Doubt Induces Economic Decline
At the moment, the prospects of both the American and the world economies are horrendous; they are struggling to stay afloat and nothing looks as if it will change for at least the next twelve months. Regardless of all the monetary and fiscal policy put into place to decelerate sluggish growth and stimulate downward-spiraling economies, that which remains ever-present is an underlying uncertainty in the future. This debilitating lack of confidence is the catalyst for the all-encompassing decline in the economies. The major economies under scrutiny are America, Europe, and the Asia-Pacific region; all three economies are suffering yet for different reasons. Nevertheless, the net effect of this depressed situation is the same: low consumption and waning fixed investment.
America is the best of the three aforementioned economies. However, America continues to suffer from the collapse of the record long boom between ‘93-‘00. The Internet bubble has definitely taken its toll on the current state of the American economy. In the first quarter of 2001, there was a surge in the technology sector that created a bull market. This bull market produced a massive overcapacity of useless telecommunications networks, which consequently left a considerable debt. Since March 2001, the economy has been weak. As everyone is aware of the American economy’s fragility, confidence has dwindled. As a matter of fact it was documented that consumer confidence hit its lowest levels in March 2003. Lack of faith in the economy has had a knock-on effect of plummeting investment. Yet, reports now say that investment is on the rise. But since there have been so many previous false starts, especially in the past two years, I believe there is no reason for one to get his/her hopes up with the expectation that the technology business has finally found its footing.
As for George Bush, he has no idea what is going on with the economy. The American people applaud him for the tax cuts but the way he has gone about doing so is ridiculous. Now since he intends for these tax cuts to have long-term benefits, they obviously do not help anyone now, which means he is not stimulating the economy (that is what the economy needs). And what makes the situation worse is Bush is giving the tax breaks to the rich, which means those who need the money most are not receiving it. Generally when the rich gain surplus money they do not spend more; rather, they save it and hence do not increase gross domestic product and aggregate expenditure. This means there is less money in the economy so interest rates are going to have to go up. They cannot go up because they need to stimulate the economy. So basically, the government is losing money and dragging the economy further into recession-like trends.
Because of this, more money is added to the already gigantic deficit the American economy suffers from and the situation is exacerbated. The tax cuts subtract from the massive deficit spending. «The White House released a budget proposal that projects deficits from 2003 to 2008 totaling some $1.4 trillion, including shortfalls in 2003 and 2004 that would be the biggest relative to gross domestic product (GDP) since the 1980s and the early 1990s (CNN).» If deflation actually does take place the federal deficit is going to be a huge problem, because debtors are at a colossal disadvantage.
With recession settling in, the inflation rate is decreasing so according to the Phillips Curve, unemployment must rise. But, with the newly instated Bush tax cuts the unemployment rate should decrease because people have a much greater incentive to work now. If they are being taxed less, then husbands and wives bring home a greater portion of their salaries and therefore they be will spend a little more resulting in increased consumption and moreover a boost in aggregate expenditure.
Interest rates are low. The reason for this is the Fed is attempting to stimulate weak investment and consumption. As a matter of fact the Greenspan has reduced interest rates to a historical low. So far this has kept consumption high. By allowing for cheaper loans for mortgages and encouraging record low savings, the economy will continue to thrive. But as soon as consumption diminishes and the encroaching asset bubble pops, the Americans will be in trouble.
Nevertheless, consumption is not the only factor that plays a role in aggregate expenditure, so does investment. The government cannot generate investment as easy as consumption, because investment is contingent on the stance of business figureheads. At the end of the day they make the final decision and if they are not confident their investment will yield sufficient profit than they will simply not invest. In terms of the exchange rate of the dollar, it does not look good. The value of the dollar has gone down. With the war in Iraq, people are now very tenuous about buying dollars. The dollar is not going to go up for awhile especially since all the countries in Europe seem to be in such a perilous state; they do not have confidence in their own economies and that has had the secondary effect of them not having confidence in others. On top of it all, for the past couple of years America has lost its title as the net creditor, which means as of now foreigners have more invested in America than they have there.
A few weeks America appeared to be slipping into deflationary trends, but due to increases in the value of stocks, worries have been alleviated. Increases in the value of stock are good indicators that in the next few months’ stabilization should take place and economic growth will hopefully follow.
Europe has structural problems that dampen growth. Rigid labor markets are one of the major problems. Strict labor laws prevent firms from firing labor, which causes serious worker immobility. This has the effect of decreasing labor because firms are too cautious of hiring the wrong people.
The current state of the German economy is appalling. The reconstruction of Eastern Germany is still a massive financial burden on the federal government plus a deflationary spiral is ravaging the economy. Before the Berlin Wall was destroyed Germany was sharply schismatic due to political reasons. Bitter rivalry between businesses in the east and the west brought about terrible consequences. Businesses in the east went bankrupt and now unified Germany is stuck with a huge deficit by which reconstruction is being funded.
Recently the value of the Euro has increased. As imports increase and exports decrease as a byproduct of the increased value of the Euro, big problems begin to impinge on the central European economy.
Trade is a very important mechanism especially with regard to European trade. Since there has been a shortage of trade, there has been less production. If there is less production that means consumption must be falling off and a smaller amount of money is left in circulation. As people gain more purchasing power, they realize they have less to buy due to lack of production. This situation spells deflation and this is evidenced by the current situation in Germany and Italy.
England is a hybrid. It is a mix of American and European styles of economy. Although England never suffered the brunt of the Internet bubble, some effects were felt. As for labor laws, they are much more flexible than their European counterparts. This allows for more worker mobility and greater ease in finding jobs. Margaret Thatcher reforms embodied many of the rights afforded to laborers today. Even though England is under threat from a possible economic slump, it is improbable that they will suffer from deflation.
Central Asia is an untapped resource. Now that China is free of suppression, their economy can now open up and begin globalization. The environment is fertile and begs businesses to flourish. With so much freedom, economic growth is almost inevitable.
Japan is not as lucky as China. Due to an asset bubble in the 1980s, Japan is still trying to recover. As equity shares prices escalated, people borrowed money to pay for new houses. When the bubble popped, people were left with high loans that out-valued their newly bought property. Consumption was paralyzed and getting rid of hefty debt was now the top priority. The opportunity is now there to consume but people are very wary about their money and only save their money in low-yielding deposits so as to exercise minimum risk. This resulted in many banks going out of business because of bad debts. Deflation followed this chain of events.
Agriculture and construction are Japan’s worst businesses yet the government continues to subsidize them despite their lack of productivity, inefficiency, and poor management. The federal government is investing in a dead cause. In addition, time employment and their general way of life conflict with economic efficiency, and hence created rigid labor markets.
Japan is also very timid about fiscal stimulus. Deflation has decreased the velocity of money whilst simultaneously increasing the marginal propensity to save. The net effect of weak fiscal stimulus and high marginal propensity to save is a huge aggregate demand gap. Firms were going out of business and investment was extremely low. Interest rates are so low that people wanting to save look outside to foreign countries for better investment rates. For seven consecutive months, household incomes seem to be declining and on top of all these problems there is high unemployment, which does not seem to be going down.
Despite all efforts by the central bank and government to stimulate the economy, they will be very little influence on consumer and business expectations over the next twelve months.
Innovation is the key to productivity levels in America. However, since investment and consumption are very low, firms lack the funds to undertake risky innovate projects. Therefore productivity is declining. Without technological innovation the future looks very bleak. In past recessions, hard times have been overcome been surmounted by technology boosts. These technological enhancements proliferate productivity and increase productivity. This results in larger output.
Although fiscal and monetary policy plays a big role in stimulating the economy, they are no good for the economy if they are dealt with through Bush’s tax cuts. Because this will only increase the large deficit that has been building up since the 1980s. This
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