Four Major Problems Faced by the US Economy Currently Based on Current Media Reports - Term Paper Example

?Introduction The economy of United s of America was performing very well at the start of the century but then went under deep recession in the year 2008 with the credit crunch and all the financial institutions seem to crumble at the same time. People started to default, and the society and institutions started to face liquidity issues. Soon with this credit crunch, the debts started to rise and the economy started to experience its effects which included the rising unemployment rates and decreasing gross domestic product (GDP) of US economy. The 2008 financial crisis of United States affected the economies throughout the world and the macroeconomic factors were shaken up. The issue started with the debt crisis when the borrowers were unable to service their loans and thus faced difficulty in paying back the loans. This resulted in the housing market crisis when people ended up with bad loans which in turn resulted in people being deprived off their homes. The credit crunch also led to damage to investors confidence and investors and savers were unwilling to inject the money into the economy which resulted in shortage of money and cash, and this also resulted in the rise of unemployment. US Federal Debt/Deficit Since the financial crisis struck in the year 2008, the US debt has been very high. According to a recent news article, the United States debt is nearly as much as the total value of all its goods and services produced in the US during the financial year. CNBC reports that the total value of the US debt is $14.96 trillion which means that the United States external debt as a percentage of its GDP stand at 99.46% (CNBC). This is a very high figure and indeed a very dangerous one because high leverage of debt can be very risky. As a matter of fact, it is suggested that every person born in the United States has a debt of $47,664 in the very second it is born. The figure on the left shows that the public debt in the US will surpass the 17 trillion mark by the end of 2012, and indicates how the debts are constantly on the rise, which can be a very alarming situation for the people. (US Government Spending) Not just the rising debts, but the economy also faces the difficulty of constant budget deficits which means the outlay of the United States government is greater than the receipts and this means that the US government has to search for sources to raise the finances. Since the past three years, the US federal deficit has been around the $1300 billion mark. (US Government Spending) Issue of Raising Finance As mentioned above, United States economy has become highly leveraged and the debt to GDP percentage is nearly touching the 100 percent mark. This increases the riskiness of the economy and damages the confidence of investors and savers to inject their money into the economy. Investors ask for high returns to take on risky projects and some do not even settle for higher returns due to the fact the people are naturally risk averse. A credit rating agency has downgraded the credit rating of the United States and has gone down from AA+ to AA. Since the credit rating is going down, the investors and savers are reluctant to inject their money into the economy (Yahoo!). This creates a problem for the United States because the US government needs to borrow the money to cover up for the budget deficits they are facing each year. When the government has to inject money into the economy and it is unable to increase its budget receipts, then it has to look for other sources of money to cover that deficit and this source is usually to borrow money. With the credit rating going down, less number of savers is ready to save their money and thus it creates a shortage of money for the US government. Not just to finance the budget deficit, the government also faces difficulty in raising the money to service or repay their previous loans. Housing The housing bubble emerged in the United States in the year 2005 when the property prices started to rise and they rose at quite high rates. This increased the speculation and expectations of the investors and they began to invest by buying property some of which was done from their personal saving and most of it was done by taking loans from banks and financial institutions. This housing bubble burst in the year 2008 when the financial crisis struck the economy and the property prices dipped to very low levels. Since then, the housing sector has not been able to fulfill its expectations of years from 2005 to 2008. Currently, the housing sector is not performing well in the United States economy and the think tank specialists feel that much should not be expected from the housing industry because let alone, the housing sector lifting the budget deficit anything towards the right direction, the best that can be expected from housing is that it does not damages the economy any further. According to Bloomberg, the housing sector was showing some signs of recovery by making some progress in the right and desired direction but it once again hit a five month low record. This fluctuation and a number of crashes damages the confidence of the potential investors and they do not feel comfortable in investing their money into an area which does not guarantees a good return by a fair margin. (Kowalski) Unemployment Unemployment is when people who are willing and able to work cannot find a job. Currently employment conditions in United States are not very conducive although they have improved as compared to the last few years. According to several sources, the unemployment rate in US currently stands at around 8.25% and gradually it is showing some signs of improvement as the economy continue its gradual recovery process after 2008 crash. The figure below shows the unemployment rates in the United States since the past couple of years and it is clear that the unemployment rate is on a decline. (Trading Economics) Generally governments inject money in under-performing economies and start new projects, because there is a multiplier effect which triggers growth. However in the case of the US economy, the government is already facing budget deficits and thus it is making with lower funds available to inject in the economy, government is cutting down its spending. Austerity packages include policies that restrict government spending on developmental and non-developmental expenditures. Wage-Price spiral is a Keynesian economic theory about the relationship between rising wages and inflation. It states that as disposable incomes increase, it raises the demand for goods and causes prices to rise. Higher prices cause workers to demand higher wages which leads to higher costs of production and put pressure on prices. This rise in the wage demand creates a problem for the corporations as they are already making lower profits, if not losses, and they are looking to limit their expenses. Thus they try it easier to down force and make the employees redundant. This has increased the unemployment into the region because some manufacturing plants have also shifted to locations where the labor is cheaper such as China and India. (Jacobe) The United States has so far not recover fully from the financial crash of 2008 and is now showing some signs of improvement, although it still faces numerous challenges ahead. The government should prioritize by lowering the debt to GDP percentage in a favorable situation because all the problems mentioned above are directly or indirectly linked to the issue of debts. Works Cited CNBC. The World's Biggest Debtor Nations. . Investopedia. Wage-Price Spiral. 2012. 16 April 2012 . Jacobe, Dennis. U.S. Unemployment Provides Mixed Picture in Mid-April. 17 April 2012. . Kowalski, Alex. U.S. Housing Starts Unexpectedly Drop to Five-Month Low. 17 April 2012. . The Independent. Spain's unemployment rate hits 22.9%. . Trading Economics. United States Unemployment Rate. . US Government Spending. US Federal Deficit. . —. US Government Debt. . Watch, Economy. Spain Economy. 30 March 2010. 15 April 2012 . Yahoo! US credit rating downgraded, again. . Read More