It is becoming more and more certain that the US is going to take the rest of the world down towards a worldwide recession in one or two year's time.
Well, to begin with, the US is the world's largest economy, but is also the world's biggest debtor. The US Controller General David Walker, who is the most authoritative person on this subject & who audits the federal government's books, the tab for the long-term promises the US Government has made to creditors, retirees, veterans and the poor amounts to USD 43,000 billion, USD 145,000 per US citizen.
This does not, however take into account the personal debts like credit card bills and mortgages. And savings had plummeted to just 1.8 per cent last year, below 1 per cent since January and at zero as per the latest estimate from the Bureau of Economic Analysis. Credit card debt alone averages USD 200 per household.
The indebtedness of the US Government happens in this way: The US is running a trade deficit roughly 6.5 per cent of its GDP and is widening every day. The citizens are spending ever more on foreign goods, and the US Government just prints money to finance the deficit. Central banks in the other countries purchase most of the US Treasury bonds as currency reserve.
Now, Japan is the largest creditor to the US Government, and the Chinese have been a fervent buyer for the last few years. And the US Government uses this foreign borrowed money to finance up to 90 per cent of the federal deficit, which stood at $412 billion last year. The federal deficit is expected to be running at about US$2 billion a day now.
To cut the story short, the Americans have been living way beyond their means for a long time. Coupled with this, the Bush Administration is cutting tax while fighting a very costly war in Iraq, which has cost the country USD 700 billion till now, and currently progressing at US$5.6 billion per month. Now the US economy is dependent on the central banks of Japan, China and other nations to invest in US Treasuries and keep American interest rates down.
Any economist knows that this situation is unsustainable. One of the most respected economist, Alan Greenspan, recently warned that the federal budget deficit would dampen the nation's ability to absorb possible shocks from the increasing trade deficit and the housing boom. Now he may have two more worries: soaring oil prices and cyclones.
And economically, socially, politically, and internationally, the US is now clearly in huge trouble. Long term interest rates are set to soar, and history's greatest property bubble is going to burst in the next one to two years.
The clock is ticking, and there is nothing that anybody can do to reverse it either by short-term measures such as fiscal and monetary policy, or through long-term reform of tax policy, entitlement programmes and even the entire federal budget. This is axiomatic & inevitable as gravity, and it will take place I am not predicting a doom's day, but the figures suggest a very bad future.
To make you understand, let us see what the problems are:
What will happen when the dollar collapses? stocks would follow... What about pensions?
What will happen when interest rates soar? How would all the people with new homes, who bought it with loans, cover their mortgages?
How will people with huge credit card debts pay back? What will happen if they go bankrupt? New rules coming into effect later this year will make it harder on such debtors.
How would a government, dependent on the taxes of a strong economy, keep its promises?
And another thing, in the coming days, every central bank and institutional investor is going to dump US dollar and US Treasury bonds. For example, when a country, say South Korea dumps the dollar, the unsold US Treasuries in Asian central banks will collapse. This will cause a sudden jump in the US inflation, forcing the Fed to increase interest rates. An great increase in inflation will cause a severe recession, or even a depression. Exports from these countries will decrease, which in turn will spread to the whole world like fire.
And now, the IMF has warned that the global economy is slowing down due to the financial crisis & sees a 25% chance of a global recession. The signs have started appearing!
Chandra Mohan is an internet marketer, owner of moneynfreedom.com. There's a site on Economic Recession. If you would really like to stay afloat & even profit during the upcoming recession, visit here
Please Rate this Article
Click the XML Icon Above to Receive Stock Market Articles Via RSS!
