The Present Economic Crisis of the US: An Analysis

Dr. 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 crises and 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 by the 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.

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 became popular. 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 the dreadful 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.

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 purge itself 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 artificial net 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%.

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.

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. The unrecognized 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, spending on 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.

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 an ambitious 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.

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 Department is 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 former Finance 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.

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 the process, 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 bilateral investment 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.

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. This page 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 (except chinas) 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 different countries. 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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