Is US Economy in Recession?

This is the current most hot topic found everywhere on the internet and media today. US is the largest economy in the world with GDP more than $13 trillion and the US citizens are the biggest consumers in the world. Hence US economy has a lot of effect on the world economy and is watched by everyone. Speculations are that US is in recession now for this quarter and might meet the technical definition of recession soon. However most of the Americans have already started facing the heat of the recession and according a survey about 48% Americans believe that the US economy is already in recession. First I will like to let you know how it all started as many of people don’t know the exact cause of it and hence just can’t understand when it might come to an end. I will try to be simple as possible so that everyone will understand.

When it all started?

The main cause of recession is said to be the bubble in the housing prices and non-recovery of funds from the banks. It works like this. If you apply for a loan of say $1000 from a bank for buying a house, then you are entitle to get a loan around 90% of that value at maximum from the bank. So you will get loan of around $900. But since last few years banks started giving loans as much as 100% is some cases and up to 95% in most cases. They won’t have any problems if the customer repays the loan. But is he doesn’t then as per the law in US bank can at the most seize the house bought on the loan and NOT any other property on the customers’ name. Now bank will later re-sell this to recover their money at the market price. Now since property rates initially only grew, banks never faced loss even after using this method. But suddenly there was a burst in the real estate sector and the prices started coming down and more and more people couldn’t repay their loans. Hence the banks now were not able to recover their money as the house they had issued loan for $1000 earlier is now prices $950. Hence they started facing huge losses and before anyone realized, it was too late. This is said to be the main cause of recession.

How will this affect the world?

Now since the US economy is in recession or will experience one soon, purchasing power of US citizens will decrease and hence imports from US too will decrease. US imports about 50% of its total imports from Asia itself. Hence this would have a great impact on Asian economies mostly China and India. Also the dollar is on decreasing spree rendering exporters less profit than earlier. With lesser profits and lesser exports they too are going to face huge losses. Although the local governments tries their best to keep the dollar in control so that it doesn’t have much impact on exports or imports in that country, they can’t go beyond a certain limit as then they would have problems like inflation in their country as there are already going in India due to world inflation. Their inflation rate is as high as 8% for this month.

The US economy might get back out of recession within 3-4 quarters and till that time; one will surely have to face the heat of it. There is a famous saying among the economists of the world that ‘When US sneezes, the world catches a cold’. The best now is for the importers from the US as the dollar value to much lesser than year ago. So if you wanna buy something from US, then go on a shopping spree in this golden period ;-)

By: Amol
Published: 04/13/08