Economics. America: The Next Greece?

Table of Contents

Introduction
Summary of the video
Evaluation
Strong points
Weak points
Conclusion
Works Cited

Introduction

America is projected to be in the same economic situation as Greece because of its budget that is mainly financed by the deficit. Not only are they financed by debts but also they show weakness in the ability to repair the loans. America takes this likeness from the fact that it has much debt enough to erode the confidence of investors to a level they cannot lend to it anymore. As in the case of Greece, the economic stimulus has only postponed problems.

Summary of the video

With the economic recession in play, governments resolve to stimulate the economy through stimulus programs. These policies are mainly supported by borrowed funds which as in the case of Greece go beyond the capacity to service the loans. As a result of people taking a look at what the economic stimulus has done to the American Economy, policy-makers recommend borrowing and spending even more as the solution to stagnant economies. The situation in Greece is compared to people living beyond their means. As a result of lenders being unwilling to lend more to Greece, they may have to replace this by seeking the high-interest rates of German’s loans. According to Schiff (“America the next Greece?”), the cause of recession is the past economic stimulus which is are the cause of imbalances, therefore, it would not be a remedy to the present problems.

The American situation follows these descriptions because of the high withstanding debts. With policies that encourage more borrowing and more spending, the American economy is headed in the same direction. The recession was cut short by the stimulus. However, with the government putting money in different programs, it creates false economic symbols by changing the allocation of resources. In this case, jobs are reshuffled. With money coming easily into the public sector, people will no longer make rational economic decisions about investment and consumption. The result of this is that the recession is only postponed. The “housing bubble” whereby real estate prices went high in 1996-97, was a result of such government interference. When the postponed recession reoccurs, jobs are lost and unemployment levels are once again reported to be high. This is because these jobs were earned undeservedly. It should be recognized that these policies are supported by politicians who always want to be associated with an economic recovery without much concern for the long-term effects of economic stimulus programs (Schiff “America next Greece?”).

Unemployment rates though reported to be 8% could be well up to 15%. The present GDP growth rate is built mainly by deficit financing. However, it is like borrowing trillions to have growth in billions. Re-inflating the economy to repay debts could result in a real economic melt-down. What makes people think that America is better off is the concentration of the problems in Europe, and that belief that to repay its debts what America has to do is inflate its currency. This may be the reason why investors invest in dollar-based securities. However, investors will soon consider inflation, and loss of purchasing power to avoid the dollar. By postponing the crisis, it is expected that the more stimuli we have the worse will be the economic crisis (Schiff “America next Greece?”).

Evaluation

When Schiff mentions the concerns of investors, he leaves out mentioning the concerns of China as a lender. It is estimated that China has an investment of about US$ 1.1 trillion which is more than a third of its foreign exchange holdings (Freeman, “China’s stake in the U.S. Debt Crisis”). Since China’s economy relies much on exports to the U.S., inflationary pressure on the dollar would reduce demand for Chinese products. Beijing likes to track the dollar by maintaining the renminbi (RMB) at lower exchange rates. Inflation in the U.S. would require China to follow the track by inflating their own currency to have favorable export conditions. China showed concern over the loss of value on its credit if America chooses to use inflation. China may be unwilling to increase its holdings in the dollar as this would increase its vulnerability to economic shocks derived from the American economy.

Past forms of stimulus are the cause of present recession; this is because it causes people to act irrationally by consuming beyond their means. Just like in the past, real estate was used for stimuli but what follows next is the economic crisis. At the present, real estate rates are subsidized to remain low. The economic recession of 2008 is thought to have been caused by declining real estate prices that caused panic. The economic recession of 2001 was a result of the irrational investment in new computer technology that made people rush to invest in computer-related liquidities. When the boom was over, people could no longer offload their securities which they acquired at higher costs (Amadeo “Causes of Economic Recessions”). The economic crisis started with the credit bubble in the late1990s when states like China and oil companies with much-accumulated capital lent to America and Europe lowering interest rates. When banks and other institutions failed on their projections over housing investment, there was a shock. The shock became popular and common because many institutions had made similar speculative investments (Financial Crisis Inquiry Commission 419). According to Schiff, the people who are now investing in America are blinded by the stimulus. When this is removed, since we cannot borrow forever, the value of the bonds and equities will fall relentlessly with holders having no place to offload their holdings. With panic, institutions contract lending and hiring, even to each other, resulting in financial crisis then economic crisis. This is the reason America would be next Greece, for it has isolated itself when Europe is dealing with the problem.

The real estate bubble is recognized as the cause of the crisis that hit in 1796 and 1797. It happened again in the period 2006-2008 but for different reasons. In 2008, the stock market prices dropped sharply causing the economic crisis (Freedman 5). This is what Schiff is almost saying, that by America postponing the problem through bailouts and stimuli, there will reach a time when the over-valued stock will start falling Europe will have cured their economic problem and nobody would be willing to invest in American stocks. With this, there would be a sharp drop in prices. The lenders would also be unwilling to lend to an economy that doesn’t have the capability to service its debts with a definite timeline.

Strong points

The strong points include economic stimuli and bailouts are sources of recession and therefore cannot be used as a remedy. Borrowing must have a definite timeline for repaying. Cuts in spending and borrowing though bitter should be the solution.

Weak points

With America’s economy melting down, it is a relief because by people trying to bail it out, they use resources far from their optimal use. When Europe is able to treat its problem while America postpones, America will finally find itself in a worse situation with none to share problems with it. This point is weak from the fact that we are not sure that the cuts in spending used in Europe will succeed.

Conclusion

With the continual need to borrow, and the need to raise rates to lure creditors, America will not be able to repay its loans at 7% interest rates. This is because currently it holds debts at about USD 5 trillion, and with continual borrowing, it could reach non-refundable levels. Raising the debt ceiling was a sign that America cannot repay its debts unless it is allowed to continue borrowing. This is what would in turn make it the next Greece.