Economic Geography Change is the only constant; which explains why the seemingly robust US Economy, cheerleader for the masses, trendsetter for the rest of the world, and a magnanimous wealth creator for its entrepreneurs, is in the thick of a recession today. Newton was clairvoyant, besides being scientific, when he proclaimed that what goes up must come down. Starting with 1971, when the US economy actually felt the pangs of growing up, by experiencing its first trade deficit in 80 years, the cycles of alternate ups and downs became shorter, more frequent, more measurable and more comparable.
It also awakened the giant to the fact that the rest of the world was playing catch up in a very determined manner. The bouts of affluence and prosperity, followed by trend reversals have characterized the growth path since, prompting economists to identify various reasons. The macro factors impacting the growth trajectory identified thus include the Gross Domestic Product (GDP) levels, fiscal policies impacting economic trade and development, bank rates and interest rates, money markets and the monetary policies of the Federal Bank, prohibitive versus liberal international trade practices, overseas expansion, free market, capitalist manipulations, and international development. National politics and conflicting political ideologies, party driven election manifestos, geopolitical manipulations and power politics, politics of alignment, War in Vietnam, War in the Gulf, political favoritism have all added piquancy over the years.
The 9/11 nightmare has upset the applecart in a very rude manner. The economic and political turbulence has also been amply reflected through the years in the stock market on Wall Street as well as on the NASDAQ electronic exchange, and triggered off a series of very definite reactions in financial markets across the globe, which have earmarked periods of prosperity and depression. The Wall Street Crash of 1929 is no comparison to the crash in 1987; but what has happened 2006 onwards is massive when compared to 1987- as we grow bigger and better, the intensity of disaster also gathers stature.
Today, we are in the middle of a formidable recession after an undisturbed, glorious, prosperous ride since 2003 when the economy picked up post the dot com bubble fiasco.
In the crash of 1987, the villain was the junk bond which encouraged leveraged buying. The culprit this time is the subprime mortgage crisis. Since late 2004, indiscriminate securitization of subprime assets has resulted in a loan repayment and redemption problem, made worse since 2006, and spurred by tightening of lending rates to control inflation and indiscriminate spending. US Employment data are disappointing week on week; companies are retrenching and downsizing because productivity levels have gone down. Financial entities are going bankrupt or being bought over for viability- Lehman Brothers is a case in point.
Bank of America, Merrill Lynch and Citigroup are other examples of erstwhile flourishing businesses now looking for relief. The economic growth rate has slowed down and the IMF has revised the global growth forecast down to 3.7% or less in the current fiscal. Alarmed at the unprecedented slowdown, US Fed has begun putting together a relief package, which includes monetary policies, fiscal relief, loans, subsidies etc. As I write, the move towards zero Fed Rate has been announced, and has cheered the market. The growth and productivity potential being higher in Asia, the recovery trend seems to be working more in favor of countries like Japan, China, and India.
The strength of the Japanese yen has been one of the reasons for the fall of Wall Street; unwinding of yen carry trade has cost the US dearly, several times in the last two years. While the financial market indices in Asia have succumbed to the trends percolated by the US economy, it is believed that these Asian countries will recover faster. It is possible that availability of inexpensive resource markets may also trigger a shift in global production to Asia. Finally, the growth of class inequality is weighing the US economy down.
It is a necessary evil, a byproduct of extreme capitalism and free market play, as has been evident in the US for the past many years. The socio economic structure in the US comprises races and communities and political parties with differing viewpoints on social justice, often regressive. Though the progressive view is that a successful modern economy and social justice go together, it is often seen that the modern knowledge driven economy intensifies the inequality further- the gap widens.
The massive capital gains accruing to individuals from speculation on the stock market have added to the economic inequality. All this has snowballed into a situation which will take a good one and a half years or more to rectify, and for the economy to be back on track. We have a royal mess on hand, which has spread to the rest of the world, and shows no signs of abating. And believe me, I am being optimistic.