The US/Global Economy: The Double Dip?

Getting Ready

Discussing the Debt Ceiling Crisis: Senate Majority Leader Harry Reid of the Democrats (left), and House Speaker John Boehner of the Republicans (right) (image from CBS.com)

 

          On July 31, 2011, the Republican Party and the Democratic Party passed several compromises regarding the debt ceiling of the United States. In return for the extension of the debt ceiling (the limit on the amount of debt the United States is allowed), the government had to initiate spending cuts of $900 billion over 10 years. Soon after the debt ceiling compromise was enacted, global markets plunged. The Dow Jones Index dipped below its 12,000 line, while Asian indexes like KOSPI of Korea plunged below the 2,000, and later, the 1,800 line.

Why take another Dip?

        The Standard & Poor’s Building in New York

           For the global economy, intricately linked to the US economy and its problems, the fall was caused by the US government. According to CNN, Dagong Global Credit Rating Company (based in China) lowered the US’ credit rating (the rating indicates the creditworthiness of the government of the nation) to an A+. Standard & Poor, the credit rating agency based in the US, devalued the US credit rating from AAA to an AA+ (*this view has been discredited by the US government: BBC News).

So what caused the US economy itself to sink? Guan Jianzhong, head of the Chinese Dagong Global Credit Rating Company, stated that "the squabbling between the two political parties on raising the U.S. debt ceiling reflected an irreversible trend on the United States' declining ability to repay its debts." As the US government failed to reach a concrete decision, many businessmen and investors began to lose confidence in the US government to honor its debts. As public funding is slashed, unemployment is predicted to rise, as well as decrease in demand for certain services.

 

Consequences

The New York Stock Exchange

Although US citizens generally agree that the compromise hurt the reputation and the economy of the US, many disagree on the appropriate action that should have been taken by the US government. The majority of the people in New York City (excluding the Wall Street & financial areas) believed that the US government should have raised the debt ceiling, while not slashing the budget at an extreme rate, sharing the Democrat’s argument on the debt ceiling crisis (*note: the state of New York is a mostly Democratic state according to the midterm elections of 2010). “Cutting budgets would only hurt the economy, where people want jobs and money is the main incentive of job creation,” argued one of the interviewees.  “As much as I want the government to spend responsibly,” said another interviewee, “I don’t want the government to slash funds recklessly.”

Although I expected to find Republican businessmen and investors the slashing of budgets, I found instead an opinion similar to the second interviewee. “The United States,” explained one investor, “has spent too much and we must stop spending recklessly; however, we shouldn’t cut our budget recklessly.” Another interviewee near the New York Stock Exchange building said that “many of the government programs that are being slashed include funds for small businesses to large corporations, so losing this budget battle also means bad news for US business.”

The Ripple from the Dip

  “I wouldn’t want the postal service to get even worse.” (Photo of New York Post Office)
 

The implications for the plunging of stocks across the globe, while clearly evident among investors and governments across the world are less clear for the general populace for now. Although cuts on spending have been passed, it hasn’t taken immediate effect. In fact, the faction that had most greatly felt the consequences of the compromise in the public sector was the private sector. “Ironically, the disaster of the public sector was most felt in the private sector,” said a businessman. “This is less about the American people, but more about the American government: the people may experience spending cuts, but it’s ultimately the government that was responsible for those cuts and the debt crisis it is in.”

Although the public hasn’t felt the budget cut yet, it doesn’t mean that they are less worried. In fact, because the spending cuts will affect or close government programs, the public sector is more worried than the private sector. “I’m worried about my next pay check, or even my job,” said a post office worker who wished not to be named. “I can’t believe the USPS (United States Postal Service) is going to be even slower,” joked an interviewee.

Apart from slower mail delivery, other important governmental programs could mean the difference between life and death. “In some neighborhoods, there aren’t even enough fire trucks or police officers because of lack of money,” said interviewee Mary Haltease (she has agreed to give her name). “That could be a real possibility for some cities of the United States 10 years from now.” For many people like Mary, the government caused a wave that swept its people.