Previous

Page - 2

The question is whether the American crisis has seen its worst, or will it deepen? The US Federal Reserve Board has cut the interest rates by a steep 0.75 percent on January 22, 2009. There is an expectation that the US economy will stabilize as a
result. Will such measures succeed? It is unlikely. They still do not remove the basic weakness of the American economy.

The first weakness is in the service sector. Previously the US was leading in software production and new designs, etc. This supremacy is now being challenged by Indian companies like TCS, Infosys and Wipro. Many leading companies are transferring their research departments to India because wages are low here. Similar trends can be seen in many areas like clinical trials, translation, architectural designing, tele-marketing, and publishing and printing. This weakness can only marginally be managed from devaluation of the dollar. It is rooted more in the moribund nature of the US education system.

The second source of weakness is in the auto-loans and credit cards. Another crisis, like that in the sub-prime housing sector, is in the making. The present troubles started here. The US Federal Reserve Board encouraged people to take loans to buy houses. The consequent demand from the housing sector kept the US economy chugging for about three years. But the borrowers could not repay their housing loans because of decline in salaries and wages due to international competition. The loans went into default. Banks seized the houses, but had to sell them at much lower prices, and had to book huge losses. A similar crisis is in the making in the auto-loans sector. Car majors are extending loans to borrowers. The loans backed by security of an automobile are considered 'safe', much like the sub-prime housing was considered safe. The borrowers are likely to default on these auto-loans and also credit cards just as they did on housing loans.

The third source of weakness is high oil prices. Americans love big and fast cars. They have to import huge quantities of oil to keep them running. This is a big drain on the American economy especially in view of the rising oil prices. The American economy is more energy intensive than, say, India. They consume more oil per dollar of income generated. Consequently, high oil prices have a greater negative impact on that economy. The adverse impact on India is reduced for another reason. The oil-rich Arab countries are making grand projects like hotels on artificial islands. The manpower for these projects is supplied in large measure by India. These workers send remittances back home. Thus, part of the money spent by the world in buying Arab oil flows to India. The negative impact of high oil prices is partly cancelled by remittances for India but not for America.

Next

* Contributed by: -
Sunil Kumar Panda,
PGDBM, 1st Semester,
Fortune Institute of International Business, New Delhi.
Article posted on Fenruary 14, 2009.