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Is a US Recession Inevitable?

Feb 5, 2008
As the sub-prime mortgage scandal continues to play out badly for many US companies, more and more questions have been raised as to whether the impact of a slowdown in one area will translate into a nationwide, or even global, recession. Growth prospects within the US are limited for this year by the unprecedented scale of bad securities that have become investments for many companies around the world, exposing them to grave losses and destroying investor confidence. According to polls, more and more Americans are becoming wise to the potential crises and have shored up spending, in turn triggering further softening of retail markets.

One cause of this problem with American consumer spending, the practically guaranteed market for many goods even in tough financial times, is that the borrowing people must first default on their mortgages before the securities (that their loans have been repackages and distributed) can truly become worthless. The speculation (or realization) that they will be unable to pay off their loans has led to the economic slowdown of the past several months, even though mortgage defaults have barely hiccuped in the same period.

Nevertheless, the certainty of two million or more foreclosures over the next year cannot translate into hefty consumer spending, because so many consumers will be unable to make ends meet and many more will be on the verge. While a plan has been introduced by the Bush administration to freeze mortgage loans for an unspecified number of borrowers, no reference to the specific criteria used to decide who is eligible has yet been made. Thus the underlying cause of this shifty-eyed economic malaise is in no way addressed.

Now the President has stated that the economy at large runs a great risk of recession without his impending stimulus package. Unfortunately, no one who can't pay for their house will be able to pay any taxes or credit card bills (which famously outpaced the median income this year), or for other things that cost money. A tax cut may be able to stem the defaults for a little while if implemented quickly, but if the Federal Reserve (the other institution that can help steer the economy) is any example, lip service and hawkish reticence is likely all the average American can expect. As job creation slowed to terrifyingly low numbers in November, (a paltry 18,000 new occupations) the US government finally issued a statement that growth cannot be expected to surpass 2% this year. Before it even started.

So, is recession inevitable? Well, if the definition of a recession includes "no longer being able to spend more money than one makes," or collectively changing expectations about wealth and the common good, then the answer is yes. If we continue on a path of breakneck consumerism, we will trade our economic security. No one is going to complain that Americans will always spend. After all, as a market of last resort, the US consumer has, time and time again, been able to keep the growing world economy robust and secure. But if these attitudes don't change, a recession will be the least of America's worries.
About the Author
Escapeso is a realty company that helps buyers locate Austin homes . Buyers can start looking for homes online using their Austin MLS search. Escapeso also provides a blog focusing on Austin real estate.
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