There's no denying that the United States is in an economic slump. No matter what you label it - downturn, slowdown, or recession - the U.S. is seeing its dollar drop in value and its job market lagging. Gas is at an all-time high and housing foreclosures are abundant across the country. How did we get to this point? And what's to blame for all of it? Don't be quick to blame just one thing. Try four: the war in Iraq, the housing market, credit card debt and the job market.
It turns out that several key developments in the past few years are causing our downward spiral. The first (and most talked about) is the war in Iraq. In 2002, the White House estimated the cost of the war in Iraq to be between $100 and $200 billion. Today, White House economic advisors suggest that American taxpayers have already spent over $600 billion on the war, three times the amount originally thought. While estimating a war's price tag fluctuates greatly, it's clear that the U.S. has far exceeded its original estimates. The federal government borrowing against itself to feed the war machine has caused huge debts to arise in the deficit and private sector. Both contribute a great deal to the overall GDP.
For over a decade the housing market has seen record sales, and huge equity growth. Economic strength in the country followed the booming housing trend. Large banks and lenders made this possible by dishing money out at such great rates that some were calling it "free money". Sub-prime mortgages and low finance loans made it possible for even the most cash-strapped family to buy a house with almost no money down. Now those sub-prime loans and low APRs are rising, and cash-strapped families are having trouble keeping up with the monthly payments. Eventually, foreclosures are imminent and suddenly, banks and lenders are out billions of loaned dollars. The banks have no choice but to foreclose on the homeowner and put the home up for sale. But currently it is almost impossible for a middle class American to get a home loan from a bank or lender with a reasonable APR because of the billions already lost in the housing collapse. There is now a surplus of million-dollar homes on the market, and buyers are scarce.
Credit cards became bailouts for many Americans. Most families are dipping back into their credit cards and driving up their ongoing debt. With credit card companies generally unregulated, finance charges rack up uncontrollable amounts of debt that seem to never end. The only solution most Americans can think of is to transfer their outstanding balance to another credit card with a lower APR. Suddenly families owe thousands in finance charges and have no leftover money to pay their mortgages or spend as consumers.
With the collapse of the housing market and a jump in credit card debt, the job market suffers. In December 2007, unemployment reached 5% in the U.S., with less than 20,000 new jobs created. Large credit card debt and foreclosures have caused families to tighten up on the economy and for the first time in many years, retailers reported an 8% decrease in consumer spending. With families losing homes, loans and jobs, the cost to support an American worker skyrockets. When compared to other countries where the worker can do the U.S. job for much less money, the decision (from a business standpoint) is clear. The job market continues to decline in direct relation to the housing and credit card problem.
Certainly the federal government is considering its options. A recent financial stimulus package was enacted to give Americans a tax rebate of up to $1,200. But how this stimulus package will help or hinder is not yet known. As of right now, it is yet another $160 billion added to the deficit. In the past, stimulus packages have given the economy a booster shot, but the housing market and job rate looked a lot better then. Whether the current administration grossly overestimated its economic, diplomatic or financial strength, the new administration certainly has its work cut out for them next year.
