Shocks to the US Economy and the Likelihood of a Depression - Book Report/Review Example

Shocks to the US Economy and the Likelihood of a Depression The report contains an analysis of the causes and the effects of shocks on the US economy. The impacts of recession in the US economy were explained by the key economic indicators of GDP growth rates, inflation rates in US, unemployment rates of US, performance of US dollar, etc. The changes in the policies of after the US presidential election of 2012 have also been reported. A comparison of the key economic indicators before and after the presidential election of 2012 emphasizes the effectiveness of the government policies in preventing the likelihood of further depression. Introduction The shocks to the US economy ended the golden age of the economic performance of the country. The economic recession laid its roots in the losses of the housing and mortgage financing sector. The government policies and casual credit policies of the companies towards lending led to the financial losses. The likelihood of further depression led to changes in the government polices in order to lead the way of economic revival. The fiscal policies of cutting the government spending and reduction of taxes showed signs of recovery of US economic growth rates which are likely to sustain in near future. Literature Review The shocks to the economy of US started from the time of economic recession in 2007. The subprime crisis and the bubble of the mortgage financing market in US highlighted the drawbacks of the corporate sector and the policies of the US government. The policy of the US government in ensuring that every US citizen should have holdings of property paved the way to increase in mortgage loans. Apart from this, the investments in the housing market were lucrative as high returns were achieved within a short period of time. In order to maximize profits, the banks and the financial institutions also opened gates of finance with relaxed credit policies. As the number of defaulters started to increase, the weight of bad loans started to become heavier and the corporate houses and financial institutions lost a considerable value of their shareholders worth leading to a financial recession and economic depression in US (Freedman 60). The shocks to the US economy transformed into a global financial meltdown. In order to gain revival from the situation of economic crisis, policy makers of US adopted government monetary and fiscal policies. The government agencies were bailed out by the US government and international funds were also channelized for bailout of US companies. In order to avoid the likelihood of further depression, the government of US adopted new appropriate policies after the presidential election of 2012. The likelihood of further depression and the depreciation of US dollar were the main concerns for the US policymakers. In order to deal with the situation, the government strategized to reduce the burden of government deficit that rose to $ 1 trillion. The consolidation of the treasury was also an area of concern in order to sustain the performance of US dollar. Emerging economies such as China that piled up huge deposits of foreign currency in the denomination of US dollars were the areas of threats to the US government. Any further dip in the productivity levels and weakness in the US economy were enough for a subsequent depression. In order to deal with the situation of crisis, the US government undertook a policy of reducing the government spending and at the same time cutting the taxation of individuals and the corporate. Instead of focusing on monetary policy which provided the base of a booming economy over the years, the US government undertook effective fiscal policies in order to avoid further depression. Data and Argument The effectiveness of the policies of the US government in reviving the economy from the shocks of economic recession and in avoiding the likelihood of a depression in recent future has been stated with the help of informational data and arguments as given below. In the golden times of the US economy, the government adopted a policy of increasing the government spending in order to boost the market demand that led to high growth rates of GDP in the economy. This is supported by the economic theory of supply and demand and the Keynesian theory of economic policies. This is depicted in the supply demand curve as shown below (Figure 1). Figure 1: Supply and Demand Curve However, due to a circular flow of money, the demand kept on rising against the prevailing supply while the government embraced increasing debt proportions. In this ever growing situation of government debts, the economic shocks due to financial recession in US put the government in a situation of crisis and faced the threats of possible erosion in the performance of US dollar. Due to the shadow of huge debts on the back and efforts for forcing revival of the US economy from the likelihood of further depression, the government adopted fiscal policies of reducing government spending. This was done with a plan to consolidate the US Treasury and avoid further depression and crisis. The government imposed cuts in the military budget while increasing spending in the areas of healthcare and energy. The government focused on tapping the overseas market for earning of revenues. The exports of the country were increased in order to prevent the falling growth rates of the US economy. The taxes which were by far the largest revenue earners were cut for both the individuals and the corporate in order to keep parity with the reduction of government spending. The policy of reduction in taxes is likely to continue in the way of slow and steady revival of the economy. The private investment would be encouraged due to the tax incentive that is likely to prevent further depression (Figure 2). Figure 2: Tax Rates The fiscal policies of the US government have started to show signs of revival and sustenance. The GDP growth rates, which dipped during the time of economic shocks, have started to recover, though at a slow pace. The US economic growth rates now stand at little more than 2.4% as shown below (Figure 3). Figure 3: GDP Growth Rates Due to effective policies of the government, the economic growth rates are forecasted to remain steady at around 2% in the recent years as shown below (Figure 4). The economic growth would largely be driven by the service sector rather than the industrial output, and from the earnings through exports. Figure 4: Forecasted GDP Growth Rates Due to the increase in demand of the economy as compared to the prevailing supply of goods and services, the inflation rate rose to 3.4% at the time of economic shocks as shown below (Figure 5). Figure 5: Inflation Rates The policy makers have been able to bring the inflation rate down to 1.4%, which is likely to be held under control. The fall in the income level of people due to shocks in the economy and a slow increase of supply in goods and services would keep the inflation rates under control as shown below (Figure 6). Figure 6: Forecasted Inflation Rates The unemployment rates in the economy, which rose to as high as 9.1%, were brought down to 7.6% as shown in the graph below (Figure 7). Figure 7: Unemployment Rates Due to the expected rise in investment in the local markets with the revival of the economy, the unemployment rates are likely to lower in near future as shown below (Figure 8). Figure 8: Forecasted Unemployment Rates The performance of the US dollar has also revived as the debt of the US Treasury has been restricted by reducing the budgetary deficits. The performance of US dollar has strengthened, which is likely to continue in near future as shown below (Figure 9). Figure 9: US Dollar versus Euro Conclusion The shocks to the economy of US have resulted in a slowdown of the US economy. The productivity levels of the industry dipped, which led to the rise in unemployment. The fall in the supply as compared to the consumption demand led to rising inflation rates. Apart from this, the large debt incurred by the US Treasury over the years raised concerns of erosion of US dollar and likelihood of a depression. The effective fiscal policies of the government in reducing the government spending and reduction of taxes helped to attain an optimum level of economic growth. This was achieved through consolidation of the treasury and at the same time motivating investments by reduction of taxes. Works Cited Freedman, Jeri. The U.S. Economic Crisis. USA. The Rosen Publishing Group, 2010. Print. Read More