Global Financial Crisis - Essay Example

Download file to see previous pages From the early 90’s, the United States has been experiencing economic expansion of the highest magnitude. During this period, it’s real Gross Domestic Product increased by 32.9 percent or 3.6% annual growth rate. The major reason for this expansion is consumption. Consumption is responsible for 75% of GDP which has been on the rise at an annual rate of 3.8 percent. What fuelled this increase in consumption is the consumer credit spending. Since the consumer disposable income increased at a slower rate than consumption, people began to spend on credit. The housing bubble is another key reason for growth in the United States economy. The housing growth did not only lead to booming in the construction industry. The machinery sector increased also. Employment in the real estate was high and mortgage industry ballooned. However during the 2006-2009 financial crisis, mortgage and the real estate credit decreased by 53 and 44 percent, respectively. This led to another sharp decline in the United States economy. The military budget is another factor in the American economy. The military budget has been on the rise particularly after September 11. The military represents a direct demand to the United States government. An increase in its spending increases production levels and creates employment to many people. When these employees spend their income, it further increases jobs and income to other people. However, spending on the military does not mean it necessary stimulate the economy. Military spending was able to stimulate the economy during the 1950s when urge for weapons was high than now. The economy needed such stimulation; with the growth of credit over the last several years, United States economic problems lie within the area of innovation and investment (David 15). Military spending has also affected the supply side of the Americans economy. Military spending reduces the ability of the United States economy to develop new goods and renovate its production technology. Countries that have an increased level of military spending tend to have low investment rates. Bankruptcy is another factor that plays a vital role in the United States economy. Bankruptcy benefits the economy since giving debtors ways of discharging their debts should encourage more borrowing and spending of funds. Consumer bankruptcy has affected the United States economy negatively. When there is a high rate of consumer bankruptcy, consumer’s confidence declines, and their spending reduces. This increases the consumer’s savings rate. Increased consumer savings reduce corporate investments, which lead to job cuts. Higher unemployment rates lead to an economic downturn. The economy of the United States has periodically been witnessing numerous downfalls particularly after September 11. There has been extensive financial crisis and housing disaster, but all in all the economy has managed to hold on as the World super power. It is not as secret that the people charged with ensuring that the financial system is stable in the United States helped cause the 2007-10 crises. The Financial Guardians in the United States and Europe established policies that encouraged adverse credit allocation, and a lot of risk taking by their financial institutions. They still stood by the same policies even after learning of the impending financial ...Download file to see next pagesRead More