1) From economic point of view.. US has added about 2 Trillion debt. Amounting to 13 Trillion till now
2) Gold price has zoomed to $1100 levels.. and is still looking strong as dollar weakens.
3) I have read quite a few articles on economic scenario in US and heard various economic analysts and would like to present my conclusion based on knowledge acquired.
US was a manufacturing nation back then. Enormous quantities of goods were produced. It was a golden period in late 1800 and early 1900's. Industrial revolution of Europe was being applied in US. Agriculture was thriving and internal consumption was low in US(US had trade surpluses). Soon US had surpluses in trade and purchasing power of US was ever increasing.
In order to trade for Oil, Agriculture produce and other articles, world needed a currency which would stand strong with minimum or no inflation. Which currency could be the best bet? The ideal currency should have following properties:
1) Currency should be highly liquid.
2) Currency should be non-volatile (in terms of inflation and deflation). GOLD back currency is ideal.
US had enormous wealth, its GOLD reserves enabled US to have extra dollars which can be easily loaned. Even if countries held those extra dollars to carry trade, US wouldn't be short of credit. Since USD was the currency which could satisfy all requirements, it was easily excepted as a global currency.
It was best thing for US to happen at that time.
Since US was such a strong economy, US citizens had huge buying power, it was natural to put money to better use. Every industry wanted latest, best technology. US had courage and capability to reach moon and advance in each and every aspect.
The major innovations, research, inventions and discoveries were done in US. US gave world new ways to communicate, interact and live a prosperous life.
Now, if everything was so rosy rosy.. when did problem occur.. what went wrong.... The answer to these questions are as following.
Wars:
US had developed weapons, ammunition and there was whole industry to support. You could profit from the world wars if you sold ammunition, war weapons. This was the one of the major income source for US.
After 2nd world war, organisations had enough manufacturing capacity to serve all countries' military requirements. But to carry trade, you need a buyer/demand :). US wanted to support non-communist government, so supported North Vietnam in Vietnam War. Hey wait, even the ammunition industry wanted a buyer. US govt itself became the buyer. Win-Win situation for Govt and Companies, but it was non-productive spending (US was net consumer). Followed by All other wars...
Outsourcing:
By this time US was global currency, and all countries had reserves as Forex in USD. The USD once perceived as highly liquid was no longer the same. In order to make it liquid (due to enormous demand) it was required for US to drop from GOLD backed currency. It was one of the major change in US financial history.
Now US can print the money it required, irrespective of its GOLD reserves. But, we all know that if the money supply increases, so follows the inflation. How did it not happen in US? The reason is insatiable hunger for USD from foreign countries to hold as foreign exchange. To profit from the huge buying power, corporations slowly shifted attention from production to services.
Why would a rich man in US spend his time, effort on production issues when he can easily outsource it, save money and make more profit? Getting things done for worth of pennies to a dollar is any businessman's dream come true. Outsourcing of manufacturing lead to lots of job in the developing nations. Both countries were at win win situation. But wouldn't it cause change in the exchange rate for that country ?
Yes, definitely it can affect the exchange rate. But, this would lead to lesser profit for developing nations. In order to keep the exchange rates artificially low, countries can buy US bonds. Viola !.. US can buy things for cheap as long as exchange rates are such low level.
It would be logical for a company to take advantage of cheap labour in other countries and make profit. Natural market forces to correct the exchange rate was never executed.
(US was net consumer)
US had enough time and money to solve global issues.
To be the best in everything requires investments and spending. Loaned primarily from banks.
With building communications, trade with other countries became easy and possible. Easy credit and relentless spending lead US to current state.
Can you imagine what would happen if you spend for 30 yrs with credit card and by paying minimum limit? You go into enormous debt ($13 trillion) It will take whole world to work for a year to pay that amount of debt.
Once a boon, became a bane. A global currency in enormous trouble. Who is to be blamed for this ? Well there is no time for blame game....
In order to pay this debt, its inevitable that US cannot outsource more!!..
1) US needs to produce more than it consumes.
2) Govt spending needs to be cut.
3) Outsourcing is a luxury only for rich and surplus country.
4) Wars are not solution to any problem.
5) Govt should become selfish by solving own problems and then look what is wrong in the world.
Obama seems to be working on those lines :).. Next 15 years would be damn interesting if Mayan prediction is wrong :P....
Disclaimer: I don't have any degree in economics, nor have any proof of the above. Its compilation of facts that I have heard, read, listen to postings freely available on Internet. If you find any piece of information which needs to be corrected or added then your most welcome. I am open to positive criticism. I can be wrong just like any other human being.
