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The BG News
BG24 Newscast
November 30, 2023

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Hold out hope on the U.S. economy

Recession “ni hao?” Not really.

It has been happening for a long time now, since the summer actually. The dollar has been leaking value. Currencies losing value is an everyday occurrence. However, when the greenback goes on a steady slide, everyone notices.

The U.S. dollar is the world currency, really. From Australia to Zimbabwe, it is highly valued. One of the world’s most precious commodities, oil, is traded in U.S. dollars.

Somalia, without a central government for more than 15 years, uses the dollar as the only acceptable currency. In Zimbabwe, with an inflation in five figures, enough dollars would probably buy over Robert Mugabe, the president. (Well, maybe not.)

What’s more, oil prices have hit an all time high. When projections hinted at $100/barrel oil, many blinked. This past week however, it was barreling toward $100, hitting $96.

The price has adjusted downwards on the news that OPEC, the oil cartel, might shore up production during its Nov. 17 meeting.

Meanwhile, the credit crunch in the U.S. hangs about like a bad cold. Investment banks and other credit institutions have been declaring or projecting massive losses. To underline the interconnectedness of the world economy, ramifications of the squeeze have been global.

The U.S. Federal government cut interest rates, again two weeks ago. Meant to infuse more cash into the market, the action is ominous.

Then, China, worried that a declining dollar means less profits for her massive exports to the U.S., decided to do some saber rattling: An official said that China would consider ditching the greenback for the euro in her U.S. credit stock.

Wall Street melted. Stock indices (composite measures of stock market wellness) plunged a bit. This has an effect of shaving wealth off investors’ investments.

The real danger, though, lies in the implication: Jittery investors may bolt markets (worst case scenarios could lead to bankruptcies). A declining index (especially in Wall Street, the world’s financial heart) triggers a domino effect that reverberates across the world.

That is exactly what happened. Asian, European and Australian markets fell in tandem. The Chinese central bank, fearful of the situation, raised (for the ninth time this year) the bank reserve ratio. This is the percent of the total value of assets that banks must keep in reserve, just in case markets go to the dogs.

Credit institutions have become more stingy. Mortgage companies are readjusting balance sheets and dealing with foreclosures. Families across the United States are having to deal with this devastation.

The government, JP Morgan, Bank of America and CitiGroup have cobbled up a fund to hedge in distressed mortgage backed securities. The fund is mainly designed to calm the turbulence in the hope that asset prices will recover soon. How soon is open to conjecture.

Enter some ominous talk of inflation and recession. Inflation is a measure of how useless your money becomes over time! It is usually expressed as a general rise in the price of goods and services. It effectively reduces your purchasing power.

Recession refers to an economy in the decline. Think the Great Depression or the 70s during the oil crisis.

Statistics show that inflation is under control, maybe. The bigger picture is the escalating oil prices, dizzy mortgages and the credit squeeze. These will definitely pummel consumers’ purchasing power.

Home owners can no longer easily use their homes as veritable ATMs. Banks are now going through credit histories with finer tooth combs.

Is the U.S., then, headed for a recession? Potentially. But maybe not. Different economists are forecasting diametrical scenarios. Some argue that the Fed’s rate cutting is an indicator of possible recession, says David Rosenberg, North American chief economist at Merrill Lynch. Others forecast a more optimistic outlook.

However, the U.S, being the world’s biggest and richest economy is tied to the world economy so tightly that a U.S recession would be a nightmare for all.

Everybody, from Asia to Australia, Africa and Europe is worried. When the dollar slips, exporting countries lose profits on their exports to the U.S. They would rather a strong U.S dollar and a stable U.S market.

Secondly, The U.S is the world’s banker of last resort. So, even as the Chinese threaten to become Europhilic, investors are not that worried. Investors all over the world have a lot of confidence in the U.S dollar. For one, the U.S political system is highly developed, ditto its finance system. Investors would still rather invest in U.S dollars.

The U.S also is the world’s largest investor of Foreign Direct Investment. This makes it a net importer of profits from investments all over the world.

Therefore, I do not think the rug is just about to be pulled from under the U.S economy. At least, not in the foreseeable future.

Meanwhile, go easy on your parents, they may be going through the squeeze. Be optimistic, but also brace for potential austerity measures.

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