Where does US economy stand today?

The United States has been one of the greatest super powers so far in the history of the world. Abundant natural resources, technological and industrial revolution, mighty military, strong infrastructure and research, excellent educational institutes etc have been forces in making it a super power. In recent years, US economy seems to be in trouble, riding from crisis to crisis.

US Economy is based on consumption and debt/borrowing and has become very unstable at the moment. The economy is post industrial i.e. service sector dominated. It has moved from the days of surpluses to huge deficits. USA is now the largest debtor country in the world. Outstanding public debt above $10 trillion and it needs the cash inflow of 2 billion dollars every day from the rest of the world.

So how does the world economy really work? USA is the world's biggest economy (30 per cent of global GDP) and the world’s biggest consumer. (E.g. Annual Consumption: USA -9.5 trillion dollars,China- 1 trillion, India – 600 billion) Countries like China and other Asian countries have a lot of workforce and relatively low domestic consumption. Hence these countries are mostly export driven – to produce more jobs and keep the unemployment low. This seems to be the fine picture, where is the problem? These countries through the exports are getting excess dollars and reinvesting in US treasuries (US government bonds). US deficit is increasing day by day. USA even needs to borrow the money from foreigners to run its government - other countries have to keep lending money to USA without ever demanding it back.

The personal savings rate in USA is negative. People in USA have been borrowing more than they need and spending more than they afford. Debt from the foreigners is not used for some constructive purposes but is mostly spent on foreign goods. They are purchasing some raw material and exporting the finished good back to foreign countries. I would like to quote Mark Faber here - he commented on the stimulus package -, ‘The federal government is sending each of us a $600 rebate. If we spend that money at Wal-Mart, the money goes to China. If we spend it on gasoline it goes to the Arabs. If we buy a computer/Software it will go to India. If we purchase fruit and vegetables it will go to Mexico, Honduras and Guatemala. If we purchase a good car it will go to Germany. If we purchase useless crap it will go to Taiwan and none of it will help the American economy. The only way to keep that money here at home is to spend it on prostitutes and beer, since these are the only products still produced in US.’ I think it is self explanatory. Another issue is the comparative advantage of Asian countries over USA with very low wages. (E.g. in China hourly wages are just $ 0.25 to 1 as opposed to $ 15 to $20 in USA)

It is not only the American people who have spent recklessly, but the government has played its part too. War on terror and world policing costs trillions of dollars every year to USA and it is not their own money - they paying for it via credit card. The biggest issue is entitlements. Through entitlements like social security, healthcare etc USA government has the obligations of around $60 trillion. To fulfill it they need to have around $10 trillion invested every year and the actual investment is nil. So how will the government finance this? – Printing more money – which will cause the dollar dilution and massive inflation.

USA dollar is becoming weaker against the other stable currencies like Euro. Other countries are slowly dumping dollars and moving to stable currencies like euro. OPEC, Russia, china are pushing to redenominated the global oil transactions in Euro. In 1944, dollar became world’s reserve currency. People had to use dollars for international transactions giving USA the tremendous financial power and leverage. Also oil can be bought from OPEC only if you have dollars. In November 2000, Iraq began selling its oil in Euros and its oil for food account at the UN was also in Euros. One can just imagine the threat it poses to US dollar. I don’t want to comment about the Weapons of mass destruction but the war on Iraq definitely removed above threat to USA and also sent the strong signals to other countries that were looking to re-denominate the oil transactions in other currencies. Iran has also proposed the Euro based oil trading system – Bush: "Iran is dangerous to USA". May be they are developing the nuclear bomb – I don’t know. Redenomination of oil in Euro is certainly profitable to middle-east countries as safeguard against falling dollar. If it happens, dollar could easily lose around 30-50% of its value.

United States has been facing other problems such as illegal immigrants. Piracy is also a big problem for US (they are definatley leaders in entertainment and research). Now they can’t handle natural disasters like Katarina too. Recent financial crisis has drawn the entire world into recession. Fed’s policies to keep interest rates too low and very loose credit standards have just help create the real estate bubble. Printing too much of money also ensures the high long term interest rates and high inflation. It could destroy its middle class. The government is encouraging people to spend more where one of the problems with USA is its excessive spending. Rich-poor gap in United States is very wide and it gap continues to grow - It could lead to civil war. Growing materialism is a big problem – it could well be one biggest reason behind weakening American economy.

US presidential candidates were also not too encouraging this time. Republican Ron Paul was the only one who was talking some sense and seemed to have clear and logical plans – should have been the president. Obama is still unsure what change is he going to bring about – talks a lot in the air. He is extremely good orator - that's it. If you listen to him, you will be very impressed but you can't even be sure about his single economic policy or plan.

As of now the long term picture for USA economy looks gloomy. We may well see another bubble or war to distract the people; but this can’t just go on. The depressed dollar may help US in reducing the trade deficit and promote the domestic production, but it will cause the high inflation and reduce the value of people’s wealth. USA needs to get back to stable, real production/manufacturing and job creating environment or some technological revolution – it is not impossible but the transition would involve a painful recession. ’Made in USA’ has to be rejuvenated – innovation is the need of the hour. It would be encouraging if the government invests the money in new science and technology programs and the invention of better/cleaner energy sources instead of propping up some of the failed and badly run firms.

-Finance freak