Is America heading for a deep depression?

Is the party over for the American economy?As the whole world awaits the outcome of various rescue packages around the globe we are starting to see signs that all may not be well in the underlying US economy even after the rescue package has been integrated. Many financial experts are suggesting that the US is on the verge of a deep depression the likes of which have not been seen since the late 1930s. If this is the case and a deep depression does engulf the US economy there are widespread ramifications for the rest of the world.

There are a number of reasons why experts believe a depression could happen which include :-

Dependence upon foreign investment

It is no secret that the US economy has been propped up over the years by investors from the likes of Japan and the Middle East which has ensured that the US dollar has stayed strong and interest rates at low levels for some time. However as we have seen over the last few months the dollar has been under serious pressure and despite short recoveries during this period the trend against all but the UK currency has been very much down.

The ongoing reduction in overseas investment into the US will take away one of the major props which has allowed the government of the day to oversee a low interest rate environment.

Cheap finance

The strength of the dollar over the last few years has seen more and more US corporations take advantage of low interest rates to raise significant amounts of money in the investment market and money markets. Many of these multibillion dollar finance arrangements are due to be rolled over and refinanced over the coming years at significantly higher levels than originally taken out. Not only will this increase the cost of finance for corporate America will seriously impact upon the profitability and ongoing viability of many of America’s largest names.

Many believe the problems which are being forecast for the future have been mounting up for some time and will have serious ramifications for the immediate and medium term future of the US economy.

Over dependence on the financial sector

It is no secret that the US has the largest financial sector in the world but the fact that this sector alone accounts for over 25% of corporate profitability in the US is of great concern. We have seen all of the powerful investment banks revert back to their original banking status for protection and while they will come back to the investment market in due course they will not have the same impact as they have had in the past.

Not only will this have a major impact on the American stock market but it will literally be a massive drag on the US economy for many years to come. We are talking about trillions of dollars of profitability disappearing overnight.

Cheap overseas labour set to disappear

For many years the US has depended upon cheap labour in countries such as Brazil and others in South America to ensure that corporate America was able to stay competitive on pricing and therefore cement its position in the worldwide economy. However, the last couple of years have seen countries such as Brazil increase their presence in the international market and reduce its dependence upon corporate America. The change in the dollar rate has further reduced the benefits of outsourcing various US manufacturing operations to these areas of the world.

It cannot be overstated how vital this cheap labour has been to fund US growth over the last few decades and now it is slowly disappearing there are major ramifications.

Consumer debt

After years of “irrational exuberance” the spend, spend, spend era has come to a sudden halt for the US consumer. Consumer debt levels have never been higher, savings have never been lower and the risk to employment in the US continues to grow. When you also throw in the collapse of the property market we have what many observers believe to be a doomsday scenario whereby consumer spending will remain low for some time which will place yet more pressure on the economy, leading to more job cuts which in turn will lead to weaker consumer spending in the future.

US property market

As we have seen over the last few months the US property market is absolutely friendless at the moment with investors prepared to wait on the sidelines as more and more distressed sales appear on the horizon. However, some major investors have shown a complete lack of interest in the US property market with some suggesting it could take more than a decade for it to show any real signs of recovery.

This has led to serious consumer financial concerns and while it began in the sub-prime mortgage market it has now spread to the more traditional “secure” areas of the mortgage industry.

Overseas competition

For some time the US has been the main economy in the world and the engine room for the worldwide economy however with emergence of such superpowers has Japan, China and more recently India, this domination by the US is slowly coming to an end. That is not to say that the US economy is dead and buried but competition has really increased substantially over the last couple of years.

Inflation

As the US dollar continued to flounder this is set to have a dramatic impact upon imports and see the cost of food and essential consumer items increase substantially. So we then have the nightmare scenario of a higher and higher cost of living, lower and lower incomes and more and more concerns about the employment market.

Conclusion

In order for the US property market to recover it is essential that the economy moves back into a forward direction. If as we suggest above there is even the remotest chance of a depression this will literally blow the US property market to pieces, removing many buyers, both national and international, and seeing prices drift lower and lower. However upbeat the politicians in the US seem there are immense fears for the future within the corridors of power.


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