Dancing on the Edge of a Recession

Lately I've been finding it rather odd that nearly 70% of the US economy (gross Domestic Product) is supported solely through our spending habits--mass consumerism. What if we suddenly stopped buying anything other than essentials, would the economy tailspin? Also concerning is the recent flood of industrial and textile jobs out of the country. Buoyed by trade agreements like NAFTA and now CAFTA--which will ultimately increase the number of American companies heading south of the border where they don't have to comply to strict environmental standards, pay for medical care, or even operate under the same human rights standards of the United States--America is quickly becoming a country that doesn't produce anything. We have great ideas, we can do your accounting, manage your stocks, but we rarely make our own clothes, build our own cars, computers or much of anything else. What happens if the foreign governments we rely on change their mind about exporting to us?

Another part of this possible vulnerability in the American Economic structure is the huge debt burden carried by almost all of American Society. There's an excellent article written by the AP Business Reporter out today on this very topic. It basically discusses the widespread affect something like a 2% interest rate change in either credit cards or mortgage financing would have on the American economy. Even more concerning than that, is the part of the article concerning China.

China's growing exports to the United States are a major factor in the explosion of the nation's trade deficit, which could exceed $700 billion this year. At the same time, China is one of the largest foreign investors in U.S. Treasury securities, with its holdings of $244 billion, second only to Japan.

This is also significant in terms of our international diplomacy. Recently, the White House has talked about discouraging China from selling arms to other countries. The US position on Taiwan’s independence also puts us in a delicate position in the middle of China and Taiwan. When the US economy is so surreptitiously influenced by China, our ability to influence either of these issues is severely undermined.

If China stopped buying U.S. securities, or even started dumping them, it would send the dollar into a tailspin. That, in turn, would push interest rates up in America and make imports more expensive, fueling inflation.

Add to all of this the recently passed bankruptcy bill that will make it even harder for Americans to get out of debt; are we dancing on the edge of another recession? Considering that most Americans carry an average credit card debt of $10,000, the ever-increasing medical costs leading to half of all bankruptcies, the volatile oil market taking a bite out of consumers at the pump and the lack of state and governmental aide due to the increasing financial burden from the wars in Iraq and Afghanistan, we may already be standing on the precipice.

A rapid rise in interest rates could also bring the housing and mortgage booms to a quick end, possibly tipping the U.S. economy into recession.

posted by Sarai @ 3:06 PM