As we have decided, we would talk about US financial Crisis. I have made a review from beginning till now. I would also like to see your valuable comment about this.

US Financial Crisis- Good to Worst !!!

The Giant is in Trouble again…

This saying is almost in every economist’s tongue. USA the ‘Giant’ in terms of size, in terms of economy, in terms of wealth creation and number one in almost everywhere. It is not the first time when US is facing this kind of economic trouble. The US economy has suffered 10 recessions since the end of World War II. The Great Depression in the United was an economic slowdown, from 1930 to 1939. It was a decade of high unemployment, low profits, low prices of goods, and high poverty. The US again saw a recession during 1982-83 due to a tight monetary policy to control inflation and sharp correction to overproduction of the previous decade. The early 1990s saw a collapse of junk bonds and a financial crisis. And lot many after that.

When & How has it started?

According to the US based National Bureau of Economic Research (NBER), if four barometers of an economy i.e. employment, real personal income, industrial production, and real sales activity in retail and manufacturing, show negativity  in their growth then it is a signal of recession period. In January this year when we all were enjoying the healthy growth of Indian economy, with GDP growth at around 9%-10% and the BSE Sensex was soaring up to 21000 to 22000, US started seeing it is in trouble.

Nobody in US knew that their small-small borrowings would actually turn in to a dramatic and huge financial crisis. People were given money in spite of their low credit worthiness by the institutional investors keeping “The Huge Profit” in their mind and finally what is happening we all know.

This is the one side of the story!! 

Do you want to know the other side of the coin?? 

Keep reading then...

What could be the reasons for slower economic growth?

First, the artificial short term fire that the Bush administration gave the economy before the 2004 and 2006 elections, through a combination of large tax cuts and large increases in military outlays, is now actually turning in to an adverse affect of bad decision making process.

Second, record budgetary and current account deficits have severely made the Federal Reserve monetary policy ineffective because interest rates cannot be reduced substantially for fear of a collapse of the U.S. dollar.

 

Third, when all were enjoying investing in Real Estate and making money hoping that it would continue till 2010-11, construction industry started losing its strength and housing prices started declining.

Fourth, Americans are known as the consumer rather than customer i.e.  American consumers keep the high pace of spending in such a context. During the years of the housing boom, consumer spending was driven by the accumulation of wealth and record consumer indebtedness, most of it in the form of mortgages, as the price of houses increased. Now what?  The reverse is occurring. They don’t have the money to pay the debt.

 The fifth factor, the flow of capital of about $2 billion a day that the U.S. economy is borrowing from abroad, mainly from China and Japan. This is forcing the Federal Reserve to raise interest rates. Surely, Federal Reserve would not do the same, because it could make the housing crisis more and more uncontrollable.

Apart from these factors the collapses of financial institutions like Lehman Brothers, Freddie Mac, and Fannie Mae have put investors in fear. Of course, on later stage these institutions were given the heavenly privilege i.e. so called ‘Bailed Out’, but people have lost their confidence on these institutions. Investment has come down resulting in less generation of money and more severe economic slowdown.

 

“Whenever USA sneezes, the world catches cold…”

That mean if something happens to the US economy rest of the world gets affected some or the other way.

As we know the so called standard currency ‘Dollar’ has its own identity in the world market. And when it starts losing its strength the Foreign Exchange market shakes.

The Export Import ratio gets disturbed in the world market because US comes out with statement that – “We would not buy much or we can’t export goods and services”.

The FIIs starts disinvesting the money from stock markets around the world resulting in the market meltdown which we have been seeing from past 10 months what is happening in India.

The IT sectors badly get affected; as we know lots of outsourcing of US IT industry is done to the India. And hence retrenchment of people in IT sector in order to cut the cost and stabilize the situation.

What is the solution then?

Having said that US economy affects the world market substantially. Why should we depend on other economy? The best way to come out with this crucial situation is to decouple the economy up to a certain extent. I know it’s very hard and cannot be done overnight. But we cannot keep quite anymore.

We have the so called mixed economy, some part of it is considered to be closed and rest is open. But mind you, I am not telling to fully convert our economy to closed one. But we should be substantially dependent on our own resources rather than other country’s economy. Than only things will go right and wherever we want it to be.