The reasons of the US economic recession

The U.S. economy during the 20th century has experienced serious problems: this was the crisis of 1929 (Great Depression), with consequences that affected the world, and the crisis of 1970-s, associated with the rise on oil prices, high inflation, which ended with the devaluation of the dollar. There was also a stock market crisis in 1987, when on the Black Monday October 19, the Dow fell by about 22%, with a chain reduction indices around the world. Given the size and economic importance of the United States, the whole world is watching on the state of America’s economy in the 21st century. It was at the peak of its development in the 1990s, but the remarkable economic expansion came to an end in March 2001, giving the way to America’s recession.

In this paper it is necessary to consider the causes of the fall of the U.S. economy in the first decade of the 21st century.

The reasons of the recession in the U.S. economy

The U.S. economy is like a “black hole”, which requires more resources to refinance its debts due to the growth of foreign creditors. The savings rate in the U.S. since 2005 is negative. The U.S. accounts about 20% of the total world production, but it consumes much more – about 35%. (Bureau of Economic Analysis)

The power of the dollar for a long time “guaranteed” an increase in domestic consumption by the growth in external federal debt, which in 2006 was about 66% of GDP (about 8.7 trillion dollars)(Chart 1)

Chart 1: the US Federal Debt as Percent of GDP, 1970-2010

This led a substantial budget deficit ”“ about 239.6 billion dollars in 2006 – 1.8% of GDP, and led to a huge amount of domestic debt in U.S. households – 12.8 trillion dollars. As a result, in terms of the deficit of about 850 billion dollars in 2006, or 6.2% of GDP, the U.S. economy is inefficient. (Bureau of Economic Analysis)

The crisis in the U.S. is due to the deep structural problems in the economy, in which employment in the U.S. industrial sector falls under the pressure of imports from China and the transfer of jobs to developing countries. And the new economy of “services” can not offer equivalent jobs and increase in exports. So the most important causes of recession are: the absence of structural changes in the economy, its artificial stimulation through monetary “pumping”, the chronic budget deficit and national debt.

An equally important reason for the fall of the effectiveness of the U.S. economy are large Pentagon’s military spending (including the war in Iraq), which contribute to outflow of funds from the civilian sector. Another reason is rising oil prices, which decrease consumer spending due to increased costs for gasoline and heating costs.

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