The economy of the United States is the largest national economy in the world.

[10] Its
gross domestic product (GDP) was estimated as $13.8 trillion in 2007.[11] The U.S.
economy maintains a high level of output per person (GDP per capita, $46,000 in 2007,
ranked at around number ten in the world). The U.S. economy has maintained a stable
overall GDP growth rate, a low unemployment rate, and high levels of research and
capital investment funded by both national and, because of decreasing saving rates,
increasingly by foreign investors. In 2008, seventy-two percent of the economic activity
in the U.S. came from consumers.
Major economic concerns in the U.S. include national debt, external debt, entitlement
liabilities for retiring baby boomers who have already begun withdrawing from their
Social Security accounts, corporate debt, mortgage debt, a low savings rate, falling house
prices, and a large current account deficit. As of June 2008, the gross U.S. external debt
was over $13 trillion,[13] the most external debt of all countries in the world.[14] The 2007
estimate of the United States public debt was 65% of GDP.[15] As of October 1, 2008, the
total U.S. federal debt exceeded $10 trillion,[16] about $31,700 per capita. Including
unfunded Medicaid, Social Security, Medicare, and similar promised obligations, the
government liabilities rise to a total of $59.1 trillion, or $516,348 per household.[

Financial Breakdown
No one knows where the bodies are buried. Indeed, no one is quite sure exactly how
many bodies there are. But they are out there, and there are plenty of them:
underperforming loans, worthless securities and overvalued assets, all safely buried well
away from the banks' balance sheets. Buried but not quite dead.

Second largest bank failure in US history

has been duly noted, with a repeat
bailout like Bear Stearns, paying down
debts still the better plan, PPT supplies
another miracle rally for the Dow, but
we fear they only delay the inevitable,
Fannie and Freddie collateral now
Toxic Waste, liquidity drains now wide
open, watch for the downward spiral

Central banks cut interest rates

Central banks across the world have cut
their key interest rates in an attempt to
stave off an economic crisis that has
seen share prices fall in global stock
markets.
The US Federal Reserve on Wednesday
cut its key interest rate by half a
percentage point, as did the European
Central Bank, Bank of England and
Swiss, Canadian and Swedish central
banks.

Markets have remained volatile in spite of a $700bn

US bail-out package passed last week [AFP]

The Federal Reserves key federal funds lending rate now stands at 1.5 per cent, while its
emergency lending rate to banks was also cut by half a percentage point, to 1.75 per cent.
The pace of economic activity has slowed markedly in recent months, the Fed said
as it announced the move, ahead of its scheduled meeting on October 29.

Moreover, the intensification of financial market turmoil is likely to exert additional

restraint on spending, partly by further reducing the ability of households and businesses
to obtain credit.
As the Federal Reserve cut its rates, the Bank of England reduced its key interest rate to
4.5 per cent and the European Central Bank dropped its key rate to 3.75 per cent.
But stock markets have remained volatile in spite of the rate cuts, with banks nervous of
lending between each other for fear of losing the amounts they lend.
US stocks closed lower on Wednesday: the Dow Jones Industrial Average dropped 209.08
points, or 2.21 per cent, at the closing bell.
The Federal Reserve also announced that it was providing $37.8bn cash injection into
troubled insurance giant AIG, which was nationalised last month.
The bank said it had used up an $85bn loan facility made available to AIG last month
when the government took a controlling stake in the firm, considering it too big to fail.
China action
China also cut interest rates and lowered its banks required reserves as part of the coordinated global effort.
It is the first time that the Peoples Bank of China has announced a change in interest

rates at the same time as other central banks.

Li Zhikun, senior economist at China Jianyin Investment Securities in Beijing, said: Its
good news. I think global central banks realised that they have to orchestrate their moves
as earlier individual steps didnt give the markets the lift they were looking for.The cost
of one-year bank loans will fall from Thursday to 6.93 per cent from 7.20 per cent, while
the benchmark one-year deposit rate will fall to 3.87 per cent from 4.14 per cent, the
central bank said.
The global interest rate cuts are intended to stimulate the economy by encouraging
consumers and businesses to spend more readily on lines of credit, such as mortgages and
credit cards.
The concerted effort to increase confidence in the faltering global economy comes after
US politicians passed an unprecedented $700bn bailout package to shore up its ailing
banks.
Analysts have predicted that the US economy will contract in the final quarter of this year
and the first quarter of next year, meeting the definition of a recession.
British banks
Earlier on Wednesday, the British government announced plans to partially nationalise
the countrys major banks, in a package using up to $87.5bn of taxpayers money.
The British treasury said that Abbey, Barclays, HBOS, HSBC, Lloyds TSB, Nationwide
Building Society, Royal Bank of Scotland and Standard Chartered have signed up for its
so-called recapitalisation scheme.
Following discussions convened by HM Treasury major UK banks and the largest
building society have confirmed their participation in a government-supported
recapitalisation scheme, the statement said.
As part of the plan, a credit line worth up to $350bn has also been opened to banks, the
treasury said in a statement released before markets in London were due to open for
trading.

Danger to the Dollar

Former Clinton Treasury Secretary Robert Rubin, now an executive at Citigroup, has been upfront for months in warning of the unsustainability of the Greenspan "wall of money" economy. In
statements widely circulated on the Bloomberg financial wire Nov. 15, Rubin said the failure to
stem the growing U.S. budget deficit may spook the central banks, hedge funds, and others who
have been buying U.S. Treasury notes. "It seems almost inconceivable that this will continue
indefinitely," Rubin said, in a videotaped message for a dinner hosted by the Concord Coalition. In
a panel discussion at the event, former Federal Reserve chairman Paul Volcker concurred,
saying that the U.S. borrowing requirements raise the risk of "crisis." "It's incredible people have
gone on so long holding dollars. At some point, you will get a situation where people have had
enough."
While the time frame Rubin cited for a dollar collapsetwo and a half yearsis highly
understated, he has done his best to convey a sense of urgency about the crisis which the
unsustainable borrowing, and speculation, promoted by the Bush Administration, has created.

On Nov. 16, a report by the Treasury Department confirmed the directionality Rubin has been
pointing to. Foreign capital flows into the U.S. in September were at "only" $53 billion, starting to
fall below the level of funding the monthly U.S. current account deficit. After eight to nine months
of inflow in the $80-$100 billion range, it dropped in August to about $65 billion. Net purchase of
U.S. Treasuries was also at just about $53 billion, with a net foreign sell-off of short-term T-Bills,
and big inflow into long-term T-Notes and Bonds.
While the value of the U.S. dollar is already falling, the collapse in foreign capital inflow could turn
it into a rout.
The US economy shrank at an annualised rate of 0.3% between July and
September, according to figures from the Commerce Department.
The gross domestic product (GDP) figures were better than expected, although they
show the sharpest contraction of the economy since 2001.
Consumer spending, which makes up two-thirds of the US economy, shrank by 3.1%,
the first contraction since 1991.
The 0.3% fall followed 2.8% growth in the previous three-month period.

IMF says US crisis is 'largest financial shock since

Great Depression'
America's mortgage crisis has spiralled into "the largest financial shock since the Great
Depression" and there is now a one-in-four chance of a full-blown global recession over
the next 12 months, the International Monetary Fund warned today.
The US is already sliding into what the IMF predicts will be a "mild recession" but there
is mounting pessimism about the ability of the rest of the world to escape unscathed, the
IMF said in its twice-yearly World Economic Outlook. Britain is particularly vulnerable,
it warned, as it slashed its growth targets for both the US and the UK.
The report made it clear that there will be no early resolution to the global financial crisis.
"The financial shock that erupted in August 2007, as the US sub-prime mortgage market
was derailed by the reversal of the housing boom, has spread quickly and unpredictably
to inflict extensive damage on markets and institutions at the heart of the financial
system," it said.
After warning earlier this week that the world's financial firms could end up shouldering
$1 trillion (500bn) worth of losses from the credit crunch, the IMF said it expects the
US to achieve GDP growth of just 0.5% this year, and 0.6% in 2009, with the housing
crash getting even worse.
Simon Johnson, the IMF's director of research, said later the key risk to the forecasts was
the danger of a vicious circle emerging, as house prices continue to fall, dealing a fresh
blow to the banks, and exacerbating the problems in the markets. "Sentiment in financial

markets has improved in recent weeks since the Federal Reserve's strong actions with
regard to investment banks. But we have seen how strains in markets can quickly become
reinforcing, and the possibility of a negative spiral or 'financial decelerator' remains a
possibility."
President George Bush has already signed off a $150bn tax rebate package to kick-start
the economy, and the Federal Reserve has backed an emergency buyout of investment
bank Bear Stearns, but the IMF said this may still not be enough: "Room may need to be
found for some additional support for housing and financial markets."
In the UK, the chancellor has repeatedly insisted that the economy is "better-placed" to
weather the storm, because of its flexible labour market and low unemployment, but the
IMF calculated that the British housing market is overvalued by up to 30%, and could be
destined for a damaging correction.

10 countries least affected by the financial crunch

of the USA
10. China

China owns roughly 19% of US treasuries; if needed, it plans to use its sizable budget
surplus to snap up even more. In addition, the United States gobbles up the majority of
Chinese-made goods, meaning a decrease in consumer demand here will make for a
chilly Chinese export market.
However, China is not solely dependent on the United States for financial stability. A
host of new trade agreements mean China has a number of potential suitors waiting for
vast quantities of goods. Domestic demand is also on the up-and-up.
Finally, Chinas financial system has been closed for many years, protecting it from
shady assets. Though the country will feel the international slump, its banking system is
probably safe. Its high domestic demand, huge pile of capital, and numerous other major
trading partners will counter the effects of US contagion.
9. Brazil

Latin American economies have boomed over the past few years. Brazil, unlike some
of its neighbors, stabilized its domestic economy while positioning itself for increased
foreign investment. The United States is currently Brazils biggest trading partner, but is
looking to boost transactions with China and India, other major partners.
Romania

Romanias banks are barely exposed to international lenders. Therefore, any

economic slowdown it feels will be a secondary result of global patterns. No shocks have
occurred in the country itself.
Known by its own journalists the tiger of the east, Romanias economy has been
growing rapidly for the past few years. Though heavily embroiled in the EUs economy,
especially Italys, Romania is one of the worlds biggest military equipment exporters.
Thailand

AIGs gigantic Thailand subsidiary, AIA Thailand, has more than half of the Thai market
cornered. Its also sitting on 286.67 billion baht worth of reserves (about 8.3 billion US
dollars), 383 billion baht ($11.1 billion) worth of assets, and capital funds worth roughly
1100% of the legally required minimum.

Foreigners affected directly by the US financial crisis may have outstanding loans in
Thailand. The country, however, isnt worried, because the amount of these loans is
relatively small.
North Korea

Although the country has recently enjoyed burgeoning trade ties with South Korea and
China, both vulnerable to the US financial crisis, North Korea remains isolated enough to
limp through the financial crisis relatively unscathed.
Iran

Longstanding sanctions have kept Irans economy relatively insulated from foreign
investment outside of a select few sectors. One of those sectors is oiland China is one
of its biggest trading partners. A fortuitous arrangement for all.
Malaysia

This Southeast Asian country hosts a number of multinational manufacturing facilities.

Though some of these companies are in the United States, experts say that bad times will
promote more offshore production in bargain-rich Malaysia, not less.
Morocco

Moroccan officials claim not to be affected by the United States financial crisis
because their banks dont contain any subprime assets. But that notion only scratches the
surface of why Morocco will survive the shakeup. Its resource and agricultural assets are
the real keys to its invulnerability.
For one, this stable, slow-growth economy relies heavily on agricultural assets, such as
almonds. It could feed its entire domestic population with the food it produces, beneficial
in a world of rising food prices.
Armenia

This small Eurasian country hasnt involved itself much in foreign affairs. Banking
is no exception. Its relatively undeveloped financial market has so few interests in the
outside world that the crisis didnt make a blip.
The United Arab Emirates

Driven by regional oil exports, the United Arab Emirates boasts one of the worlds
fastest-growing economies. The UKs Guardian calls it the home of the Arabian
Dream, the worlds new version of the spent American dream. Dubais free trade zone,
exalted commercial real estate market, and financial services make it an international
powerhouse. This growth was fueled by oil revenues, but now has a momentum of its
own.

IMPACT
INTERNATIONAL MICROECONOMICS - The impact of the current global financial
crisis on developing economies

By Sean Crowley

Governments around the word are trying to contain the current financial crisis although
many fear the worst is not yet over. Stock markets are well down from their recent highs,
investment banks have collapsed, rescue packages worth more than a trillion US dollars
have been drawn up and interest rates have been cut globally. Leading indicators of
global economic activity, such as shipping rates, are declining at alarming rates.
What does this turmoil mean for developing countries? Many such economies are still
growing strongly, but forecasts have been downgraded substantially in the space of a few
months.
Agenda asked Wim Naud, Senior Research Fellow and Project Director at the United
Nations University World Institute for Development Economic Research (UNU-WIDER)
for some answers. Based in Helsinki since 1984, UNU-WIDER is the first research and
training centre of the United Nations University and undertakes applied research and
policy analysis on global development and poverty issues.
Does globalisation mean that we are we likely to see a major slowdown in developing
economies that mirrors what is happening in places like the USA, Britain, Iceland and
elsewhere?
Yes we are likely to see a slowdown in growth in developing economies although not
all developing economies will be affected in the same manner and some will recover
faster than others.
What are the channels through which the crisis could spread to other economies and
how are the effects being felt in developing countries?
There are at least six channels. One direct effect is that financial institutions in
developing countries may fail, to the degree that their assets were contaminated by their
holdings in failing US and UK banks. The second is that people in developing countries
may lose trust in their banks and save less in the formal banking system. A third, more
indirect, effect is that declining wealth and rising interest rates in the USA and EU will
reduce the demand for exports from developing countries, which will slow down these
countries growth. Fourth, export contracts are underpinned by trade credits, and as these
become harder to obtain, export volumes will fall further. Five, with the huge financing
need in the USA and EU pushing up interest rates, developing country governments will
find it more expensive to borrow/issue debt for expenditure on infrastructure, education
and health, for instance. Six, as governments in the USA and EU face growing pressure
on their finances; less money is likely to be made available in the form of aid to
developing countries.
Which developing countries will be able to withstand the challenges created by the

downturn in developed economies, and which are most at risk?

Most at risk are small, highly-indebted countries with weak public finances, current
account difficulties/deficits and exposed banks. Larger countries, such as China and India
are likely to be less seriously affected, as these countries banking systems have held less
of the bad assets from the US mortgage lending market, and they have large reserves of
foreign currency. The continued, albeit slower, growth of China and India is likely to
support growth in many other developing countries.
What kind of macroeconomic strategies could be beneficial for countries like China,
India and Brazil to weather the current financial storms? Are there actually real
opportunities here for such economies when most of the more developed countries are
suffering the effects of recession?
The financial storms have by now largely passed it is now more a question of limiting
contagion, speeding up recovering, and avoiding a similar crisis in future. In developing
countries, where it is possible and balance of payments constraints do not pose a crisis,
governments could support domestic demand through more expansionary policies.
Especially in China, where savings rates are traditionally very high, growth in
consumption expenditure could revive growth. Given that China is a big importer of
commodities from developing countries, this would also be good for these countries.
Elsewhere, governments should adopt policies which signal stability, and encourage
investment, including foreign investment. Some countries will inevitably require
assistance to overcome balance of payments problems such as that offered by other
central banks or the International Monetary Fund (IMF). These should however be seen
as short-term measures to restore macro-economic stability.
As for opportunities, we have already seen in recent years growing South-South trade
between countries such as Brazil, China, India, South Africa and others. Perhaps the
recession in the USA and EU will have the side effect of increasing the growth in this
trade. Also, many financial institutions in developing countries have withstood the global
financial storms remarkably well as for instance those in South Africa. With their
reputations now enhanced, these institutions may even come in future to be more noted
global players.
What should the very poorest countries, resource-rich or otherwise, be doing during
these uncertain economic times?
The most fundamental challenge remains to reduce poverty and create jobs. The financial
crisis has the very real possibility of putting back efforts in this regard by years.
Therefore, in the very poorest countries, comprehensive measures should be taken to
ensure that the effects of the crisis are not permanent. Of course, if these countries were
able to do so effectively and on their own, they would not be poor in the first place.
Poverty increases the vulnerability of countries. Because of this vulnerability, the very
poorest countries should be supported by the international community. The latter should
ensure as far as possible that aid volumes and effectiveness are not compromised, and

that the advanced economies do not close their economies to goods and services from the
developing world.
Of course, what the crisis has illustrated powerfully in the West is the important role of
finance in the economy. Hundreds of millions of people in developing countries have to
do without access to finance. Let us hope that the current crisis will have the positive
outcome that more effort will in future go into extending access to finance for people in
the poorest countries.
What is likely to happen? Id suggest four possible scenarios:
1. Acceptance by the U.S. population of diminished prosperity and a
declining role in the world. Grin and bear it. Live with your parents into
your 40s instead of your 30s. Work two or three part-time jobs on the
side, if you can find them. Die young if you lose your health care. Declare
bankruptcy if you can, or just walk away from your debts until they bring
back debtors prison like theyve done in Dubai. Meanwhile, China buys
more and more U.S. properties, homes, and businesses, as economists
close to the Federal Reserve have suggested. If youre an enterprising
illegal immigrant, have fun continuing to jack up the underground
economy, avoid business licenses and taxes, and rent out group houses to
your friends.
2. Times of economic crisis produce international tension and politicians tend
to go to war rather than face the economic music. The classic example is
the worldwide depression of the 1930s leading to World War II. Conditions
in the coming years could be as bad as they were then. We could have a
really big war if the U.S. decides once and for all to haul off and let China,
or whomever, have it in the chops. If they dont want our dollars or our
debt any more, how about a few nukes?
3. Maybe well finally have a revolution either from the right or the center
involving martial law, suspension of the Bill of Rights, etc., combined with
some kind of military or forced-labor dictatorship. Were halfway there
anyway. Forget about a revolution from the left. They wouldnt want to
make anyone mad at them for being too radical.
4. Could there ever be a real try at reform, maybe even an attempt just to
get back to the New Deal? Since the causes of the crisis are monetary, so
would be the solutions. The first step would be for the Federal Reserve
System to be abolished as a bank of issue and a transformation of the
nations credit system into a genuine public utility by the federal
government. This way we could rebuild our manufacturing and public
infrastructure and develop an income assurance policy that would benefit
everyone.
The latter is the only sensible solution. There are monetary reformers who know
how to do it if anyone gave them half a chance.
End of an Era

In fact, it really does look as if the foundations of US capitalism have shattered. Since 1864,
American banking has been split into commercial banks and investment banks. But now that's
changing. Bear Stearns, Lehman Brothers, Merrill Lynch -- overnight, some of the biggest
names on Wall Street have disappeared into thin air. Goldman Sachs and Morgan Stanley are
the only giants left standing. Despite tolerable quarterly results, even they have been hurt by
mysterious slumps in prices and -- at least in Morgan Stanley's case -- have prepared
themselves for the end.
"Nothing will be like it was before," said James Allroy, a broker who was brooding over his chai
latte at a Starbucks on Wall Street. "The world as we know it is going down."
Many are drawing comparisons with the Great Depression, the national trauma that has been
the benchmark for everything since. "I think it has the chance to be the worst period of time
since 1929," financing legend Donald Trump told CNN. And the Wall Street Journal seconds
that opinion, giving one story the title: "Worst Crisis Since '30s, With No End Yet in Sight."
But what's really happening? Experts have so far been unable to agree on any conclusions. Is
this the beginning of the end? Or is it just a painful, but normal cycle correcting the excesses
of recent years? Does responsibility lie with the ratings agencies, which have been overvaluing
financial institutions for a long time? Or did dubious short sellers manipulate stock prices -after all, they were suspected of having caused the last stock market crisis in July.
The only thing that is certain is that the era of the unbridled free-market economy in the US
has passed -- at least for now. The near nationalization of AIG, America's largest insurance
company, with an $85 billion cash infusion -- a bill footed by taxpayers -- was a staggering
move. The sum is three times as high as the guarantee provided by the Federal Reserve when
Bear Stearns was sold to JPMorgan Chase in March.
The most breathtaking aspect about this week's crisis, though, is that the life raft -- which
Washington had only previously used to bail out the mortgage giants Fannie Mae and Freddie
Mac -- is being handed out by a government whose party usually fights against any form of
government intervention. The policy is anchored in its party platform.
"I fear the government has passed the point of no return," financial historian Ron Chernow
told the New York Times. "We have the irony of a free-market administration doing things that
the most liberal Democratic administration would never have been doing in its wildest
dreams."