BEC 202
International Economics
Westminster International College, BA (Hons) Business Studies
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BEC 202
International Economics
Table of Contents
1.0 Introduction .................................................................................................................... 3
40 years old .. Exchange crisis which government made by force .......................... 3 After 40 years .. The burden of debt that burdened the empire ............................. 4
2.0 Analysis................................................................................................................................ 5
2.1 US Domestic economic problems ................................................................................ 5 2.1.1 Budget Deficit and National Debt ........................................................................ 6 2.1.2 Credit Crunch .............................................................................................................. 7 2.1.3 U.S. Trade Deficit shrink ......................................................................................... 8 2.2 US International economic challenges ....................................................................... 9 2.2.1 Budget deficit & Balance of Trade ....................................................................... 9 2.2.2 Restoring Financial Stability ................................................................................. 9 2.2.3 Reimagining Global Trade ................................................................................. 10
3.0 Conclusion & Recommendations .............................................................. 10 4.0 Bibliography ................................................................................................................. 12
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BEC 202
International Economics
1.0 Introduction
The year 2010 was a turning point for the world economy coincides with man-made disaster because of the fatal mistake in the system of the U.S. dollar with the natural disaster caused by the increased number of older people in Europe and the United States. Then the economic crisis will not be inevitable only, but in the hope that a strong recovery of the U.S. economy, driven by the power of habit in consumer spending, will be broken on the rock of the growing U.S. debt. This will also, no doubt, a radical change for both emerging economies that have a large card of the industrial production, but are dependent on exports to the United States and Europe.
40 years old .. Exchange crisis which government made by force
Since the United States dismantled the dollar link with gold in 1971 (SCHOON, DARRYL, 2010), the confidence of the bankers in Central banks reached to levels which were not reached before. As once boasted Federal Reserve Chairman Alan Greenspan, the bankers believed that they mastered the skills of how to convert paper currency into gold. In doing so were able to defy gravity and making currency out of nothing and end the economic cycle like how it should have been completed, and secured eternal protection against unemployment and able to secure prosperity. If the money supply is - under the cover of the gold that was used before 1971 - "rule by law", then absolutely what bankers in central bank do is "strong governance rights" (Aljazeera, 2010). As the documentary [I.O.U.S.A] showed in the past few year on the debt crisis of the United States, the officials of the Central Bank and its branches in the United States are have stronger power from the power vested to the President of the US Itself, and they become the absolute ruler of the U.S. national economy. Alan Greenspan admitted in a television interview when he said that there was no such thing as a free market economy when it is fully controlled by central banks to money supply and when the laws governing the monetary economy.
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BEC 202
International Economics
There are two systems which are intertwined, but at the same time, independent of the global economic system, namely the monetary system and the real economy. We wonder what happened in the economic cycle if the issue is essentially an error in the monetary system. It's the cyclical nature of self-growth of the monetary system that leads to recurrence of the economic crisis.
After 40 years .. The burden of debt that burdened the empire
The basic error in the monetary system is the "compound interest". Albert Einstein described compound interest an eighth wonders of the world. They suggest that expands the monetary system itself, as my work as a pure independent of the real economy. After the establishment of debt is not sponsored by the creditor in the debtor, it will not take pity, no mercy for whatever reason. Repayment of the debt and the principle of self-esteem represent the most important element, which is held by the society. When the interest is growing faster than the income of the debtors bankruptcy becomes inevitable. If we likened a nation with a company, when it increases the average cost of borrowing for the whole society for profit growth, the debt is growing with amazing speed in a system of compound interest. Thus, the growing debt puts a significant burden on cash flow, which usually grow slowly, leading to defaults on a large scale and thus to a financial crisis. The Federal Reserve and U.S. Treasury will not leave the American people for bankruptcy. If we consider that the United States is a company, the consequences in the final statement is growing very fast compared to the limited growth of its assets. The only way to avoid bankruptcy is to apply a very loose monetary policy by printing more money and increase the price of assets in order to stimulate spending, at the same time inflating the deficit by borrowing from the future and protect the economy by increasing government spending. But the problem is that printing money and increasing government spending does not ensure that they can re-run economic growth again. The reference to the generation after World War II, which were born between 1946 and 1964, of up to 77 million, which is a quarter of the current population of the United States. This generation is the backbone of American
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BEC 202
International Economics
society. With the growth of this generation, the United States scored an amazing period of prosperity lasted from 1960 until 1970. This generation has pushed the growth of the U.S. economy starting from toy manufacturers and cardboard industry and the end of pop music. In the period between 1970 and 1980, this generation of marriageable age was the motive behind the growth of the real estate market and the automotive industry. In the period from 1980 to 1990, this generation at the stage where spending contributed to the growth of the Internet and personal computer. And this generation created the largest market for capital and the largest real estate market and the largest manufacturer of space, also contributed strongly in the personal computer industry, the Internet and developed the games and tools used in leisure.
2.0 Analysis
2.1 US Domestic economic problems
Domestic economy is the country financial resources and its monetary management, with a sight towards its production. The National Economic Council [NEC] in US has four principal role: to manage policy-making for domestic and global economic problems, to direct economic policy recommendation for the President, to certify that policy decisions and programs are reliable with the President's economic objectives, and to examine implementation of the President's economic policy agenda. The US economy stays the leading and largely influential economy in the world. However, even with its position the US economy is facing unprecedented issues and the risk of a recession is just one of many issues affecting the US economy. Several of the economic issues faced by the US were mostly avoidable and are the result of economic mismanagement at different levels. The US is facing economic tragedy on an extent few nations have ever experienced. Most citizens are unaware of the easily visible signs of this rising crisis. While they continue in their superpower mentality, they have silently become a secondclass State in many respects. (HEFFNER, 2011).
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2.1.1 Budget Deficit and National Debt
The U.S. debt is over $15 trillion (Anon., 2011), and is the total of all outstanding debt to be paid by the Federal Government. Almost two-thirds of the public debt is owed to the people, businesses and foreign governments who bought. The rest is owed by the government to itself, moreover is detained as Government Account securities. Most of this is owed to Social Security and other trust funds. These securities are assured to pay back these funds when Baby Boomers retire over the next 20 years (US-Treasury, n.d.). Government debt is an accrual of budget deficits. Yearly, the government cut taxes and increased spending. In the short term, the economy and the people gained from deficit spending. Nevertheless, controllers of the debt want greater interest payments to pay off for what they recognize as a rising risk which they won't be repaid. This adds interest payment expense frequently forces a government to keep debt within realistic limits. However, the U.S. has been the beneficiary of two unusual factors. One is the Social Security Trust Fund got in extra revenue by payroll taxes forced on Baby Boomers than it required. Preferably, this capital should have been invested to be obtainable when the Boomers retire. The interest-free loans help out maintain Treasury bond interest rates low, which allows additional debt financing. Nonetheless, it's not actually a loan, ever since it can only be repaid by increased taxes when the Boomers retire. I will discuss the other factor in section: 2.2.1
How the U.S. Debt Affects the Economy
The Social Security funds have to be paid back when the Baby Boomers retire over the next 20 years. While this money has been spent, resources require to be identified to pay back this loan. This would mean higher taxes. Furthermore, a lot of the foreign holders of the U.S. debt are investing further in their own economies. Eventually, reduced demand for U.S. Treasuries could raise interest rates, therefore slowing the economy. In addition, expectation of this lower demand puts descending pressure on the dollar (Amadeo, 2011). That is because dollars and dollardenominated Treasury Securities could become less wanted, thus their importance
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declines. Since the dollar declines foreign controllers get paid back in currency which is worth less, which will decreases demand. The underside line is that the huge Federal debt is like driving with the emergency slow down, additionally slowing the U.S. economy. Voters have to become fuming enough at government's need of thrift that they act on their annoyance and force a political reaction. The inferior the government's debt problem raises, the bigger the risk that they will twist to the previous habit of pressuring the central bank to boost the money supply. That itself is the everlasting danger of letting politicians wherever near the persons with the power to print money. The extraordinary risk here is that high inflation rates dishearten personal savings, which they themselves a high-risk economic issues for the United States.
2.1.2 Credit Crunch
A credit crunch is defined as a reduction in supply of credit to both businesses and consumers from traditional financial institution (Investopedia, n.d.), which means that the banks and credit card corporations are no making as many loans, and so as to the loans they are making, at greatly higher interest rates, are only to individuals and businesses who have both superb credit and a lot of assets for collateral. Credit crunch happens due to existence of the big bank and corporations that is too big to fail. The US Housing Market is a common example of a preventable asset price boom and bust. Different factors endorsed house prices to grow faster than incomes, making an asset which was essentially overvalued. As house prices drop to correct the imbalance, there will be a clear slowdown in consumer spending and could lean the economy into recession.
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2.1.3 U.S. Trade Deficit shrink
United States had a trade deficit since early 90s. In September 11, the U.S. ran a trade deficit of $43.5 billion as shown in the graph bellow, which represents approximately 3.5% of the GDP (BBC, 2011). How is it likely for a country to buy extra goods and services from the world than it sells to the world? Its all in the financial account of the BOP balance of payment. United state can trade assets as well as trading goods & services, and such transactions are followed in the financial account. If we look at it from a different perspective we realise that the U.S. had to borrow from other countries around the world ever since the early 90s in order to fund this trade deficit. The money it receives for the sale of those assets has financed its trade deficit.
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International Economics
2.2 US International economic challenges
2.2.1 Budget deficit & Balance of Trade
Most people knows that US no longer produce what they need to sustain their lives, they import much more than what they export, as well as they are selling off their assets and taking up huge debts in order to sustain a living standard that they can no longer afford. It looks like a sure way for U.S to lose their status. U.S is failing yet to allow foreign trade practices which discourage U.S. industry. As a replacement for that they support U.S. manufacturers to design, engineer, and manufacture in other world markets such as China and Mexico (HEFFNER, 2011). As I talked in section 2.1.1 that the U.S. has been beneficiary of two unusual factors. One was the Social Security Trust Fund; the other factor is that the foreign enlarged their assets of treasury bonds as a safe haven, In addition keeping the interest rates low. These holdings grew up to 31% this year comparing to year 1988 which was 13% (HEFFNER, 2011).
2.2.2 Restoring Financial Stability
With U.S. financial issues at the middle of the current international vortex, the U.S. has significant duties to strengthen the international financial system, plus strengthening its own financial regulation and withdrawing its dependence on foreign credit. The next president of U.S must work with the global community to develop an ordinary agenda to managing capital flows, as well as increasing flexibility in exchange rates to assist the adjustment of persistent differences (Prasad, 2009).
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2.2.3 Reimagining Global Trade
American people feel secure about international engagement while they are well prepared to compete and have insurance against economic risks. That will require dynamically implementing the trade regulations and investing in economic competitiveness to extend the circle of winners, Whereas at the same moment developing effective and moveable insurance systems for health, unemployment, pension and earnings to provide economic protection in the countenance of job displacement.
3.0 Conclusion & Recommendations
Is the US actually passing its wand in the battle for world economic leadership to China? We can see several convincing arguments that such a change is already in progress. For in nearly every aspect Chinas movement will challenge that of the US. at the moment, China have the worlds largest population, and graduates the worlds biggest number of engineers and scientists annually, is the worlds largest receiver of FDI, it have the worlds major current account surplus, as well it has the worlds major reserves of foreign exchange, and has the largest standing army in the world, and is the worlds second largest economy in purchasing power equivalence. With all these facts I dont see that the United States can maintain its economic leadership for long. The most trouble sign to date that a international economic system that pivots on the US is a system which is waiting to crash.
What reasonable steps should US take to overturn the trend?
Firstly, US must take direct action to overturn its uncontrollable trade deficits. While its rigid and tax systems have unreasonably raised domestic business costs, the basic cause of the current crisis is three decades of extremely negative U.S. trade and globalization policies.
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Secondly, US should carefully control access to its markets. They should not frankly relax on the faith that other countries will hold themselves to their standards in parts such as the labor, environment and competition policy. These standards are affecting the cost of production. For example; if other countries fail to hold to these standards, they will get an unfair cost benefit. Therefore, access to their markets must be conditioned on a planned analysis of their own national requirements essentially. While things set, they have passed their monarch rights to their domestic markets to international bodies like the WTO World Trade Organization also is committed to devastating one way free trade agreements such as CAFTA and NAFTA. Lastly, dramatic new way is essential. Promoting economic growth and open markets overseas will not only rebalance US trade accounts and domestic industrial collapse. US industries have been so defused and dismantled that its now lacks the capacity, knowledge and investment capital to assist self-sustaining creation (HEFFNER, 2011). In my point of view, I see that the BOT is one of the main misunderstood point of US economy. For instance, a lot of people think that a trade deficit is a terrible thing. Nonetheless, whether the trade deficit is terrible thing, is related to the business cycle and economy. Countries prefer to export more in a recession, which will create jobs and demand. As well countries like to import more in a tough expansion, which will provide price competition, and that limits inflation without rising prices and provides goods further than the economy's capacity to meet supply. What I want to point at is that during recession the trade deficit will not be good thing; however it could assist during expansion. For the U.S. trade deficit, one solution could be to pose a tariff on imports lets say about 15 to 20%, to make it more profit for a company to make their products in U.S. than for them to make them in other countries like China and Spain. So for example if China wants to export goods to U.S. then a high tariff will be imposed to the imports. Therefore many U.S. factories will come to US. For sure china will be mad; however they wont pay the American bills. Heavily tariff imports into the United States and low tariff on exports. That will make more businesses settle in US therefore more jobs in US. The question is will United States restore its financial stability?, No one knows!
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BEC 202
International Economics
4.0 Bibliography
Aljazeera, A., 2010. Business and Economics. [Online] Available at: http://www.aljazeera.net/NR/exeres/DD1FA6F2-D6AC-4720-90A0-A93C266A75D4.htm [Accessed 11 December 2011]. Amadeo, K., 2011. The U.S. National Debt and How It Got So Big. [Online] Available at: http://useconomy.about.com/od/fiscalpolicy/p/US_Debt.htm [Accessed 12 December 2011]. Anon., 2011. U.S. National Debt Clock. [Online] Available at: http://www.usdebtclock.org/ [Accessed 12 December 2011]. BBC, 2011. US trade deficit narrows further to $43.5bn. [Online] Available at: http://www.bbc.co.uk/news/business-16113578 [Accessed 9 December 2011]. HEFFNER, T., 2011. Major Economic Problems Facing the United States. [Online] Available at: http://economyincrisis.org/content/major-economic-problems-facing-united-states [Accessed 12 December 2011]. Investopedia, n.d. Credit Crunch. [Online] Available at: http://www.investopedia.com/terms/c/creditcrunch.asp#axzz1gKFOD2yQ [Accessed 12 December 2011]. Latter, S., 2011. The U.S. National Debt: How Bad is the Problem? [Online] Available at: http://welkerswikinomics.com/blog/2011/02/22/the-u-s-national-debt-how-bad-is-the-problem/ [Accessed 12 December 2011]. Prasad, E., 2009. TOP10 GLOBAL ECONOMIC CHALLENGES FACING AMERICAS 44th PRESIDENT. BROOKINGS GLOBAL ECONOMY AND DEVELOPMENT, pp.4-6. SCHOON, DARRYL, 2010. The End Game and The Illusionary Gold Bubble. [Online] Available at: http://www.financialsense.com/contributors/darryl-schoon/the-end-game-and-the-illusionary-goldbubble [Accessed 11 December 2011]. US-Treasury, n.d. Debt to the Penny; Debt FAQ. [Online] Available at: http://www.treasurydirect.gov/govt/resources/faq/faq_publicdebt.htm [Accessed 12 December 2011].
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