Is the US’s growth sustainable ?


 

The polls have ended.

 

In our second “Have Your Say !” segment, your opinion was sought on whether is the US’s growth sustainable.

61 % voted No

39 % voted Yes

In the aftermath of the 2008 finincial crisis, i believe that the markets have taken a liking to rewarding and punishing based on sentiments. The age old concept of fundamentals is now an area of ambiguity.

The S&P 500 went from 1400+ at the end of 2007 to 900+ at the end of 2008.

At the end of 2011, the S&P 500 was at 1200+.

While the index has almost recovered to it’s 2007 levels now, many other sectors of the economy beg to differ.

The US unemployment rate was at 5% at the end of 2007 and 8.5% at the end of 2011.

Many people remained unemployed and this is a contrast to the US equities.

The housing market still faces challenges and foreclosures are still happening.

 

I personally believe that real growth comes with real debt reduction too. Otherwise it will be like telling your mum that you have saved $100 but yet you again borrowed $50 from your neighbor down the street.

 

US Total Debt by Year

Chart created using http://www.onlinecharttool.com/

 

A look at the US Total Debt by Year chart above tells us that the debt is increasing.

This is a dangerous situation because we all know what is happening over at the Euro Zone. A failure of confidence towards the troubled countries and hence an extremely challenging refinancing situation.

Due to the US’s status of the world’s reserve currency and the “too big to fail” belief, it remains somewhat immune to the scrutiny of the sentimental markets for now. However it must tread carefully as any major setback of it’s economy risks opening the can of worms.

One may think that the US can simply print more money / weaken it’s currency in a bid to “pay” off it’s debt. However the implications are far wider. An excessively weaken currency will upset the economic balance and dampen demand for the US dollar. An eventual lose of it’s status as the world’s reserve / currency of choice for international trade may happen and along with it, the ease of trade for the US.

One may notice that the debt increased at a slower rate from 2010 to 2011. This is encouraging and more must be done to reverse this increasing trend.

 

In conclusion, while one wonders if this growth is sustainable, i wonder where is the real growth. The US is in a fragile balance play between the value of it’s currency, the sentiment towards it’s economy and the management of it’s debt. Time is running out and the US must fix it’s debt problems before the cat is let out of the bag.

 

Thank you readers for your time and why not head out to vote for the new Have Your Say ! poll?

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China has come a long way. From a largely rural third world economy, it is now a world economic power. Has the party reached the peak?

Have your say at the home page!

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