How the US economy could be harmed by their own efforts.

The nerve-racking fear for a global currency war determined most part of the second half of 2010. In his outlook on 2011 bravenewlook stated, that this topic is not covered extensively anymore, but is still very much there. Following up on his short outlook for 2011 on this particular topic I will describe how the $600 billion bond program could backfire on the current economic Situation in the US. Referring to this, I will discuss how critical the situation between China and the US currently is.

The extremely low interest rate and the two rounds of so called Quantitative Easing were both put in place by the FED in 2010 as measures to enhance the US economy. The ideal being, that growth in the economy will not only help easing the situation for US companies but also reduce the unemployment rate, which rose to 9.8 Percent by end of 2010.

In the article “US economic outlook 2011” the International Business Times reports a growth rate of around 3 percent for the US economy in 2010 and forecasts a growth rate of 3.5 to 4 percent in 2011. According to their forecast, this growth rate will result in a decline of the unemployment rate to about 9 percent. But it still may take 3 – 4 years for the unemployment rate to fall to acceptable levels.

How unreliable those forecasts are is shown by yesterdays report by Bloomberg: Already the Jobless Claims rose higher than expected in the first week of 2011 to 445,000 as fewer jobs as forecast were added in the US.

For an easing job market the US economy needs to accelerate further, which might lead to a long term low of the interest rate. But, if the FED does not hike up the interest rates they might risk “unleashing inflation” as stated in the article “Fed Official: $600 Billion Bond Program Could Backfire” by the Huffington Post. Charles Plosser argues, that the near zero interest rate as well as the huge Bond Program could lead to an inflation which would outweigh any benefits of those programs to the economy.

Another big problem, the US is currently facing was announced by Mr. Geithner himself (ftd, 07/01/2011): The US is slowly but steadily reaching its own debt limit of $14.3 billion, which, according to Geithner, would lead to the bankruptcy of the United States of America.

A very interesting aspect concerning this is the fact, that the biggest creditor of the US is China. In his Blog “The informed observer” Peter Cohan states, that China is currently holding US debt securities worth $ 906.8 billion which helps financing the very low interest rate in the US and its budget deficit of around $ 1 trillion. Being very dependent on China due to this fact, the US could easily be pressurized.

The different problems of the United States, are all very much connected with each other and influence their entire economic situation. Although their economy seems to recover they should start thinking about the impact such cheap money and its ensuing deficit will have on their economy in the long run.

And any solutions to their current situation should not include any accusations to China, as no other country other than the US should be made responsible for their own situation.

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4 Responses to How the US economy could be harmed by their own efforts.

  1. bravenewloock says:

    Checking Youtube for content on this issue, I found that there a real bailout-countrymusic-genre has sprung up. One of my favourite songs: “Bailout Song” by Ron Paul and others: “I wanna know where the money goes / Last I saw it was headed someplace uptown / I wanna know where the money goes / Cause what goes up doesn’t ever seem to trickle down / …” I think that stuff like this shows another, very dangerous aspect of the events since 2008, particularly clear: A truly deep-rooted disillusionment with politics and economics, which will be very hard to overcome even over the next decade!

  2. Pingback: Anticipating risks in 2011…but can we? | BraveNewFinance.

  3. rudi2020 says:

    Sure, in the long run, cheap money will do more damage than good. Reason is that companies are willing to take more risk if they can afford more money. Imagine you are a manager and about to finance a risky project. In case financing this project is the issue, you are more willing to undertake the project if you have a cheap monetary foundation.

    Actually I didnt want to make that point, however, listen to Sarah Palin and her opinion on the bailout. I’m seriously keen to know if she’d made a difference as president. One thing we know for sure, she’d look good no matter what she’d do. (am I serious? 😉 )

  4. I like this “Bailout-Song”. It is very funny.
    But to be serious, I agree with stuerzele‘s message. The low rate environment may lead to inflation.

    But one could consider the FED to be made (at least partly) responsible for this.
    If you compare…
    …their multiple policies and corresponding goals they try to achieve…
    …with the ECB’s sole goal of keeping the inflation slightly below 2%…
    …then one might ask himself whether the FED is aiming at too many things for such an institution with its influence on the US economy.

    Perhaps, it is time to rethink the FED’s responsibilities and compentencies.

    For a historic, and very astonishing, overview of the FED Funds Rate, please have a look at the bloomberg chart.

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