US in crisis???

“Major Economic Problems Facing the United States”

The United States is facing economic disaster on a scale few nations have ever experienced.

--They have quietly become a second-class country in many respects.--

They can no longer produce what they need to sustain theirselves.

--They import much more than they export, and they are selling off their assets and taking on massive debts to sustain a standard of living they can no longer afford.--

They are failing even to acknowledge predatory foreign trade practices.

--They encourage U.S. manufacturers to design, engineer, and produce in third world markets like Mexico and China.—

“Trade Deficit Widens to Three-Year High”

It was reported that America’s trade deficit in June rose to the highest level since October 2008, according to the U.S. Commerce Department. The deficit rose 4.4 percent during the month, to $53.1 billion as exports fell to their lowest level in more than two years. Economists had expected the trade deficit to be around $48 billion for the month.

Exports fell 2.3 percent to $170.9 billion. Imports fell 0.8 percent to $223.9 billion, largely due to the falling cost of crude oil products.

The drop in exports is a major concern for American manufacturers who were driving much of the economic growth in months past. “The real weakness was in exports and that’s consistent with slower growth in the rest of the world,” Jay Bryson, a global economist at Wells Fargo Securities, told Bloomberg News. “The contribution of exports is going to be a little shakier.” Now, however, global markets are grinding to a standstill, which could endanger any economic recovery in America.

America’s trade deficit with the European Union rose 12.2 percent to $9.8 billion. That is the largest trade imbalance America has held with the EU since 2008.

America’s most politically sensitive trade deficit, the one it holds with China, rose 6.8 percent to $26.7 billion. Since China entered the World Trade Organization in 2001, it has consistently been able to game the system through mercantilist practices and gain an unfair advantage against American competitors. That not only leads to trade deficits, but massive jobs losses and the offshoring of entire manufacturing operations.

OVERALL, America’s trade deficit on the year is 15.3 percent to $576.6 billion. LYN (email sent for the error in her code)

"The market's already been shaken out," -Harvey Neiman, a portfolio manager of the Neiman Large Cap Value Fund "The United States deserves to have this happen,because of its clumsy handling of fiscal policy.” - Peter Morici, a University of Maryland business economist.

The credit rating agency Standard & Poor’s, lowered the US AAA rating for the first time since granting it in 1917. The move came less than a week after a gridlocked Congress finally agreed to spending cuts that would reduce the debt by more than $2 trillion -- a turbulent process that contributed to convulsions in financial markets. The agreed cuts were not enough to satisfy Standard & Poor.

The drop in the rating by one notch to AA-plus was telegraphed as a possibility back in April. The three main credit agencies, which also include Moody's Investor Service and Fitch, had warned during the budget fight that if Congress did not cut spending far enough, the country faced a downgrade. Moody's said it was keeping its AAA rating on the nation's debt, but that it might still lower it. But any losses might be short-lived. The threat of a downgrade is likely already reflected in the plunge in stocks said.

One fear in the market has been that a downgrade would scare buyers away from U.S. debt. If that were to happen, the interest rate paid on U.S. bonds, notes and bills would have to rise to attract buyers. And that could lead to higher borrowing rates for consumers, since the rates on mortgages and other loans are pegged to the yield on Treasury securities. However, even without an AAA rating from S&P, U.S. debt is seen as one of the safest investments in the world. And investors clearly weren't scared away this week. While stocks were plunging, investors were buying Treasuries and driving up their prices.

A study by JPMorgan Chase found that there has been a slight rise in rates when countries lost an AAA rating. The government fought the downgrade. Administration sources familiar with the discussions said the S&P analysis was fundamentally flawed. S&P said that in addition to the downgrade, it is issuing a negative outlook, meaning that there was a chance it will lower the rating further within the next two years. It said such a downgrade, to AA, would occur if the agency sees smaller reductions in spending than Congress and the administration have agreed to make, higher interest rates or new fiscal pressures during this period. CHA

The U.S. economy is currently experiencing its worst crisis since the Great Depression. One of the underlying causes of the current crisis can be traced to the decline of the rate of profit.

The most important cause of the subpar performance of the U.S. economy in recent decades is a very significant decline in the rate of profit for the economy as a whole. This significant decline in the rate of profit appears to have been part of a general worldwide trend during this period, affecting all capitalist nations. According to Marxist theory, this very significant decline in the rate of profit was the main cause of the “twin evils” of higher unemployment and higher inflation and also of lower real wages, experienced in recent decades. As in past periods of depression, the decline in the rate of profit reduced business investment, which in turn resulted in slower growth and higher rates of unemployment. An important factor in the postwar period was that many governments in the 1970s attempted to reduce unemployment by adopting expansionary fiscal and monetary policies (more government spending, lower taxes, and lower interest rates). However, these policies generally resulted in higher rates of inflation, as capitalist firms responded to the government stimulation of demand by rapidly raising prices in order to restore the rate of profit, rather than by increasing output and employment.

Financial capitalists revolted against these higher rates of inflation, and generally forced governments to adopt restrictive policies, especially tight monetary policy. The result was less inflation and a return to higher unemployment. These facts demonstrate that government policies have affected the particular combination of unemployment and inflation at particular times, but nevertheless the fundamental cause of both of these “twin evils” has been the decline in the rate of profit. AMA

The Current Crisis

The housing bubble started to burst in 2006, and the decline accelerated in 2007 and 2008. Housing prices stopped increasing in 2006, started to decrease in 2007, and have fallen about 25 percent from the peak so far. The decline in prices meant that homeowners could no longer refinance when their mortgage rates were reset, which caused delinquencies and defaults of mortgages to increase sharply. The American dream of owning your own home is turning into an American nightmare for millions of families.  A total of about 6 million mortgages either have already been foreclosed, are in foreclosure, or are close to foreclosure. Six million mortgages are about 12 percent of all the mortgages in the United States. The situation could get a lot worse in the months ahead, due to the worsening recession and lost jobs and income, unless the government adopts stronger policies to reduce foreclosures. Defaults and foreclosures on mortgages mean losses for lenders. Estimates of losses on mortgages keep increasing and there will also be losses on other types of loans, due to the weakness of the economy. Therefore, total losses for the financial sector as a whole could be as high as $2 trillion. The losses for the banking sector could be as high as $1 trillion and losses of this magnitude would wipe out two-thirds of the total capital in U.S. banks. This would obviously be a severe blow, not just to the banks, but also to the U.S. economy as a whole.

The blow to the rest of the economy would happen because the rest of the economy is dependent on banks for loans. Bank losses result in a reduction in bank capital, which in turn requires a reduction in bank lending (a credit crunch), in order to maintain acceptable loan to capital ratios. According to this rule of thumb, even the low estimate of bank losses of $1 trillion would result in a reduction of bank lending of $10 trillion! This would be a severe blow to the economy and would cause a severe recession. In addition to the credit crunch, consumer spending will be further depressed in the months ahead due to the following factors: decreasing household wealth; the end of mortgage equity withdrawals and declining jobs and incomes. All in all, it is shaping up to be a very severe recession.

Bank losses may be offset to some extent by “recapitalization,” i.e., by new capital being invested in banks from other sources. However, it is becoming more difficult for banks to raise new capital from foreign investors, because their prior investments have already suffered significant losses. PEY

August 2011- Credit Rating agency Standard & Poor’s downgraded the US Credit rating from AAA to AA+ which took place because of the negative outlook on the long term rating. First, let’s define what credit rating is. Credit Rating assess the credit worthiness of a business enterprise such as a corporation or a government who is an issuer of a particular debt. Credit rating agencies like S&P use this to measure the ability of a particular entity to pay its short and long term maturing obligations. A weak credit rating denotes that the company has a high tendency of non-payments of its maturing debts.

        The demote of the US credit rating indicates the lack of trust of other firms in the government of US to pay its maturing obligation. Since this can lead to an increase in interest rate of Treasury debts, US government may tend to borrow more money and increase its taxes. The rates for credit cards, car loans, student and other debt may also increase. In addition, the downgraded of credit rating of US will result to a higher mortgage rate.

        Since it can affect the economy of United States, the government must stabilize its loans and debts by controlling its expenditures and meeting all its obligations on time. JAM