Site icon WestfieldVoice News

Causes and Effects of the Recession in the United States

The world was told that the economy of United States presented, in the second quarter of this year, a drop in the Gross Domestic Product (GDP) equivalent to the annualized rate of 0.9%. As in the first quarter of the year, the contraction of economic activity had registered 1.6%, the retraction for two consecutive quarters is considered bad enough performance to characterize a technical recession. The first conclusion of market agents and specialized analysts is that the red light coming from the United States could mean that a recession is brewing in developed countries, or at least a strong economic slowdown.

This technical recession in the United States is the result of factors that were already taking shape, so that, if there was any surprise as to the magnitude of the retraction, the drop in GDP is not at all surprising. The publication of the bad results of the North American GDP came alongside the rise in the rate of inflation annual interest rate increase by the Federal Reserve (the US central bank), and all these economic components are interconnected. To understand what is happening to the great American economy, it is necessary to pay attention to certain aspects that are at the base of the three evils: inflation, rising interest rates and recession.

First, the North American economy works based on a high volume of credit, both on the production side and in relation to national consumption. The country’s productive system is based on credit for investment and for working capital for companies, so the ratio of borrowed money to finance production and trade is proportionately quite high and higher than the world average. Although this aspect induces business growth, any increase in interest rates increases business costs, with the potential to reduce profits and discourage productive activity. Secondly, the same logic is strongly present in national consumption, in which people’s own citizenship is judged in part by its relationship with the credit system, causing most consumption to be done through credit cards and bank financing.

The North American economy works based on a high volume of credit. Any increase in interest rates increases business costs, with the potential to reduce profits and discourage productive activity.

To a large extent, the trust attributed to an employee or self-employed professional is affected by the credit granted to him by the financial market, stamped on the possession of a credit card, home mortgage and bank credit. The volume of purchases on credit in the United States is immense and represents a high percentage of national consumption; therefore, the rise in interest rates negatively affects the consumer market. Third, this same logic applies to the government, as revealed by the size of the public debt which, according to an announcement in February 2022, had surpassed the barrier of US$ 30 trillion, against a GDP of US$ 25 trillion (at current nominal values). . Thus, any increase in interest rates, no matter how small, causes a significant increase in public debt burdens, eventually indicating that the US government will take austerity measures and reduce public spending later on.

All these connections in the US economy, involving the interest rate and its increases, show that the level of economic activity – production and consumption – ends up being reduced almost inevitably when interest rates rise. And the situation worsens when the general framework in force at the time of the increase in the interest rate occurs together with an increase in the rate of inflation. In the United States, inflation, especially after the pandemic, was already wreaking havoc on the local economy. As is well known, the closing of companies and social isolation imposed losses on companies and workers, and disorganized the production system and supply. The inflation that hit the United States – and indeed the entire global economy – hampered economic growth, a situation that was exacerbated by the war between Russia and Ukraine and rising energy prices, fuels and foods.

Recently, the Federal Reserve raised the benchmark interest rate by 0.75 percentage point for the second time in a row, this measure aimed at fighting the highest inflation in the country in 40 years. There are always those who disagree and there was no lack of voices to criticize this measure; however, considering the gigantic public debt and that part of it is represented by bonds in the hands of international creditors, not raising the interest rate in the face of an inflation that exceeded 9% a year would mean immediate flight of investors, and this would impose on the Treasury American struggling to roll over the public debt. And, even with the recent increase in the interest rate – which rose to 2.5% per year in the face of 9% inflation – the real interest rate remains negative, discouraging the spirit of savings in view of the losses to savers who trusted the stability of the country’s economy and invested their money in government bonds.

This scenario, therefore, makes the technical recession that has now occurred neither a surprise nor a distorted event: it is the result of serious problems, which have international political consequences. An example: until some time ago, the largest holder of US public debt securities was the China, which had more than $1 trillion in bonds, but has been reducing its position, making it yet another weapon the Chinese government uses to weaken the United States. It is worth mentioning that China has also been facing serious problems, especially in the sectors of infrastructure, civil construction, real estate credit, bank defaults and signs of recession in the sector.

International analysts are predicting that China will grow at a much slower pace than previously thought, and could even flirt with economic recession. The coexistence of crisis in the United States and China has the power to aggravate the global economy, as international trade is highly dependent on these two giant economies. Here is the point capable of affecting emerging countries, reducing foreign trade and spreading economic slowdown, including in Brazil. It remains to be seen how these two large countries will perform in the coming quarters and what direction their economies will take. In the case of the US economy, it is believed that it has a greater capacity to withstand recession than to withstand high inflation, and recessions are seen as efficient in pushing inflation down. To check.

Exit mobile version