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Problems Facing American Economy

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The US economy is the largest economy in the world, with one of the highest GDP per Capita. However, despite its position as the most powerful economy, it now faces many serious economic problems. Some of these are short term, but some of them reflect an underlying weakness.

National debt and Government Borrowing

Due to decades of government borrowing the US national debt is fast approaching $10,000 billion, or more than 65% of GDP. The consequence of such high levels of national debt is to increase the cost of interest payments. It also limits the potential for future tax cuts and higher government spending. High levels of government borrowing can also lead to crowding out. Where government borrowing reduces private sector spending.

Current Account deficit and External Debt

In the past 2 decades US economic growth has mostly been financed by high levels of consumer spending. This consumer spending has created an increase in imports that has not been met by a corresponding increase in exports. At its peak the US current account deficit reached 7% of GDP. This current account deficit was financed by foreigners buying US securities. It means that most of the US external debt is held by Chinese, Japanese and other investors. A current account deficit has contributed to the declining dollar and remains a constraint on economic growth

Housing Market

It is estimated US house prices have fallen by 10% in the past 12 months. Although there are many different ways to measure house price statistics, most people will agree that US house prices are falling. There is a combination of oversupply and falling demand due to uncertainty about the future of the housing market. Declining house prices can be a powerful disincentive for consumer spending. As house prices fall, consumers see their wealth decline leading to lower economic growth. It is feared that falling house prices could alone tip the economy into recession.

Low savings Ratio

The low savings ratio is linked to the current account deficit. It is a result of consumer led growth. It is also a result of increased personal borrowing levels. It is suggested that the economic growth has been based on an unsustainable footing. It means that the American consumer is susceptible to any rise in interest rates.

Rise in Commodity prices

Despite a slowdown in the US economy, we have seen a rise in cost push inflation. In particular rising prices of oil, wheat and soybeans have created problems for the US economy. It could lead to a situation of stagflation - rising prices and falling growth.

More in depth analysis of the problems facing the US economy.


About the Author

Richard Pettinger studied Politics and Economics at Lady Margaret Hall, Oxford University. He now works as an economics teacher in Oxford. He enjoys writing essays on Economic and he edits an Economics Blog focused on UK and US economies: http://www.economicshelp.org/econ.html


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Article Published/Sorted/Amended on Scopulus 2008-02-22 11:57:12 in Economic Articles

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