Wednesday, June 11, 2008

Notes on the US Economic Scene

One of my friends who made a comment to my earlier post asked me if I could write something on the economic issues related to the US election. I don't know if I am the competent person to do so. But there are some ideas in one's mind.

The situation is certainly bad in the United States. I don't know what would have an impact on the elections and what would not--it would be best to leave that to the politicians, Barack Obama and John McCain, who are fighting the presidential election. The verdict on the American economy clearly states that growth is likely to be very sluggish.

Warren Buffett was quoted by the International Herald Tribune on May 5, 2008, stating that the US economy was already in a depression and you can read the story here. This was at a news conference that he addressed a day after 31,000 shareholders attended the annual meeting of his company Berkshire Hathaway.

On May 28, 2008, he gave a detailed interview to the German newspaper, Der Spiegel, where he said a similar thing about a recession in the United States.

I am not stating that one should simply believe what the sage of Omaha, Warren Buffett, says as gospel truth without looking at it ourselves. But I fear he may be uncannily correct in his analysis.

The Federal Reserve has been trying for months to contain the subprime crisis and it has constantly reduced interest rates from a high of 5.5%. And the Fed Chief, Ben Bernanke, has seen the US$ fall against the yen and the euro and the fall of the dollar has exacerbated the oil situation. Oil seems caught in a speculative bubble and a number of people have begun to feel the pinch of rising gasoline prices in the US. And Bernanke hinted yesterday that further rate cuts might not be effected and there is a fear that interest rates might be hiked. There is a growing risk of inflation in the US economy on top of job losses, failing mortgage payments and high gasoline prices.

And it seems that another blow was delivered by the latest job data that was released and led to the crash at Wall Street. It is quite possible, as US government officials state, that the job data is misleading. Still, one should not lose sight of the fact that a large number of people in the United States today are only employed temporarily, which means that they are unemployed for over six months in a year. The economists might not agree for a variety of reasons, the chief among them is that 2008 is an election year and another important reason is that such admissions could wreak havoc on the global financial systems.

The subprime is a big mess by itself. And if you look at the Bear Stearns deal, it was such a major shock. I still believe that any rise in oil prices or any escalation of geopolitical tensions or any substantial fall in the dollar would only worsen things from an economic perspective.









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