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Economic Monthly Report

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United States: beyond the storm

Thu, Nov 20 2008, 13:12 GMT
by La Caixa Economic Research Dept.

La Caixa

The United States is facing one of the most complicated moments in its history. The country is suffering a deep real estate recession that looks like becoming one of the worst ever experienced. Closely linked to this, a financial crisis has broken out that puts the survival of the existing financial system in doubt. On top of all this, the prospects of a recession are getting stronger and stronger.

In the face of this situation, the whole world is becoming worried. The old saying that when the United States sneezes the planet catches cold again comes to the fore. For a period, it seemed reasonable to believe that a decoupling could take place between the US economy and the world economy. The strength of the emerging countries, with China in the lead, suggested a new dynamic in which these countries could come to play the role of economic engine traditionally reserved to the American colossus. After all, the so-called BRICs (Brazil, Russia, India and China) make up 21.5% of world gross domestic product, in purchasing power parity equal to the United States. However, the upsets in financial and commodity markets over the past two months have left various emerging countries in serious straits, putting the decoupling theory in question. All of a sudden, it seems that no one is escaping from the world economic recession.

Because of this, all eyes are on the United States, on its capacity to stabilize an economy that represents a paradigm of progress under a free market. It is not only a question of knowing when we shall see a return to the prosperity now put in doubt but how this could happen. The drastic measures adopted to deal with the collapse of the monetary and credit system go counter to the tradition of liberalization introduced in the Eighties which laid the basis for the prosperity of the Nineties and the beginning of the current decade which spread around the world. The management of economic policy is now being looked at under bright lights following two consecutive speculative bubbles (high-tech and real estate) and a succession of regulatory loopholes that came to light with Enron and ended up in the subprime mortgage scandal.

Furthermore, the elections have put US citizens in the position of having to choose between two radically different proposals on tax matters and public spending. Those who have placed their confidence in Barack Obama have opted for increased redistribution of income and an increase in investment in infrastructures and research. Those who would have preferred John McCain, on the other hand, were opting for a reduction of the distortions created through taxes and a major reduction in public spending. In other questions, such as energy policy, the environment and health care, both candidates proposed a notable change from the policies followed by President Bush although, again, they espoused different approaches in carrying out reforms.

This is a critical moment but the United States has always shown a strong capacity for overcoming adversity and for hard work to achieve personal and community goals. It enjoys an enviable production base and potential, with flexible and adaptable markets, an education system and scientific base that generates a majority of the Nobel prizes awarded each year and an entrepreneurial mentality supported and admired within the society. It is to be hoped that the change in the presidency will contribute to generating a leadership capable of facing the challenges. May it be something like that of the presidency of Franklin D. Roosevelt (elected in 1932) right in the worst moments of the Great Depression, which in his 12-year mandate made him the most popular president in history.

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Published on  Thu, Nov 20 2008, 14:48 GMT