Thoughts for the US

After emerging from the worst recession since the 1930s the American economy needs to find path to its accustomed economic growth. With unemployment at nearly 10% and 36000 job cuts in February in manufacturing, it has the potential to disable an economy. However as productivity is increasing, due to a decrease in inventories, the US faces problems regarding the role of China, financial markets and politics.

The role of China has been much discussed and debated as it could hold the key to the US becoming either the global precedent or having to settle for a silver medal. China has undoubtedly bought a lot of American debt whilst keeping its currency (allegedly) artificially low.

This could have one of two impacts: 1. China could become far more powerful as it is they who claim to be the saviour of the western world by buying this debt. Their reserves amount is potentially something to fear in firms across America. However the opposite effect; 2. the US could have more power than originally thought whereby if China did offload this debt the dollar would devalue leading to a beneficial trade situation. This would alleviate the trade deficit in the US, sure up their accounts and could overtake China whose economy is overheating.

The financial sector also needs to be highlighted. With the potential of the Volcker Rule being passed i.e. the separation of the retail banking side and proprietary trading could have a severe negative effect. Unless the rule is multilateral then it puts the US’s banks at an unfair disadvantage and will hamper a sector which has the potential to drive growth. With the markets starting to ease the last thing the US needs is to hinder this sector.

Finally politics is a huge potential burden to the economy as can be seen in the slow financial sector reforms bill and the everlasting health reform package which can never be finalised. While the Republicans and Democrats squabble over these bills, valuable time and action is wasted.

What the economy needs is decisive action within its trade deficit (which it has huge potential in), finalising a multilateral agreement on financial sector reforms (as to alleviate the risk to the whole economy) and to create stronger ties with China. If the US achieves this without puffing its debt-ridden chest too much then the future is bright.


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