Primary Reasons for the Current Status of the United States Economy - Essay Example

Primary Reasons for the Current Status of the United States Economy Introduction Past indicators affecting economic growth or declination do not truly represent the indicators indicative of the reasons our United States economy has plumaged. The United States is a global economy now and that factor must be taken into account now. Hansen (2007) states that though the US is still the powerhouse of the economies it is now commencing its demise. Major factors on economic declination in the recent years have been due to consumer debt related to loans, bankruptcy filings, the financing of wars, ineffective use of our natural resources and over extension of sub-prime lending. Literature Review “As our consumer debt rises so do the interest rates rise” (Factors, 2007). Our ability to conduct business is tremendously affected because loans go into default and the numbers of people as well as businesses’ falling into bankruptcy are rising in the recent years. United States consumers are as well dependent on the importation and exportation of foreign goods to keep the economy growing and the high dollar financing of the Gulf War has restricted this tremendously. The United States has natural resources such as oil, gas and rubber and is not making thorough use of these resources. As a result there is much competition in other countries making the price of these commodities rise in the United States. Wall Street economists state that potential rate hikes in the interest rates are quite premature as of the September 2009 policy meeting. Bernanke states that the recession that the United States is most likely over but he feels a very dismal outlook for the labour force for a very long time to come. Data from GOP growth has shown that the retail sales continue to outperform expectations so that is a positive for the United States economy but it is very slow in coming. Jerry Williams of the San Francisco Fed states that we should hold off until 2010 to spike the interest rates. “Williams further feels that the Federal Government would come closer to achieving its goals without affecting inflation and the unemployment rate by postponing these rate hikes until the beginning of 2010 because the normal 2% rate that banks currently use for inflation targets could be too low” (BW Staff, 2009). Waiting a year could allow a little stronger inflation target hike. The following chart represents the Gross National Product (GNP) changes for the past twenty (20) years in the United States. (Source: http://www.bea.gov) In Western worlds like the United States the growth of the economy is based on the value of the currency. With that said as the dollar is worth less on the open market the consumers have to use more money to purchase consumables and that is how inflation affects us directly. Everything in life is based on the rate of inflation including businesses’, your salary and the price we pay for medical services and prescriptions. If the company that employs you has to pay more for raw materials you will not get a raise most likely in the current state of the economy or worse that than you may get laid off. “By direct channel effect the inflation rate affects the small lag prices of imported goods as well as semi-manufacturers of consumer goods for domestic use. In a second manner indirect channel where the change in the exchange rate is equal but it affects the change in the real exchange rate.” (“The Effect of the Exchange Rate on Inflation”). The following chart represents the inflation rate of the U.S. dollar as compared to the UK pound over the past four months (July-August 2009) as compared to the Import Rate. (Source: http://www.ukimports.org; http://bea.gov.) Since the recession in the United States has already started the unemployment rate is only a lagging indicator of the proposed growth for the U.S. economy. Employers are afraid to lay people off in this state of economic decline as well afraid to rehire people now that the economy is at a standstill at the perspective of recession. For this reason the unemployment rate may still decrease a little even when the economy begins to strengthen. “The Federal Reserve does use the unemployment rate to determine the strength of the U.S. economy as well as looking at individual sectors to determine how to strengthen the economy” (Amadeo, 2009). The following chart represents the change of unemployment in the United States over the past ten (10) years (1999-2010). The national unemployment rate commenced at approximately 5% in 1999 and is presently at 9.5%. (Source: U.S. Bureau of Labour Statistics) Our ability to meet the ever changing international demands of tax and international trade must be thoroughly accessed in order to improve our ability to compete in the international market. Benchmarking techniques, quality assurance assessments and managerial assessments have been set in motion to address these needs. Marketing and advertising are very important factors to domestic business relations. Pricing and quality of products effect the future production and marketability of products. The supply of labour through skilled and unskilled applications can be supplied internally. Policy implementation affects productivity as well. Our natural resource supplies were disrupted during the Gulf war in 1991 because the supply of oil was halted. The cost of that war was split with Kuwait, Japan, Saudi Arabia and the United States. The Persian Gulf War cost the United States over $60 billion. There currently is no surplus in our budge to accommodate the current international war. “In 1990 after the Iraqi forced invaded Kuwait the price of oil per barrel sky rocketed from $15 to $40” (Tyler & Stevenson, 2002). “I am firmly of the school that the Iraqi invasion of Kuwait precipitated the American recession in 1991,” Richard N. Cooper, a Harvard economist who headed the Central Intelligence Agency's top analytical body during the 1990'said while he generally praised the first President Bush's handling of the war, “the one area of fault was that they dallied on their commitment to release oil supplies from the Strategic Petroleum Reserve” (Tyler & Stevenson, 2002). Lending to people who normally couldn’t get traditional loans (sub-prime loans) contributed to the U.S. economy going “bust”. Foreclosures and voluntary sells shot the value of properties to an all time low. Even those people who took traditional loans and were forced into foreclosure lowered the property values by 1%. As more money is being distributed to hedge funds and banks less money is available to local businesses. Subprime lenders basically underwrite a loan and sell them off to Wall Street investors as a quick sale so they do not lose anything out of the transaction. Most Wall Street buyers were protected by the Federal Government. Sub-prime loans were even given out for car loans and credit cards. College students were solicited for credit cards even without a job. People were paying interests rates at 3X the regular rate but they did not care as long as they received the loan. Many of these sub-prime loans were also sold to banks of which they were converted to safe bonds and mutual funds. Some of these banks were international banks in countries such as Germany and the United Kingdom. When these bond values started to dissipate the foreign banks were out of their mind. There are some international loans as high as $100 that cannot be covered. The United States financial risk used to be one of the lowest one in the global world and now it is up in the air what will happen to us. The following chart represents the U.S. bond rates at present (2009) for various lengths of time. (Source: http://bloomberg.com) Conclusion Perhaps there has been limited supply of infrastructural materials from the governments which have contributed to the already existent factors of the loss of our U.S.economy. Perhaps there is a fallacy of monopolistic buyers and trading houses that have stunted the future growth of our economy. Illegal trade practises have somewhat contributed to the downfall of our economy however the major factors have already been discussed in this paper accordingly. Enforcing contacts in a deficit economy is not the solution to getting our head above the water because there is no money to pay the debt. However government laws and regulations do affect the competiveness of trade amongst nations which affect profitability and our economic growth. With particular emphasis on licensing regulations our government needs to take a step back and allow businesses’ to operate under organized and minimum controlled regulations according to the law. There appears to be a resolution to this deficit our economy is in but the use of natural resources might want to be severely tapped into and less money might want to be focused on the foreign war. References Factors that Affect the American Economy. (2007 July 24). Retrieved November 1, 2009 from, http://www.associatedcontent.com/article/318851/factors_that_affect_the_american_economy.html?cat=3 BW Staff. (2009). Sizing up the Fed’s Next Move. Retrieved October 31, 2009 from, http://www.businessweek.com/investor/content/sep2009/pi20090916_221601.htm National Economic Accounts. (2009). National Economic Accounts. Retrieved November 4, 2009 from, http://bea.gov/national/index.htm#gdp The Effect of the Exchange Rate on Inflation. (2005). The Effect of the Exchange Rate on Inflation. Retrieved November 3, 2009 from, http://www.cnb.cz/en/monetary_policy/inflation_reports/2005/2005_april/boxes_annexes/a_05_april_b2.html Amadeo. (2009). Unemployment Rates Retrieved. October 31, 2009 from, http://useconomy.about.com/od/economicindicators/p/unemploy_rate.htm U.S. Bureau of Labour Statistics. (2009). Retrieved November 4, 2009 from, http://www.bls.gov/bls/unemployment.htm Tyler, P. E. & Stevenson, R. W. (2002 July 30). Profound Effect on U.S. Economy Seen in a War on Iraq. New York Times. Global Policy Forum. Retrieved November 2, 2009 from, http://www.globalpolicy.org/component/content/article/185/40466.html Government Bonds. (2009). Bond Rates. Retrieved November 2, 2009 from, http://www.bloomberg.com/markets/rates/index.html Read More