Impact of the global economy on the recovery of the U.S. economy
(source: "Recovery at risk," Time, August 6, 2001
In the year 2001, the U.S. economy was in a mild recession with a barely .7% rate of growth in the second quarter of the year. Before the world economy became global through close linkages, a strong economy such as the U.S. was able to recover from recession on its own strength. However, nowadays, the U.S. economy is very closely related to other economies of the world, and their problems directly affect the fate of the U.S. economy. The following are some of the major worries of the world economy, which may adversely affect the recovery of the U.S. economy.
First, the U.S. invested heavily in Latin American countries:$12 billion to Argentina, $24 billion to Brazil and $18 billion to Mexico. The economies of these individual countries are also closely tied to each other. Argentina, once a very thriving economy, faces a very serious economic problem, and may default on its $128 billion debts to foreign countries. This default may create a domino effect on loan defaults of other Latin American countries, and this will have a seriously adverse effect upon the balance of payment position of the U.S.
Second, the U.S. depends heavily on imported oil from OPEC (the Organization of Petroleum Exporting Countries.), which is a cartel and acts as a monopoly in setting prices. Crude oil is a mineral drawn from underground, and there does not exist a true price of oil in terms of its production cost. The price is a political price determined by OPEC. The price has fluctuated between $38 and $25 per barrel recently depending on the demand for oil and the mood of OPEC. In mid 2001, the price was around $25. Dissatisfied with the U.S. foreign policy in the Middle East, it was anticipated that OPEC may raise the price to $30. Since crude oil is an important raw material for a wide range of goods from plastic to gasoline, higher oil prices significantly reduce profits for U.S. firms and thus decrease available funds for new investment. This would seriously retard the U.S. recovery from recession.
Third, the European Union with 12 member countries adopted a single currency, as well as a European Central Bank to formulate a uniform economic policy for the EU. However, economic conditions and interests of the 12 member countries do not always coincide, and the ECB was rather slow in lowering interest rates to stimulate the economies of some of its member countries out of a fear of inciting inflation for other member countries. As a consequence, investor confidence in the EU declined, and many investors switched from EU to American stocks. To buy American stocks, investors needed U.S. dollars, and the value of the dollar increased in comparison with EU currency. This makes U.S. goods much more expensive, which would discourage U.S. exports and encourage imports to the U.S. The result would be a high trade deficit for the U.S. and contraction of U.S. manufacturing activity.
Fourth, Japan, the second strongest economy in the world, failed to revive its economy. Many investors, including Japanese, may switch their investments from Japan to America. This will likely depreciate the Japanese yen, make Japanese goods much cheaper and greatly encourage Japanese exports to the United States. However, other Asian countries, such as South Korea and China, whose economies heavily depend on their exports to America, will similarly devalue their currencies to be competitive with Japan. This will discourage U.S. manufacturing due to cheap imports. In addition, devaluations of currencies of these countries pose a real danger of inflation to them. They have to pay a much higher amount to pay for their loans from foreign countries and international financial institutions, and this creates a definite possibility of payment defaults by any one of these countries. Such default would again adversely affect the U.S. economy and its recovery from recession.