Before There’s No Way Out
The United States economy missed two opportunities of going through a necessary recession. Some argue that the government’s involvement is what the nation needed. Sure, stimulating the economy to prevent massive layoffs is a good thing, in the short run. However, the country is facing a large devaluation of its currency, i.e. the U.S. dollar becoming more worthless.
Prices will dramatically rise, investment will disappear, and unemployment will reach record highs. It is time the American people understand their circumstances so they can put pressure on the government to act appropriately. The government’s sustainability can be credited to Japanese, Chinese and the Federal Reserve’s investment in treasury securities.
Otherwise, the government would have defaulted a long time ago. If the government faces a deficit, then the United States has, at most, three options: find other lenders, increase taxes and decrease spending, or just default. I propose that a mix of the second and third options occur. It will be a major blow, but would leave the nation economically healthy in the future.
The Federal Reserve responded to the 2008 financial crisis in the same way it responded to the Dot Com bubble bursting. It lowered interest rates (Federal Funds Rate) from 6 percent in 2001 to a low of 1 percent in 2003, to offset the oncoming recession. This led to the housing market bubble. When the housing market bubble burst, interest rates were 5.35 percent, but the Fed lowered them to a low range of 0 to 0.25 percent. The implication of this is that another bubble is being fueled, set to be bigger than the last. When it bursts, bailouts and low interest rates will not be able to save the nation from a deep recession.
There are a few measures that the government can do to limit the next recession and prevent the devaluation of the dollar. First, there must be incentives in place for firms that produce on homeland as opposed to overseas. This will bring manufacturing jobs back to the U.S., meaning there will be more goods to export. Currently, the trade balance is negative at 44 billion dollars. With manufacturing back in the U.S., the trade balance will be positive and meaningful investment will flow into the country.
Despite the importance of foreign investment, domestic investment needs to drive economic growth. This can only be done through saving and allocating capital to efficient means of production. Instead, the government keeps trying to enrich the economy through stimulus packages. Spending is not economic growth. It only inflates the GDP, creating the illusion that the economy is growing. However, spending is having adverse effects on the economy. Concisely, we borrow and buy too much, but don’t make enough.
Lastly, the Fed needs to adjust its monetary policy. The artificially low interest rates are facilitating unsustainable borrowing by the government. If the interest rates are allowed to rise, the government will not be able to afford to borrow money and will have to adjust its fiscal policy accordingly.
Looking beyond the short-term, there needs to be serious changes in fiscal and monetary policy. Changing how the government spends its money will ultimately determine how much debt it accumulates. Making sure the Fed uses its tools to stimulate economic growth and not just economic demand, is what’s going to change the dynamics of investment in this country. If you want an idea of what the U.S. is to expect, look at Greece’s situation. Greece’s problems are a few hundred billion dollars bad. The U.S. is over 10 trillion in the hole. Who’s going to bail us out?
Originally from Brooklyn, New York, Andre Lewis opted out for the rural town of Storrs-Mansfield. He is in his junior year at the University of Connecticut continuing his studies in Economics and Mathematics. He has a passion for African American history and hopes to share his wisdom through teaching and education.
Andre can be reached at firstname.lastname@example.org.