US Economic Recession and Contributing Factors

Introduction

War in the Middle East

We begin by focusing on the war in Iraq which resulted in diverting resources to finance one of the most unprecedented wars of our time. This directly affected capital expenditure and recurrent expenditure. The monetary resources could have been used for useful development or to supplement other arms of the United States government like the service sectors. It also meant that the federal government had to employ manpower to work outside the country, a labor force which could have been exploited locally. Energy crisis in the Middle East and the search for renewable source of energy has destabilized the United States economy. This has consequently created unfavorable condition for business to thrive. The U.S. role in the conflict resolution means that it had to chip in some billions of dollars in the process and thus creating a crisis that has not been resolved to this minute (Shiskin 102).

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Economies of the world

Economic suctions placed on other countries have contributed to the destruction of businesses with such countries. This can be illustrated by Zimbabwe which has lost confidence in the United States government and thus setting tense business environment. The progressive growth of economies of Japan and Europe have had a negative impact in that other world economies would consider trading with the two economies. Appreciation of the dollar against other hard currencies has affected exports. This in turn affects the balance of payment deficit where the United States economy cannot find foreign market for its products while on the other hand it has to import.

Progressive rise in prices of products

Increase in price of oil per barrel translated into an adverse effect on other related products like the consumer goods. Since the prices are high, purchasing power of the consumer has significantly reduced. This translated to a situation where producers of goods cannot find their market thus forcing producers to cut down their production level to cater for the limited market. Inflation also affects negatively market securities like bonds. The public tend to shy away from the unattractive bonds which then call for a new offer.

Decline in value of dollar

The United States saw decline in the value of its currency by 45% between the years 1985 to the end of 1987. This mainly affected the bonds owned by foreigners who had invested in the U.S. economy. It therefore meant that the public and private projects cannot be financed by foreign direct investment as a source of capital because of this significant foreign debt.

Effect on future business cycles

An election in the United States has resulted in different policies. President Bush administration with a policy of eliminating terrorism in the world invaded Iraq. This resulted in shifting of resources to otherwise none profit generating activities. The expansionary policy adopted by president obama saw more supply of money into circulation. This monetary policy was put in place to deal with unemployment but it later translated into inflation which is now being felt by the African countries. From the above experience, it is evident that fluctuation in business will be affected by political factors and as long as elections are conducted, there will always be a variation in business in the future.

Globalization has resulted in inter-dependence between different world economies. Development in the information communication technology has brought together different world economies with relative ease as compared to the early 20th century. This situation has therefore favored international trade and the possibilities of conducting international businesses with relative ease.

Business cycle

A business cycle will always exist in the United States because it operates a reserve and a central bank which acts as a regulatory body. The Austrian school of economist maintains that an equilibrium which would have been maintained by a free market is distorted when a regulatory body is put in place. If central bank adjusts the rates of borrowing to a lower level, it results in high demand for loans than those willing to give loan. This later translates to overinvestment (Shiskin 56)

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Unemployment in the United States has reduced the purchasing power of the population. According to Marxist Rosa Luxemburg, supply in the market is high when people do not have a source of cash. Since demand is low, production is cut down to avoid losses. To recover from this, the United States government has to employ a bigger population so as to build on the effective demand of products being produced in the market (Shiskin 76).

What to be done by the president

To end the 2008-2009 recessions, priorities should be laid on creating effective demand by increasing the purchasing power of the citizens. Funds from the Federal Reserve should be availed to lending institution so that the wider population can access the monies. Grace period for surfacing loans ought to be enhanced so that people can borrow to invest in long term projects. Financial institutions must be streamlined to make them more effective in their service delivery to investors and financial seekers who are in essence the potential boosters of the country’s economy (Shiskin 28).

The United States government ought to relax its trade barriers with other countries so as to allow free flow of products in and outside the country. This will result to an increased demand of the U.S. dollar in a balanced way that will favor both the imports and the exports from and out of the country. An increased trade will definitely balance off the inflation crisis and instead regulate the movement of money within the country. Another imperative factor that I will ensure to do as U.S. president is to increase public insurance scheme in order to stabilize the country’s health concerns. An improved health of the country will cut down the cost of hospital bills that could have been avoided through thorough checkups. More so more of the country’s population will be going to work and hence leading to a more working nation which means a more productive nation and thus ending the economic recession.

The 2008 recession was felt worldwide because of the general impact of the downturn effects in the world. Some countries like the United Kingdom were hardly hit by the aftermath of the recession. The major reason why the United Kingdom felt the consequences of recession was because the real GDP was affected as a result of the general reduction in the economic activities like the major income generating activities which included housing and financial sectors of the country. The entire world was hit as a result of the general decline in economic activities which then resulted to loss of jobs as major industries lay off workers as a result of significant decline of demand in the market (Shiskin 56). An increase in common products like oil and foodstuff prices was also another major impact of the recession in the entire world in the late 2008-2009 fiscal years for concerned countries financial budgets.

There are several things that both the government and the Bank of England tried to do in order to avert the economic recession. The Bank of England tried to reduce the interest rate of its loans and on the other hand pumped a large amount to the country’s financial system in order to achieve a balanced flow of money and in the process overcame the effects of decreased buying power. The government and the Bank of England tried to buy assets from the private sectors which had a direct impact in increasing the financial power of the privately owned sectors. In summary, there are two major causes of inflation, the change in the GDP and specifically the real GDP and on the other hand the increase in inflation which leads to the rise in the common products.

Now in order to combat these two causes of recession, a balanced flow of cash in the economy should be done in order to rectify the decline in the GDP through increasing of money in the hands and pockets of the private sector which leads to a significant increase in economic activities which then translates to reduction in recession. This is exactly what the governments not only in the United Kingdom but all over the world tried to do in order to reduce the effects of the 2008 recession. On the other hand, the Bank of England increased money in the country’s financial system by pumping more than ₤75 billion to the system (Shiskin 18)

The 2008 recession was felt worldwide because of the general impact of the downturn effects in the world. Some countries like the United Kingdom were hardly hit by the aftermath of the recession. The major reason why the United Kingdom felt the consequences of recession was because the real GDP was affected as a result of the general reduction in the economic activities like the major income generating activities which included housing and financial sectors of the country. The entire world was hit as a result of the general decline in economic activities which then resulted to loss of jobs as major industries lay off workers as a result of significant decline of demand in the market. An increase in common products like oil and foodstuff prices was also another major impact of the recession in the entire world in the late 2008-2009 fiscal years for concerned countries financial budgets (Shiskin 80)

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There are several things that both the government and the Bank of England tried to do in order to avert the economic recession. The Bank of England tried to reduce the interest rate of its loans and on the other hand pumped a large amount to the country’s financial system in order to achieve a balanced flow of money and in the process overcame the effects of decreased buying power. The government and the Bank of England tried to buy assets from the private sectors which had a direct impact in increasing the financial power of the privately owned sectors. In summary, there are two major causes of inflation, the change in the GDP and specifically the real GDP and on the other hand the increase in inflation which leads to the rise in the common products.

Now in order to combat these two causes of recession, a balanced flow of cash in the economy should be done in order to rectify the decline in the GDP through increasing of money in the hands and pockets of the private sector which leads to a significant increase in economic activities which then translates to reduction in recession. This is exactly what the governments not only in the United Kingdom but all over the world tried to do in order to reduce the effects of the 2008 recession. On the other hand, the Bank of England increased money in the country’s financial system by pumping more than ₤75 billion to the system (Shiskin 66).

As evidently seen above, the major ways of reducing recession is through creating a suitable balance in the major causes of recession which is the reduction of the real GDP and inflation. Creating an environment conducive for economic activities is one of the major and necessary functions of the government and the Bank of England in this case in order to ensure decrease in effects of the recession.

Conclusion

As evidently seen above, the major ways of reducing recession is through creating a suitable balance in the major causes of recession which is the reduction of the real GDP and inflation. Creating an environment conducive for economic activities is one of the major and necessary functions of the government and the Bank of England in this case in order to ensure decrease in effects of the recession.

Work Cited

Shiskin, Julius. The Changing Business Cycle. London: Oxford Publishers, 2010.

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