Why a United States Recession Seems Imminent ?

Bank of America has issued a warning. The world’s second-largest bank by assets believes that the United States economy is staring at an imminent recession. Bank of America went as far as to say that the economic outlook was indeed scary and by the third quarter of 2017, the recession would have kicked in! The markets are currently not behaving very depression like! The sentiment is high as we are looking at possible economic growth. Bank of America strongly disagrees. In this article, we will look at this point of view and critically examine it.

Inherent Weakness

The United States economy is being pumped up using monetary tricks. Since the 2008 crisis, the American economy has recovered using monetary techniques like quantitative easing. Although these techniques do create a temporary boost in the economy, experts have already warned about their long term effects. It is as if the economy were dependent upon recurring monetary shots.

The American economy is based on the interest rates being low for extended periods of time. That cannot always be the case. As the Federal Reserve looks at raising interest rates, the American economy is almost inevitably staring into an abyss. The moment consumer confidence goes down; there will be a domino effect that will bring the entire economy down.

Declining Corporate Profits

America is a capitalistic country i.e. its economy is dependent upon private corporations. The health of those corporations, therefore, has a significant role to play in the economy. The American corporations have been facing a steady sleuth as profits have been declining for the past three-quarters. Any corporations that are profitable are so because they have most of their operations overseas. If this trend continues, an economic catastrophe would not be off the cards. Falling profits would soon translate into falling wages and falling consumer spending causing a contraction that could blow out into an all out economic crisis.

Reducing Rates Not Possible

Central banks are good at dealing with economic crisis. They have dealt with so many crisis in the recent past. So what is it that makes this crisis particularly worrisome? Well, for one the central banker may not have any recourse this time. Central banks rely on tools such as reducing interest rates to revive the economy. However, these tools cannot be used. The interest rates have already been at zero for quite some time! In fact, one could argue that they have been in the negative because of the quantitative easing that has been going on! The central bankers can therefore not take a lot of steps to correct the problems that would arise.

Quantitative Easing Not Possible

The United States economy has already been through several rounds of quantitative easing. The money supply is peaking out, and inflation is hitting record highs. The United States is shielded from inflation because other nations need dollars and hence these dollars do not hit the US economy. However, the value of the dollar is falling, and the world is already considering an alternative reserve currency. Another round of quantitative easing will be a severe blow to the credibility of the United States dollar. Apart from that, it could also cause massive inflation. It is for this reason that the American central bankers may not be able to use this option to deal with the forthcoming recession.

External Bailouts Not Possible

Another alternative is to ask for a loan from another economy on favourable terms, a bailout package. However, this too may not be possible. Britain is reeling under the effects of the Brexit and may not be able to provide much help. China is also facing an economic downturn itself, and so is the European Union. In fact, the economy of China is said to be heavily inflated by debt. It is said that the Chinese government has misreported numbers for a long time and the actual extent of the damage is neither known nor easy to predict.

The economies of emerging nations are dependent on the United States. Hence, when the United States economies go down, so will the economies of other emerging nations. A bailout from them would therefore not be a feasible option. The only country that may be able to bailout the United States will be Russia and that may be politically unacceptable to Americans.

Why it Would Lead to Global Recession

The American economy is the central pillar of the modern day global economy. The monetary and trade system of the world is based on the United States economy. The US is the biggest consumer market.

The goods produced in China and India, are eventually sold in the United States. The fall of the US economy will take consumer demand to rock bottom levels. This will translate into lower production worldwide. Lower production will trigger job losses and a vicious cycle of low consumer spending and low credit availability.

❮❮   Previous Next   ❯❯

Authorship/Referencing - About the Author(s)

The article is Written and Reviewed by Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.