US Economic Crisis

     United States, a capitalist mixed economy, fueled by abundant natural resources,well-developed infrastructure  and high productivity. Though its GDP is larger than any nation which is about 23% of the gross world product, its national GDP is 5% smaller than the European Union in 2008, according to the International Monetary Fund. Considered the largest importer of goods and the third largest exporter, though its export per capita i relatively low. United States being one of the powerful and influential countries nowadays has a great impact on the global economy. 

     Today, America is facing an economic crisis that had started in August of 2007. In this month of the year, began the seizure in the banking system precipitated by BNP Paribas announcing that it was ceasing activity in three hedge funds that specialized in US mortgage debt. This was the moment it became clear that there were tens of trillions of dollars worth of dodgy derivatives swilling round which were worth a lot less than the bankers had previously imagined.

     Nobody knew how big the losses were or how great the exposure of individual banks actually was, so trust evaporated overnight and banks stopped doing business with each other. 

     After that event another bank went bankrupt, the Lehman Brothers, a large investment bank. Up to that point, it had been assumed that governments would always step in to bail out any bank that got into serious trouble: the US had done so by finding a buyer for Bear Stearns while the UK had nationalized Northern Rock. When this happen the notion that all banks were too big to fail has no longer held true, making all banks too risky to invest into. Within a month, the threat of a domino effect through the global financial system forced western governments to inject vast sums of capital into their banks to prevent them was collapsing. Credit flows to the private sector were choked off at the same time as consumer and business confidence collapsed.

     On May 2010 marked the point at which the focus of concern switched from the private sector to the public sector. By the time the IMF and the European Union announced they would provide financial help to Greece, the issue was no longer the solvency of banks but the solvency of governments. Budget deficits had ballooned during the recession, mainly as a result of lower tax receipts and higher non-discretionary welfare spending. Greece had unique problems as it covered up the dire state of its public finances and had difficulties in collecting taxes, but other countries started to become nervous about the size of their budget deficits. Austerity became the new watchword, affecting policy decisions in the UK, the euro zone and, most recently in the US, the country that stuck with expansionary fiscal policy the longest.

     In the circumstances, it is hard to be wildly optimistic about how events will play out. Markets are bound to remain highly jittery, although it seems unlikely that American bond yields will rocket as a result of the S&P downgrade. America's growth prospects are poor, which is why bond yields will remain low in what is still, for the time being, the world's biggest economy. Whatever it means for financial markets this month, 5 August 2011 will be remembered as the day when US hegemony was lost.

     The US is drowning in negative equity and foreclosed homes.Because of this, there will be a long period of weak growth and high unemployment as individuals and banks pay down the excessive levels of debt accumulated in the bubble years. At worst, the global economy will be plunged back into recession next year or even a Great Depression as the US goes backwards and the euro comes apart at the seams. 

    The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s. The depression originated in the U.S., starting with the fall in stock prices that began around September 4, 1929 and became worldwide news with the stock market crash of October 29, 1929 (known as Black Tuesday). From there, it quickly spread to almost every country in the world.

     The Great Depression had devastating effects in virtually every country, rich and poor. Personal income, tax revenue, profits and prices dropped, while international trade plunged by more than 50%. Unemployment in the U.S. rose to 25% and in some countries rose as high as 33%. Cities all around the world were hit hard, especially those dependent on heavy industry. Construction was virtually halted in many countries. Farming and rural areas suffered as crop prices fell by approximately 60%. Facing plummeting demand with few alternate sources of jobs, areas dependent on primary sector industries such as cash cropping, mining and logging suffered the most. 

     This phenomenon could be avoided if there is international co-operation. There should be plans for growth not merely austerity. Europe lacks the political will to force the pace of integration necessary to avoid disintegration of the single currency.