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13 July 2011

US economy from the 21st eye

Since the 9/11 incident, US recovered and moved forward. Although it hit the world trade centre it did not make a huge impact on their economy. Ironically, Eight year later houses could do more damage than the air planes did. US’s financial crisis went on to be an economic crisis and later a world economic crisis. The central bank and all the commercial banks do have a responsibility.  The central bank should analyse and forecast the upcoming issues on time, while the commercial banks should simply make sure that they keep the balance between profit and liquidity. In the year 2008, these duties were under estimated and as a result the American economy saw a down slope.
It is relevant to have a review of the roots of US’s economic down slope in 2008. Few years before the incident, the demand for houses in the country increased. It increased up to a level where housing business became an extremely profitable profession. As a result, the financial institutes including the commercial banks identified that lending money to these business sectors. Initially, banks realized a great number of profits through this sort of lending, tempting banks and business people to continue on the same practice in order to maximise the profits. “They thought they had spread all their risks effectively and yet when it really went wrong, it all went wrong.” (Anup Shah, 2010). Since no one knew the limitations, this went on until the house builders ran out of customers. This made them bankrupted and it spread to the banks as a virus where banks were unable to collect the money lent. Since the financial institutes ran out of liquidity, community lost faith on those banks. As a result those financial institutes suffered until they faced bankruptcy. As a result, the branches and deposits of banks such as main street and meridian were taken over by more reliable institutes such as central bank and other financial institutes with bigger capitalizations.
However, financial institutes hold back bone of an economy. since, the commercial banks were in such a fragile situation, the entire business cycle faced a threat and, before it was detected, a majority of the firms were forced to shut down by this economic disaster. The problems did not stop from there, it deviated to the community. People lost jobs to an extent where the so called richest country in the world was threatened to suffer with poverty. The lifestyles needed to be changed. The increasing prices of oil didn’t do any better for US. In fact the US firms suffered from two sides. People were having a lesser purchasing power and the raw materials were expensive. as a result of that, the cost of production was rising while the demand was decreasing.
All these reasons reflects the economic indicators. The real GDP shows a massive downturn in 2008 compared to other years. So is the unemployment rate. In fact unemployment has been a growing issue in USA as the graphs show increasing figures since 2008. The major reasons for unemployment and decreased GDP apart from the economic issue could be the fact that the US production firms prefer out sourcing methods in order to reduce the production costs. When firms out source a production plant, the country looses the job opportunities as well as the production that could have been done in the country. "More than 1.3 million additional Western jobs will vanish by 2014 due to "the accelerated movement of work to India and other offshore locations,"(rttsweb, 2010)
On the other hand, it is understandable that the US economy is threatened by Newly industrialized countries (NICS), which are in roads to be leading nations in the next few decades. Countries like India, china, and Mexico produces similar products at a lower cost courtesy of inexpensive labour. “This concern with the NICs is not surprising given the rapid growth of US imports, particularly manufactured imports, from these countries.”(Been Y A and Robert M J, 1985). This was just a concern in 1985, but by early 2000s it developed in to a major issue that increases every year. The best example to prove it is the higher demand for those products imported from china and india etc Compared to local products. These imported products can be bought at lower price than the local products causing further problems to the US manufacturers.
All in all, it is understandable that USA is going through a lot of issues, especially since the economic down fall. It is extremely important for US to find solutions to those issues such as increasing unemployment. Is US continues to suffer from economic issues, will the countries that depend upon US be able to overcome the global economic issue?

Anup Shah. 2010. Global Financial Crisis. [ONLINE] Available at: [Accessed 20 June 11].
Bee Yan Aw and Mark J. Roberts. 1985. The role of imports from the newly industrializing countries in US production. [ONLINE] Available at: [Accessed 20 June 11]. 2010. Statistics Related to Offshore Outsourcing. [ONLINE] Available at: [Accessed 20 June 11].