Thursday, July 8, 2010

United States standing on cross- roads of Inflation, Deflation, depression or recovery? Which of one them is closer?

World seem to be caught turbulences one after other but it seem to be tougher for United states than others 2008-2009 recession, massive unemployement, threat to global currency value and now a new question appearing for the world’s biggest economy.

Where it heading to?

United States is indebted to worlds largest economies the country is running on 11 % deficit and has gross debt of 83% its GDP. As of now the country is majorly running on subsidies and rebates, Sooner the government would like to repay these debts and also reduce the subsidies so what would happen then?

After the subsidies reduction the Fed would like the demand in economy to be maintained and to foster growth it would possibly pump more money in the system and maintain money supply by keeping lower interest rates.
However what can be the impact of lower interest rate be?
  • Lower interest rates would lead to more money in system hence fear of inflation.
  • It would lead to easy purchases and hence people would buy more than they can afford (Unemployment levels are still same and hence people do not have sources to repay the debt) hence eventually another bubble and another recession.
What if the FED is cautious and the lending and rules are made strict then they were before recession?
  • The purchasing power of people will go down, the consumer price index will go down and the economy would move towards deflation.

Which one of them seems to be closer and what could be the right move towards recovery is something to ponder about.


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