The world is in the grip of the worst economic turmoil since the great depression of the 1930s, it all started from the collapse of the US mortgage giants and quickly spread to various financial institutions and we ended up seeing financial institutions like Freddie Mac and Fannie Mae collapsing and the US mortgage system completely in disarray. There was a massive slump in the housing market, credit lines dried up and the flow of money started decreasing ultimately resulting in slow economic growth. Businesses and individuals depending on mortgage-based assets were caught in the middle because the value of these assets dropped profusely, People were unable to make payments against the mortgages which affected the ability of the these giants to create more credit and so the financial crisis triggered, the absence of credit from financial institutions affected the ability of people to purchase and build new homes and that ultimately led to the huge drop in demand in the housing market which was like adding fuel to the fire. (Faiola, 1)
Following are some of the signs of recession that at times come into view right before the recession gets into full swing or during the recession:
Massive rise in rate of joblessness: Instead of following a steady jobless rate each period, the rate of jobless people suddenly experiences a big rise which is a major sign of recession and it can be seen in the financial world today happening all around us.
Depressing profit forecasts by companies: Various companies start forecasting figures that don’t look positive and can get extremely high on losses.
Default by Borrowers: When people start defaulting and they are unable to pay against their loans and mortgages, this is another sign that trouble has started brewing up.
Commodity, Utility prices shoot up: When the prices of day-to-day stuff like food, commodities and utilities shoot up it can be a sure sign that the inflation is adding fuel to the brewing recession.
Freeze of Vacancies in Companies: Companies stop hiring people and voluntary retirement and downsizing programs are started to reduce costs and maximize liquidity which is another sign of recession.
Purchases on Credit cards shoot up: If the purchases on credit cards rise it generally means that people do not possess the cash to full fill their requirements hence their only option is to depend on their credit cards.
Stocks and Properties lose value drastically, but no buyers: The value of stocks and property experiences a massive depreciation but even still people are not prepared to purchase them which is another major sign of recession.
Drop-in GDP: When the growth figures of a country start falling and negative forecasts start emerging it means that the country is experiencing recession.
People start utilizing savings to survive: If people start selling their belongings and withdrawing money from long-term investments to survive on a day-to-day basis it means that recession is hitting them.
Economic Impact on Exports
At the end of 2008 the American output ended up falling 3.8% but the exports had a dropped at a rate of 44% annual pace in the recent six-month data which indeed is an extremely worrying picture considering how financial recession is fast crumbling banks, financial institutions and even countries at such a rapid pace. The meltdown of the credit system has acted as a double-edged sword, it not only is crumbling the power of purchase of consumers but also is affecting the ability of firms to produce goods and ship them off to various markets which again is having a extremely negative effect on the economy.
Since the curtailing of the power of purchase of consumers the US imports have also slid at a rate of 51%, and that’s a nightmare for many because the US market is considered to be the driving force in the global economic scenario and then the huge drop simultaneously in the exports of the USA have effected the fastest growing sector and brought it to its knees by these massive declines in figures.
The US economy is being hit hard by the drop in demand for products being produced in the USA intended for other countries the exports have recently dropped by 5.7% which translates into a figure of $124.9 billion which is considered to be at the lowest level since in September 2006 the main driver behind this slump is the drop in demand and sales for technology-based products like telecommunication equipment, drilling and construction equipment, automobiles, semiconductors etc (Csmonitor, 1)
Following are some of the brief examples taken from news items of what kind of conditions are being forced the industries exporting products to foreign countries:
“Technology Workers National Semiconductor Corp., the maker of chips for the five largest mobile-phone makers, said it plans to cut more than 1,700 jobs, or about 25 percent of its workforce. “The worldwide recession has impacted National’s business as demand has fallen considerably,” Chief Executive Officer Brian Halla said in a March 11 statement. “The actions we announced today will help us remain competitive.” Boeing Co., the world’s second-largest commercial jet-maker, said it delivered 19 aircraft to buyers abroad in January, down from 27 the previous month. U.S. gross domestic product is forecast to contract again this quarter after shrinking at a 6.2 percent annual pace from October to December, the most since 1982. A collapse in U.S. exports led to a widening in the trade gap that subtracted a half percentage point from growth last quarter. The trade gap with Canada, the U.S.’s biggest trading partner, narrowed to the lowest level since May 1999, and the deficit with Mexico was the smallest since January 2002. The shortfall with the European Union was cut in half from $7 billion in December to $3.5 billion the following month. “(Homan, 1)
What should be done to control the situation?
The trade talks and restructuring of trade agreements is one front behind which we can see some major weight. The new Obama administration seems to be focused on restructuring and beginning new trade talks to gain more concessions for US suppliers so that they gain access to more markets at better terms, there have also been concerns regarding some trade agreements signed by George Bush during his tenure as they seem to be unfair in the emerging global scenarios one such example is South Korea which causes great problems for American automobile makers to gain access to their local markets.
Another factor being blamed are the availability of cheap imports from countries like China and India which are cheaper In price and of good quality as compared to products being manufactured by American producers, although a “Buy American” initiative with a 787$ Billion stimulus program to support the American producers on a local level but on a global level tougher restructuring and negotiation on conditions for US exporters to foreign markets can be an option since most countries are involved in protectionism and they create an unfair advantage for local producers as compared to foreign products being imported from abroad. (Economycrisis, 1)
The tax system which is being followed by various trading partners of the USA has a border adjustment system in which they provide a rebate on tax in exports and they impose taxes on imports but in relation to that policy in the United States we see that the tax system imposes taxes on the domestically produced goods which includes goods being manufactured to be exported to foreign countries but the overseas produced goods that are being imported into the United States do not get taxed, there is a view that the USA can boost its exports and minimize the imports by applying adjusting measures known as the “Border-adjusted tax system”. Furthermore, the permission gives in international trade agreements to implement the border-tax adjustments can result in a very big benefit for the US export sectors. (Globaleconomiccrisis, 1)
Another factor is the competition in global trade with China, The Chinese producers have held the advantage of producing at very low costs and exporting their products to all countries of the world at extremely loss prices which are considered to be the death knell for most of the producers working in exports In other countries particularly the West, any initiative towards measures to undermine Chinese influence in the export sector and promote US-based suppliers can very well take a political color but then the importance of providing support, financing and research measures to local producers in exporting products can not be ignored, the country should not make any bold moves against the Chinese domination of world markets but the by tougher negotiation in international trade agreements some concessions can be obtained by the new administration.
Works Cited
Anthony Faiola. “U.S. to Toughen Its Stance On Trade” Washington Post. 2009. Web.
Dustin Ensinger. “Ron Kirk Needs to Overhaul his Trade Agenda” Economy crisis. 2009. Web.
Global economic crisis. “U.S. Trade Deficit Grows Due To Global Economic Crisis” Global economic Crisis. 2008. Web.
Mark Trumbull. “Biggest hit as GDP falls: American exports” Csmonitor. 2009. Web.
More business. “10 Causes of Economic Recession” Morebusiness.com. 2009. Web.
Timothy Homan. “U.S. Economy: Imports, Exports Drop as Demand Weakens” Bloomberg. 2009. Web.