How serious is the state of the U.S. Economy?

Question

Intelligent, informed answers please.

How serious is the bank situation? The currency situation? Are we headed for a crisis?

Answer 1

I think it is extremely unlikely that "we" are headed for a crisis.  There are numerous reasons:

Unemployment currently stands at 5.5%, relatively low by a historical standard and I have yet to see any projections that it will rise significantly.

GDP growth was positive, albeit low, last quarter.

Inflation expectations are rising, but do not seem to be excessive.

Considering that people moaned and groaned about the trade deficit for years, the currency situation should probably be viewed as a good thing as it will theoretically lead to an increase in exports and a decrease in imports.

Failing banks are never good, but last I read only about 100-200 banks expected to fail (out of 8000+) and more importantly, failing banks are a lagging indicator not a leading indicator.  Even though failing banks will be a burden on taxpayers, it is unlikely they would cause a "panic."  

The biggest issue right now, in my opinion, is uncertainty, and it comes in three forms:  financial uncertainty, uncertainty about oil prices, and political uncertainty.  Given the amount of uncertainty right now, businesses are hesitant to invest.  As each of these uncertainties settle out (and they will, it's just a question of how long), I believe we will see the U.S. economy start to stabilize.

Financial uncertainty is probably the biggest issue right now, mainly because financial markets are the backbone of the U.S. market system.  

The oil price jump came fast and at least somewhat unexpectedly.  Since there are few substitutes in the short run, this has had a big impact on the cost structure of firms and the expenditure plans of consumers.  This impact is likely temporary though as adjustments are made - there are substitutes to using oil, it just takes a while to adjust.  I actually believe that the price of oil will fall (although not to below $100 per), not contiue to rise as (1) consumers and firms substitute away from oil-based products and (2) oil-producers increase production.  The supply of oil is relatively inelastic in the short run, i.e. it is not easy to increase production when the price increases, but production will increase with time.

In my opinion, political uncertainty is probably the most underestimated factor right now.  Where will the federal government be one year from now?  Will there be stronger regulation against speculation?  Will U.S. troops still be in Iraq?  How will taxes change over the next year?  Each of these has major economic implications.  Especially in times of recession (or at least slow growth), when the government starts coming up with "recovery plans", businesses and consumers become hesitant about the implications.

dnbotte - I agree, if all these people are so certain that the economy is "doomed", why aren't they cashing in on it over at intrade...

Answer 2

As an Economist I can tell you that it is a serious as Cancer

Answer 3

All right here are my thoughts.  The economy will recover and is not as bad as some say it is.  It is AWFUL, but not to the point of DEPRESSION, crash, or COLLAPSE. I understand why people are scared. And I am disgusted at our current situation- so many banks going out of business and people feeling a lot of strain at their wallets and bills.

However, America is strong.  It will pull through this crisis. "Depression" will not occur.  The country has been through horrible times in the past- Great Depression, Savings and Loans crisis in the 1980s,  70s economic problems, and 1992 economic slowdown and each time it rose back up.  It will rise back again.  Its normal (though not a joyful thing) for an economy to go through excellent periods and downs.  Its normal, and our economy, by my estimates will get back up in 1-3 years.  Of course, it will be difficult for people during this time.  I am not happy about things like that, but what I'm trying to say is that I have hope for the economy, and I just don't think people should panic.

However, what people should do is to do what they can and try not to worry toooooo much.  I understand about people feeling strained, but panic is not going to help the situation.  It can make it worse.  The government needs to take some steps to help out this problem.  First, it needs to abandon its idea of domestic drilling.  We won't get a good amount for oil until like 2029, 2030 somewhere along there...and we should invest in alternate energy.  Let's give incentives to persuade companies to make more alternate energy-using products.  Wind, solar, etc you think of it, they should make it ^__^  We should also give them benefits for doing so.  Also, we should give and put some investment in alternate energy research.  And help create enviornmental/green energy jobs.  That will help the economy- it will increase the number of jobs out there.

The government also needs to provide aid to those feeling the threat of foreclosure and/or those who have lost thier homes.  One key piece of Obama and McCain's plans is that they both plan on giving money to a Federal organization to help those feeling problems from foreclosure or fear from it.  I don't support a bailout/FULL total relief of those, all of the people, who are in foreclosure...what I mean is I don't think the government should buy all their mortgages because that would be VERY costly.  It already spends a lot of money just trying to help the banks- Fannie Mae, IndyMac- and that spending is going to cost tax payers hundreds of billions of dollars.  Rather, it should work with economists and others (advisors) to find a way to provide some relief for those under the threat of losing their homes/foreclosures and those who already have suffered.  But not a total rescue because that would be costly.  Use the most cost-effective, yet HELPFUL way (I want a moderate, sound solution) to help those affected by the mortgage problems.

Also the government may want to look at putting some regulation on lending.  That's what got us into the mess and there was too little regulation of it from what I researched.

The government also needs to- back to the issue of gas prices- work with other countries on creating more alternate energy.  We need worldwide efforts on this to help reduce gas prices.  It would take a while, but it would help if the world worked on reducing gas and using more alternatives..perhaps we could get researchers from diff countries, partnerships, agreements, all that..and it would help.  I hope this idea is used.

Moreover, what our leaders should do is help the middle class and poor.  Let's give them relief.  Give them a $2000 minimum tax cut...that will help stimulate the economy somewhat.  Let's provide help to the poor and middle class.  The poor, I'm certain, must be strained by this crisis.  ALso, the EITC (Earned Income Tax Credit- gives tax credit to those who are poor) should be expanded.  Its been shown to reduce poverty by a nice number.

http://en.wikipedia.org/wiki/Earned_inco...  (5 million off poverty due to this credit).

We must also work to curtail spending.  I suggest the government work with economists and the GAO (General Accounting Office) to look at where we are spending our money...and stop wasteful spending.  Examine where we are spending too much and slow it down!  We really gotta take a look at our spending.

In addition, we should provide tax cuts to small businesses.  That will help improve the economy and increase some jobs (maybe not that much but still a good number).  Maybe middle-size/those who earn moderate/okay income should get tax breaks too.  But not big businesses.  They already earn a lot.  The rich- people- should be taxed too.  Rich persons, esp those making over a million should be have their taxes raised.  Those over $250,000 in general should see tax raises...why? because they have been paying lower taxes in the last few years. that contributed to the deficit and national debt.  So taxes must be raised..and once we get enough revenue (to a surplus) we should start paying the national debt.

So yes, let's raise the taxes of the rich.  We should also work to see where our foreign aid is going.  See where its effective.  In addition, we should work with our leaders (military commanders) in Iraq and Afghanistan.  Work with them to stabalize the areas.  That will help reduce our spending in those countries.

Lastly, we should provide personal finance classes to people.  The government should work with private sector to have personal finance classes to help people make good financial decisions (part of the reason why there is a crisis now is because of people obtaining loans they could not pay for. not eveyrone is like that but some were like this).  So we need more personal fiannce classes.  Every high school should teach it.

Answer 4

We are already in a recession.  Sure, the government pretends that there is 1% growth, but if you're paying attention to the prices, you'd know that the Federal Reserve is inflating at a 10% rate (and that is a conservative estimate).

All banks are always insolvent, due to the manner in which banks operate.  The banks don't actually keep $1 in the vault for every dollar deposited.  They are, however, required to keep a fraction of that by the government (this system is called "fractional-reserve banking").

Obviously, the dollar is inflating at a rate of at least 10%.  It is clearly in bad shape and should continue to lose money against the Euro.

The political environment is also extremely bad.  We have 2 presidential candidates who are more pro-big government than any candidates in recent memory (yes, McCain and Obama both want a far larger government than any politician in at least 30 years).  Whichever way this election goes, the next president is going to support socialist "anti-speculator" legislation, bans on short selling (obviously, speculators and short sellers cannot bankrupt a company; the company can only go under if it is in fact insolvent and the bailout and Fannie and Freddie proves that they are insolvent), a War against Iran (remember when Israel threatened Iran and the market tanked?  If Iran is invaded by either the US or Israel, as appears likely, the market will crash.), and a "New New Deal" (this should scare every American, as the original New Deal turned a minor recession into a Great Depression that lasted nearly 20 years and didn't end until the so-called "Do Nothing" Congress cut the size of government by three fifths).

It is unlikely that we will see a recovery in the near future, as the government appears determined to intervene in the economy (which is what turns a recession into a depression).  It is also unlikely that we will see any tax cuts in the near future (Obama wants tax increases and McCain actually thinks that taxes are low already), nor is it likely that the government permit the necessary deflation of prices (including the price of labor) to occur.

Answer 5

war.cost 3 trillion

freddie and fannie,possible cost 12 trillion.......

defucit,,,,,,,,,,,,,,,,,,HUGE........

IS real problem....we are printing money like a third world country...............

Answer 6

I highly doubt it. if you watched the congressional hearings today, SEC chairman Cox, Fed director Bernanke, and Secretary Paulson have all denounced the rumors of a potential collapse of freddie mac and fannie mae. What happened was a group of short sellers who never borrowed any stock created false rumors that created fear across the market, causing their share prices to fall that way they could short it (look up short selling and naked short selling on wikipedia). As for Bear Sterns, well  they're another story and more of investment bank.

As for the dollar, well there's a serous problem. The fed has to decide between lending money to banks at a lower rate to save them, or at a higher rate to. The week dollar is part of a lower real income (a higher cost of living) and distorting our net imports. I personally think they should raise the rates to strengthen the currency.

We're not headed for crisis, and if so, the whole world is too. One way I like to tell is by checking the intrade stocks: right now the possibility of the US being in a recession is trading at bout $31, so chances of it are about 1 in 3. I like intrade.com because people have to pay to play. It's not like YA or bs TV "experts". Here you actually risk your money so unless you want to gamble randomly Vegas style, you better know what's going on and have more than an educated guess.

My advice to you is to improve your own personal finances and learn how to consume resources more efficiently and at lower quantities. But most importantly of all: stay informed! educate yourself and don't let CNN or FOX News tell you about business. CNBC, Bloomberg, Wall Street Journal, the economist are much better and pay attention to the economics of whoever is most likely to be elected.

Answer 7

The total debt in the banking investing system is around 750 trillion of worthless paper . The US dollar has lost 60% of value sense 2004 .  Financial armagadan is just about here .

Answer 8

It's reletively serious, and if it stays it's current course it will be much worse in no time at all.

If you really want my opinion, not to sound bias, because i assure you i try very hard not to be...

It's the Republicans fault.  They hold true to the idea of leaving the market entirely free.  In theory this is a good idea.  However, when you do that it allows people who control markets that affect everyone, like housing, banking, and oil... to charge outrageous amounts at the expense of everyone.  

Unfortunately for the Republicans this time around, the world market is getting larger at the same time as trying to implement this national tactic, which hurts us in international trade more than they expected.

Also take a look at the Iraq war.  No, we didn't attack to take Iraq's oil.  However, by preventing them from producing oil, there is less competition in the oil market (they were the #3 producer).  If there's less oil on the world market due to Iraq's absense, everyone else raises prices.  Less supply = higher demand = higher prices.  The fact that most oil producing nations are members of OPEC and undoubtedly monopolize the market makes matters worse when it comes to oil...

EDIT:  Starting wars  used to be a Republican tactic to stimulate US economy... because we'd produce all of our own war-materials, which allowed for more jobs to be created in making them.  This time though, we took out loans from China and other countries to pay the bills, which hurts our economy, especially in international standards.  Wondering why our dollar is worth less than the Euro?  It's because everyone knows we owe other countries trillions of dollars for the war.

Answer 9

Our economy is in the worst shape it has been in a very long time.  Americans have even begun to pull their money out of banks because they have lost so much else where. They are afraid they are going to lose their money they do have in the banks when the banks go tumbling under especially at the rate the stock prices have been falling.

Its starting to feel like a Great Depression is coming back upon us. The deficit is so gigantic we cannot even pay it back. We are using the money we do NOT have to fund the war we are fighting over seas when there are so many things that need to be fixed here.  People are losing jobs from big time companies such as General Motors,Sprint,Cisco,AMD and Ford who are constantly making big cut backs.  

The real estate market is falling like a rock out of a sky.  Prices of homes are sinking lower and lower with every passing day.  And as far as the currency we are printing it with the hopes it will jump start the economy when all it is doing is sinking the value of the dollar and making everything more expensive.