The Struggling American Economy: This is Serious, Very Serious

The Ottawa Citizen published a great editorial today about the state of the U.S. economy and what it means. Great read for all who believe in the rosy "recovery" picture portrayed by the financial media.

"This is serious. Very serious. The U.S. Federal Reserve, possibly the most powerful financial institution in the world, is on the lookout for deflation.

So what is the Fed doing? Chairman Ben Bernanke and the Federal Open Market Committee are keeping the benchmark interest rate at 0 or 0.25 per cent and have no plans to raise it. Those aren't low interest rates. They are rock bottom rates. That shows just how serious the plight of the United States' economy is.

Indicators are showing that the U.S. is having great difficulty recovering from the Debt Crisis of 2007-08 and the subsequent recession. That's trouble for the world. The largest global economy won't be buying a lot of merchandise from places like China and India if the downturn continues.
Meanwhile, Canadians -- who have smugly celebrated that we largely avoided the debt crisis -- should remember that the U.S. is our largest trading partner. When the U.S. sneezes, Canada catches a cold. In fact, the U.S. looks like it might be dealing with a bout of pneumonia. What happens to the U.S., despite the presence of our strong banks, matters to Canada. This exporting nation can't sell its products to a market that has no money to buy.

Keeping interest rates so low is a sign that the U.S. economy is in terrible shape. With rates at an absolute minimum, the Fed is having to inject money into the financial system to create economic activity. Central bankers are usually loath to do this sort of thing. But with the interest rate lever essentially exhausted as a stimulant, there's little left to do. The Fed is worried that the U.S. will fall into a deflationary cycle where companies decrease prices to stimulate demand. That means little in the way of expansion and job creation. That's the kind of situation Japan has faced for decades and that has restricted its economic growth.

Without a properly functioning economy, we lose a lot. Foreign and domestic policy is curtailed because of a lack of funds. Unemployment goes from being temporary to structural. Generations lose hope of creating something wonderful for themselves and their families. The pressure of unemployment can destroy the basic unit of society, the family. Infrastructure, the foundation of the economy, decays, slowing expansion and job creation. A poor economy means that not enough revenue is available to police the private marketplace. Accordingly, capitalism is hampered by the lack of effective government.

The U.S. government must get very serious and very strategic about repairing its struggling economy. The world cannot have prosperity without a vibrant U.S.

At present, the American political system is so divided and fragmented that the proper economic course is obscured by ideology. The U.S. government still needs to confront honestly the reasons for that country's economic meltdown and to establish precise structural remedies to prevent it from happening again.

The world is likely to face trying times until the U.S. discovers the roots of its malaise. In the 1992 presidential election campaign between George Bush and Bill Clinton, the expression, "It's the economy, stupid," pushed Clinton into the office.

Current leaders must remember that, indeed, it's always the economy."