a recession. The US economy is at a standstill. Such is the proclamation of doom that is being directed everywhere by media houses, politicians, economists and institutions involved in research. Events on the ground indicate that something is economically amiss given the gradual deterioration of living standards and inflation the general fall in consumer spending that is slowing down businesses. More subtle definitions are also pouring into the foray stating that the economy is in sickbed. The global economy leader is obviously suffering at the moment and in the process of taking down with other economies as facilitate by the decreasing dollar demand in the global market. In the global market the US is fairing quite dismally compare to other periods in history and the performance of emerging tiger economies in Asia and especially China. While the United States borrows close to $3 billion a day China’s growing trade surplus earns almost $500 million a day.

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Current economic situation in the US

Since the end of the cold war and the slackening of the economy, the recovery process for the US has had its worst progress in the recent past notably immediately after the September 11 terrorist attack on the World Trade Center. The Economic Policy Institute in Washington described the growth registered after that incident (2001-2005) as a shadow of the expected growth.

Following are some of the issues that prompted such a description.

  • Cost of living through inflation was rising on a hourly basis
  • Household income has declined as prompted by inflation. From 1999 to 2004 it registered a 4% decrease.
  • The rate of growth in employment opportunities registered a drop from a previous of 9.9% before 2001 to the current 1.5%.
  • Private household indebtedness increased to 70% compared to a 12% increase in personal income.
  • Decline in consumer spending current trade deficit in the world market
  • Falling housing prices crash credit expansion

The employment situation

A report by the US department of labor employment the last month of March alone registered a fall in employment shedding over 80 000 workers mostly in the in the nonfarm employment sector. This contributed significantly to the monthly overall fall in employment opportunities that rose from 4.8% to 5.1 % (department of labor statistics). Despite the rising cost of inflation weekly wages continue to take a nosedive giving Americans more reasons to worry about. Inflation is at hand to reduce their purchasing power accompanied by a weakened US dollar that makes consumption of imports a very expensive trend.

The US as world economy leader

With the turn of a new century and millennium, there were initial fears that there was going to be a global recession but the fears were dispelled in late 2001, through a modest turnaround the following year as anticipated. The global economy is increasingly reliant on performance of the U.S. economy. This nation holds such a big stake in world affairs providing nearly one-third of global demand of goods and services. These hopes of a turnaround in the world economy did not last for long as the progress made became quickly overshadowed by hindering factors that consequentially brought about sluggish growth in the U.S. and the world at large. Economists and political analysts in the world became concerned over the real financial position of corporate America after the controversial bankruptcy filing in December 2001 of one of the world’s largest energy traders and market leader, Enron Corporation. This was followed by other corporations that went down in financial falls marking the birth of the justifiable doubt by investors over the real financial position of corporate America and security of their investments. Given the incentives offered by other emerging economies to attract wealthy foreign investors, the US was posed to huge loss.

No country in the world believes that its policies are to blame for the downfall of their economy and thus the US is no exception. The Bush administration has been busy pointing fingers at terrorism and the emergence of economic threats such as China and India

Recession in the US

Since the 2001-02 recessions the US has averaged 3.5% annual GDP growth rate up to 2006 when the trend reverted to a decreasingly increasing rate. This boom that only lasted for four years did spread to other economies of the world due to the nation’s influence in trade. Factors that have caused recessions in the past have occurred on a large scale that it would seem irrational to ignore. This brings in the question of whether the economy could be growing even faster, had these problems not emerged. Some of the new challenges that were not present in the past are the terrorism threat which at the moment is slowing down the economy, through stringent security measures that were not necessary before and even financing countries in the fight against such. It is estimated that the September 11 attack cost the US government $200-800 billion. The measures and security concerns are responsible for keeping tourists away thus losing another $100 billion.

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The International Monetary Fund (IMF) says the global economic outlook is becoming increasingly grim as the United States appears unable to escape recession triggered by a housing prices crash

whose effects are still spreading and the situation still not promising. On a wider scale global expansion for 2008 is set to slow to 3.7 percent amid an unfolding crisis that began in the United States. The year is not whatsoever promising with the same report saying that there exists a 25% chance of the global economic growth registering a less than 3% growth by the end of the year.

Measures were taken by the US

As the main initiator of this global economic decline the US government has tried to save itself from the imminent danger of a full-blown recession. The government in February enacted a bill that was aimed at helping the ordinary American bear with the times by helping him improve on his household expenditure which is greatly threatened by increasing inflation fall in weekly average wages, lack of employment opportunities among other vices afflicting the economy at the moment with the looming of possibility of full blown recession measures are being taken to contain the prevalence of this mild recession at the moment. In a rare sign of bipartisanship republicans and democrats serving in this era of the Bush administration sought to improve things for the ordinary American by boosting consumer expenditure to inject money into the economy without further aggravating the problem of inflation. The Stimulus Bill as the procedure was called was passed into law in February this year giving the government authority to increase federal spending by 1% of the GDP in a span of two years. This amounts to about $152 billion for taxpayers to spend. The money is to be disbursed in form of tax relief and tax rebates to already working citizens to encourage spending rather than saving.

Effects on global economy

Competitors of the US in global trade bear the brunt of the failures of the US economy. Asian and European stock markets plunged downwards following declines on Wall Street last month amid investor pessimism over the US government’s stimulus plan to curb the mild a recession. India’s benchmark stock index shed some percentage points to settle at 7.4 percent, while Hong Kong’s blue-chip Hang Seng saw the biggest percentage drop since the Sept. 11, 2001, terror attacks.

Investors sold off their shares because they doubted the economic stimulus plan President Bush announced would restore the economy, which has been battered by housing, credit problems and increasing world energy prices.

Prospects for the global economy in 2008

Credit conditions will continue to tighten in the US as markets recoil from exposure to a very unfriendly US household balance sheet. Consumer spending cannot be entirely expected to improve solely from the benefits of the stimulus plan, an appropriate combination that identifies weakness in the US consumer sector thereby enacting more effective measures that are expected to bring immediate changes. In isolation, the stimulus plan would spell a difficult year for the global economy as the US occupies the driver’s seat and thus decides the direction that the global affair takes.

A combination of the myriad of problems afflicting the US makes the present situation a particularly appealing time for East Asian monetary authorities to introduce a secular domestic currency appreciation strategy that will help establish a permanent position that will counter the dominance of the US in the world market to take care of such a problem in future. This is only going to be achieved if the imbalance that exists right now is done way with. As such a crash of one economy in a world dominated by at least more than three economies according to me will help avert a repeat of the current situation.

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References

http://www.abc.net.au/news/stories/2008/04/09/2212609.htm

www.imf.org/external/pubs/ft/weo/2008/01/index.htm

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