Mumbai: Is the US already in the midst of a recession?
Some say it is. The recent issue of Fortune says:
Forget any talk about whether there will be a recession.
It is already here.
White
House economic adviser Glenn Hubbard, too, reportedly
conceded to the Congress that the economy is likely in
recession. In any case, most agree that the US is almost
certainly in the midst of a short-term recession.
Even
Allan Greenspan, the optimist that he is, had admitted
after the 11 September attacks that immediate damage to
the economy is negative. Speaking to the Senate Banking
Committee, he had reasoned that, post-attacks, much activity
had ground to a halt largely due to the structural damage
inflicted on financial systems.
He
said: Payment systems among financial institutions had
been disrupted directly by the attack on New Yorks financial
district and manufacturers and distributors supply chains
had been convulsed by the closure of US air transport
system. The shock was most evident in consumer markets,
where many potential purchasers stayed riveted to their
TV sets and away from shopping malls. Credit card purchases
were reportedly down 20 per cent in comparison to the
same period last year and have yet to pick up.
Prior
to the September 11 attacks, the American economy, in
the midst of a slowdown, was beginning to show signs of
an early revival. One area, which provided continued streams
of optimism, was the housing market, which ducking the
general trend, had surged ahead responding to lower borrowing
costs.
In
fact, analysts had predicted a 6-per cent rise in house
prices pre-terrorist attacks, which have now been scaled
down to moderate levels. Steve Brice, treasury economist
with StanChart Bank Singapore, has reportedly said: House
prices are the only thing holding up the consumer. If
the housing market collapses, the economy goes with it.
Quite
obviously, therefore, the main concern as of now is to
avert a long-term recession, though Greenspan feels that
the American economy is resilient and better equipped
than before to absorb shocks such as the current ones.
A
long-term recession in the US, considering the size of
its economy estimated at $8 trillion, would mean a disaster
for the world. In fact, the contagion is fast spreading
to other sectors of the global economy such as the electronics
investment cycle in countries like Singapore, Taiwan and
Malaysia.
Efforts
to revive the economy
Operation Salvage Economy is already on. Two things
have happened in the last couple of days to suggest that.
One, in a frantic move on 2 October, Allan Greenspan,
for the ninth time in the present calendar, cut down the
interest rate by 500 basis points bringing down the borrowing
rate to 2.5 per cent, lowest since 1962 when John F Kennedy
was the president. The Fed said it was prepared to bring
down interest rate further, if needed.
Two,
President George W Bush announced considering an economy
stimulus package amounting to $100 billion aimed at reviving
the economy. He reportedly said: Whats needed is a stimulus
package big enough to get the economy moving in the short
run, but small enough to not affect long-term interest
rates.
The
$100-billion package comprises roughly $50 billion in
emergency spending and $45 billion in the form of new
tax cuts. The idea is to arm consumers with more cash,
which they would go out and spend.
Will
it work?
The key question is will bringing down interest rates
or implementing economic package suffice to put back life
into a recessional economy? Look at Japan. The interest
rates there have been zero for a long time now, but the
economy refuses to respond. Low interest rates merely
mean low borrowing costs, but it does not necessarily
mean consumers, already burdened with record debt, will
borrow more no matter how cheap the money is.
Losses
in the form of fall in equity values, which has reportedly
eroded wealth by almost $1.75 trillion, will prevent consumers
from taking risks and borrowing more. The same holds good
for the industry. The excess investment that took place
prior to the year 2001 has left so much of excess capacity
that industry is unlikely to make profit even if interest
rates are zero.
Clearly,
there is what is known as a crisis of confidence in
the system. The need of the hour, therefore, is also to
tackle crisis of confidence among the trade as well as
the consumer, which is what is holding back investment
and expenditure. The consumer may have a lot of cash to
spend but will he go out and do it?
Fear
psychosis of an impending slowdown will prevent them from
parting away with cash, in the process holding away that
precious expenditure. Therefore, the need to infuse confidence
so that the American economy will revive and bounce back.
After all, the US is not Japan.
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