Introduction The United States hardly depend on its industries growth and development, its economic main drive is money. The United States finances the global multinational and the emerging new markets. American dollar remains the world’s top reserve currency, while American’s purchasing power makes it possible for the colossal consumption which accounts for more than 60% of the world’s biggest GDP.
Thus it saddens that at the present moment America is experiencing a liquidity predicament out of all probable economic situations. As Thurow (2006) explains the United States heavily relies on global dependence to get its finances, and thus a worldwide credit crunch heavily weakens its leverage. This paper will review the current American economic situation and predict the future of its capitalism system. The paper will also provide a SWOT analysis of the economy. Current situation
Staring from the 1970s, the United States has increasingly moved from being an industrialized production superpower to being a consumption-founded financial hub, concurrently moving from a considerable creditor country to debtor country (Seltzer, 1999). The United States was able to undergo this transformation because of its control it had over other economies of the world. Consequently, the United States started facing trade deficits that were allowed to continue and at times encouraged owing to the fact that the dollar had superior strength over other world currencies.
The dollar being the world’s most significant reserve currency, countries that were newly emerging from the collapse of the Soviet Union and were embracing capitalist principles provided the United States with huge markets which the United States financed as well as made investments. This again offered power for debt. At that particular period, America provided the safest investment option in the entire world, providing its superior currency, vibrate economy and high liquidity. The resultant affect: Greenspan
Thurow (2006) explains that Alan Greenspan the Federal Reserve Chairman manipulated a credit bubble that occurred in the 1990s by carrying out a succession of cuts on interest rates. Owing to a very inaccurate new system of inflation evaluation introduced by the Clinton Administration, interest rates were then manipulated to falsely ease credit, this badly misdirected capital in the economy and created successive bubbles in a number of industries such as the information technology, equity markets, the real estate and generally created credit.
The 1990s, was an era of absurd economic growth in United States, however most of it was considerable artificial, thus over consumption suffused the perceived economic growth. This over consumption by American consumers was financed by borrowed money through the use of artificially available credit. Accurate purchasing power was considerable less than supposed wealth, and consequently asset values highly shot up, and currently there are going down faster than they went up.
Now, at the moment the credit market has crumpled going down with industries that depend on credit such as housing, real estate and automobile. Daianu (2008) explains that, the purchasing power of American consumers has gone down, and Americans are bound to loss wealth faster, particularly through their money that they invested in mutual funds or in pensions and also in homes and houses. To try and correct this aspect the federal bank is reducing the interest rates on loans, however this time around, inflation adds another problem.
The re-computation of inflation is presently apparent as the dollar weakens, and lastly valuations will ultimately come to represent the correct inflation rate most possible nearly 8% at the moment. The current problem is that the government is attempting to inspire consumption among consumers a\once again through providing more liquidity to banks through buying out the bank’s bad mortgage associated assets, particularly derivatives. However, Harrison (2005) asserts that, consumption does not spur economic growth when it comes to long term, but capital invested does.
Capital drives technology, increases liquidity and adds production, something that American has lacked since slowing down on industries. The United States in the past has been able to enjoy sustained strong inflow of foreign investment as a result of its equity markets coupled by its strong currency. However, none of these are providing incentives to foreigners to invest any more. Daianu (2008) warns that, the government’s measure to buy out defaulted credit assets in order to bailout large banks is a worse measure for long term economic growth.
This is because such a measure weakens the American dollar even more. The American dollar at the moment is basically supported by bad mortgage loans, and the thing that is keeping up the dollar is the credit crises that other countries in the world are facing. The United States national debt is seen as the last bubble that will collapse. In deed, the debt is still inflating and possibly it will continue with this trend until the time when a weakened global economy will force other countries to avoid lending to America and instead request to be paid the outstanding debt from America.
Accordingly Harrison, (2005) predicts that this will be the moment when the emerging new economies like Russia, china, Singapore and Australia will be extending their influence and reducing the power of the dollar as the world’s pervasive currency. According Harrison, (2005 argues that this moment will bring the real financial crisis to America, and according to him the America will basically be compelled into bankruptcy. It will not have any surplus to repay the debts and sadly it will not have a method of funding an illiquid banking system.