The rising tide of US credit crisis Essay
The rising tide of US credit crisis
With the advent of modern age heralded by surmounting technological revolution, world has ceased to exist as a scattered identity. The revolution on technological side brought the means to interact, with the main driving force behind such global integration being economics. Today the world has become so much interdependent that a major event on one side of globe has its wrinkle effect felt on the other side. The magnitude of this effect is not determined by the size of land or nation, or even by the strength of armies, it is proportional to the size of economies.
Thus it is economics and the financial system that has become the juggernaut and deciding factor of the fate of this world. Even today’s wars hovers around the shadows of economic gains, as stated by A. J. P Taylor that what ever the political reason declared for wars, it’s in fact the underlying economic interests that creates them. As it is well rehearsed that every rise has a fall and the otherwise, after a decade of healthy economic growth, when the world grew in an impressive fashion especially the league of developing countries in Asia, lead by a huge leap forwards by India and China.
This had also been the period that made the later to claim the status of World’s fourth largest economy surpassing France and Britain. The decade of strong demand fuelled by the thirst of economic powerhouses to quench the needs of their expanding economic base, the period that showed immense rise in international trade that smoothened the way for various agreements between the communities of nations.
Though the same decade had been marred by conflicts in region like Afghanistan and Iraq, stained by a barrage of threats and sanctions over Iran, but none of these disturbances ever inflicted any serious blow to the world growth. Most surprisingly of all, the economies of regions where these conflicts erupted demonstrated the most impressive macro-economic figures, like Pakistan who despite of being at the forefront of war on terror heralded to be become the fastest growing economies in its region.
This leads to a simple yet significant conclusion that the way the economies operate in today’s world has significantly changed. Global structure has become more resilient, some what shock proof and thus stable. This stabilization effect emanates from the fact that enhanced integration of regional economies into the global system has made them absorbent to shocks stemming form regional disturbance and conflicts, these countries are able to exhort economic and financial depth form the greater global system which provides them with the shielding effect form local commotions (Evans-Pritchard, 2008).
Examples include the State of Israel, South Korea, U. A. E, Kuwait, Pakistan; all of them having chaos inside or on their borders, while showed remarkable buoyancy in their capacity to guard themselves under the greater swathe of global economic protrusion (Bloom, 2008). World economic order If the global financial system has become so resilient that even campaigns like the War on Terror does not botch its thrust, then why the sudden mess up, upheaval and commotion in international market.
What triggered the breakdown of the huge momentum this cavalcade had gained in a decade of unprecedented chase, the chase of prosperity and growth? Does there lie anything more dangerous and disconcerting then war? Let us understand this breakdown by a simple analogy. What if a caravan is running on a high way in an assorted fashion from the heaviest and largest to smaller and lighter vehicles, all attached to each other by a connecting chain such that if things go wrong with smaller members, it’s the force of bigger players that keep them heaving and intact.
For all these years, this was the biggest and the most powerful player leading this convoy that provided the whole procession with direction, momentum and pace, thus any fault on its part used to render the whole fleet in disarray (Bloom, 2008). But the current decade saw the emergence of new players, possessing not only the capacity to carry their own weight but to absorb the lost thrust in motorcade. Things were all going smooth when a sudden burst rendered the capacity of its biggest mover in dismay.
Gradually the parade not only lost all its momentum’ leading to mayhem and chaos, but this brought the emergent heavyweights to test, the test of their capacity to keep themselves form straying while proving their ability in facilitating the big hauler. They are well on their way in providing the desired support’ but worries are surmounting that a total failure on part of convoy’s juggernaut would render all to a total halt, what would happen next?
Who would take over the responsibility to lead? How problems would be fixed? Prospects are grim but it tells us one thing that these are not the exogenous factors that effects and alters the pace, it’s the varying capacity of its own members that causes the momentum to shift its modes. This convoy is the amalgamation of world economies lead by the largest of all the United States, the new emergent being China and trouble is the sub-prime apocalypse (Tan, 2008).
The surmounting worries are the seizure of US economy, boding ill to jam the entire global engine (Bloom, 2008). Economic powerhouse casting shadows The size of United States economy no doubt casts its influence over the international system, such that a sheer blink radiates capricious ripples that affect the global financial structure. But the economies of Japan and few European countries if summed up fairly makes a large portion of global chunk, what makes the United States so special and significant while the rest so latent.
Over the period of time US has turned form a major producer to consumer, thus it’s the ever growing consumerism that today drives the global engine, so much so that the world has turned into a manufacturing base to feed the unabated appetite of US government and its people. Interestingly the purchasing power of U. S. hasn’t kept equality with its craving for larger imports, leading to huge negative trade imbalances, record budget deficits and surmounting borrowings (Bajaj & Story, 2008).
The situation is getting worse as the swelling burden of floated government bonds and treasuries has begun to put strains on the US and the global financial system but some how for good, international lenders have come to exist with this reality but the worrying question is’ For how long? What if there’s an internal apocalypse leading to implosion? Is the world prepared to subsist with the stagnant United States! The nightmare has happened and a full scale implosion has rendered shock waves which have begun to take tool on the global scale, the burst of sub-prime bubble, spiraling commodity prices, wide scale collapses and deafening bailouts.
But pundits are still in a fix, they state the current spade of crumpling dominos as mere preliminary shock, precluding the greater quake yet to come. With $500 billion in bank losses, yet accounting for just one third of the total damage of $1. 5 trillion has brought the financial juggernauts of the likes of JP Morgan, Merrill Lynch, Lehman, Fannie & Freddie, AIG on their knees and a long queue still in waiting, followed by staggering $1 trillion in bail outs, yet the spiral sees no end (Bajaj & Story, 2008). The financial meltdown
For the past two decades, Americans ‘distracted’ by the direction that their government, have been spending much more then they own or allowed by their means, which can be seen by a steady decline of their saving rates that stood at 11% in 80s to -1% today (Bajaj & Story, 2008). The total debt owed by the public amounts to massive $2. 5 trillion without accounting the sub-prime fiasco (Bajaj & Story, 2008). Of consumption patterns, last decade saw an enormous increase in spending’ bumped up by soaring housing prices’ though this had been the era of shrinking real wages.
Without the wage increases’ riches were being made by selling homes without ever thinking that for how long this cycle would swing, as the point would ultimately reach when stalemate would occur, when people would be left with no money to buy expensive properties. Without such logical thinking, things went on moving so much so that the American home owners extracted nearly $5 trillion since 2001 in various forms like refinancing their mortgages, home equity and selling till the dooms day occurred, when whole system based on faltered assumption on the lines of Dot Com collapsed (Bloom, 2008).
The reason it has been called ‘distraction’ is the fact that the policies engineered by the government wrongly encouraged the public to tow the dangerous path of callous burning up of goods and services while giving birth to a banking system that fueled this trend, thus slowly and gradually the structure moved away from the production and sales, to the addiction of free goods and manipulation of debts. This was the beginning of an unimaginable end, an end marred by severe deflation, the point of squeezed credit from the money market.
How could the money market operate without money, this prompted the Fed to inject liquidity, which directly means more loans and interests. The current trend of unfathomed bail outs only augments the wrong impression of unconditional government support in any circumstances, its guarantee of a fix for any faltered system and furnishing of the already wrong signal of its intervention in the much touted free market.
The situation is really spiraling out of control, as all these bails are adding new heights to the rising Mount Everest of the already nine and a half trillion dollar debt, having yearly interest of whopping $500 billion, all but ultimately would be paid by the US taxpayers! But for now, who is paying for these surmounting obligations lest the unconceivable actual debt? (Evans-Pritchard, 2008) This is the point where the damage trickles outside motherland and begins to haunt the globe (Evans-Pritchard, 2008).
As mentioned earlier that US has become the largest importer thus the heaviest borrower in the world, just to mention that United States increased its debt by 90% in the last eight years (Bajaj & Story, 2008). This is being financed by the US government through bonds and securities, bought by Middle Eastern and East Asian countries (Bloom, 2008). Today the strategic rival China holds the largest share of US treasuries making up to $1. 4 trillion, financing up to three-fourth of U. S. deficits annually (Bloom, 2008). For what good reason?
To artificially hold its Yuan from an ‘up-rising’, which would render its exports costly and make the industry uncompetitive. A country which needs to feed one and a half billion people, living on an industry 60% export oriented, is willing to swallow bitter pill of piling reserves of a nose diving dollar (Bloom, 2008). The red dragon for the sake of its growth ‘highly pertinent for keeping its huge populace from being unemployed, hence mass commotion’ give Americans the credit to buy toys that its people make, thus towing a delicate line.
This is the spiral that is sucking the United States deeper into abyss, that is by giving credit for callous spending spree, it keeps the US interest rates low, which gives new impetus not for investment but for greater imports, needing more credit again. It’s like a tornado that is feeding on itself to gain strength, the strength to ultimately rage an unthinkable destruction.
University/College: University of Arkansas System
Type of paper: Thesis/Dissertation Chapter
Date: 20 February 2017
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