America is a country addicted to spending; always has been, always will be. Its economy functions most effectively only when its citizens spend. Nearly 70 per cent of its gross domestic product is consumer spending. We are now seeing a massive shift in consumer spending which has put a damper on a recovery. Because of this, we're seeing America's fleeting dominance fall into a hopeless downward spiral. The government believes that it must spend its way out of the recession. It worked before, so it shall work again. But this concept of government spending, whether it be an addiction, a cure, or a habit, has created a $14.3 trillion deficit that is so large its value seems completely arbitrary. The mindset of massive consumerism and materialism built the country that dominated the 20th century; it is also this mindset that will destroy the country in the 21st century. It is a troubling evolution that has led America to its current hopeless conditions.
Masked in the financial irresponsibility was sustained long-term economic prosperity that took the nation to the top. The idea that America would topple seemed unimaginable. Its debt has been rated the safest global investment for decades and that image still stands today. Its economy recovered strongly after the Great Depression, as did everyone else I suppose, but also thrived for decades after, unlike so many. It contained the wealthiest individuals and corporations on the planet, proving once and for all that capitalism was an overall effective method of financial success. America's rise resulted in consumption and materialism by its citizens so envied by third-world nations. Complacency in the economy proved to be powerful as saving rates were some of the lowest in the world and goods were more important than saved assets. But all this changed in the late-2000's, when the biggest and safest companies in the world started showing signs that giving citizens the power to buy at their own will without accountability was not sustainable.
It started with the issuance of sub-prime mortgages, mortgages issued to higher risk individuals that did not meet the criteria for traditional mortgages. Under stricter regulations perhaps, these individuals would not have received loans in the first place, but since the practice of issuing sub-prime mortgages persisted for so many years, it seemed the norm. These individuals would hold loans that carried higher interest rates as they were considered high-risk. The housing market peaked in 2007, followed by drastic declines in home values. Refinancing became immediately difficult and it resulted in massively high amounts of mortgage delinquencies, which lowered the values of mortgage-backed securities held by the biggest financial firms.
Shortly after in 2008, global markets collapsed as confidence in the financial system eroded directly from troubled mortgage-backed securities. Names like Merrill Lynch, Lehman Brothers, and Bear Sterns, the biggest names on Wall Street, some of the oldest companies in the history of America, bankrupted. Soon thereafter, banks implemented stricter lending policies, which halted economic growth. Suddenly those who qualified for loans two years ago, would be denied access to capital funding. America's economy, which heavily relied on consumer spending, was in jeopardy. Business investment ceased, which would have eased negative growth. And governments spent billions bailing out banks trying to save the country instead of normally investing in infrastructure and programs.
Fast forward to August 2011. America is technically not in a recession, but its "positive" GDP growth doesn't inspire confidence. Millions of Americans are pinching every penny and low interest rates aren't bailing out the innocent victims of a troubled system. Banks still have bad debt on their books and nobody has money left to fund them. Bank of America and Citigroup probably won't make it to the next federal election. Business spending has ceased and companies are still laying off workers. Signs of a recovery disappeared months ago and optimism is a shadow of today's state.
Consider that over the past three years, the country's multiple plans to restore confidence in the market and economy required spending or borrowing through quantitative easing strategies and low interest rates to "spur" growth and spending. The lack of creativity and imagination from lawmakers have been ineffective and continued bailouts of banks, automobile firms, and government-sponsored enterprises pushed spending to the $14.3 trillion debt limit. Consequently, the country is in worse condition than it was three years ago and the country was on the brink of default.
It was clear that nobody would ever allow this to happen, not even the Republicans, but the stalemate drew worried eyes. Republicans prevented the debt ceiling from being raised for what seems like political motives. Although a deal eventually passed, it resulted in the first ever downgrade of the country's debt by the Standard & Poor's because of political ineptitude, along with other reasons. After all, the US debt ceiling has been raised nine times since the turn of the century, some of which occurred during Bush's presidency. In fact, the US has only twice gone more than three years without raising its debt since 1939 (See link). So why the fuss? It seemed Republicans decided it was time to cut the massive spending and show some fiscal responsibility and they would not budge on this concept. Brilliant!
But wait a minute... The debt deal that raised the ceiling to nearly $16.7 trillion passed through bipartisan cooperation is expected to be revisited in 2013, after elections (coincidence?). Even with the Republicans spending cuts, the country is still borrowing more money than it earns and saves. The deal did not raise taxes which ultimately puts the burden of debt reduction on savings programs. The country is expected to save $2.4 trillion over the next decade, yet the country is expected to spend a net of $2.4 trillion over the next 18 months. Not only that, the "savings" is expected to be withdrawn from public programs aimed to help those who need it the most, such as social security, Medicare, and education. Can someone explain how this leads to the resolution of spending addiction in American government while restoring economic sustainability?
The economy is highly dependent on one facet, consumer spending, therefore it lives and dies by the sword. Now that we are witnessing consumers drop their spending and pay off credit cards, loans, and save, a majority of the economy has been affected. It is a shame that the plethora of personalities and opinions of US government has become too large to be effective. The government's inability to resolve its economic woes leads me to believe that its lawmakers lack or will not pursue creativity. Other countries have escaped a long-term recession, and although conditions are not near pre-financial crisis levels, growth in many sectors are relatively strong. Yet, signs of a real recovery has started to dissipate everyday.
With rumours swirling that the Fed is about to act, maybe they can do something else other than spend another trillion dollars keeping interest rates low so that the few that still have money left to spend or wish to spend eventually do. Or maybe, America is too addicted to spending it will never find another way to resolve its problems.
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