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February 20 2011

Hardly can I believe on top political slogans and sentences anywhere in the world. Yes motivation is an important factor but we can never motivate a person, institution or a nation to do something extraordinary when they are not capable to do ordinary. Everything gets better from a process and rational thinking. It is not always a time to do damn great. Sometimes it is better to pick small things and get them in order with zeal and enthusiasm to construct the bigger story.

The president of United States of America [Barak Hussein Obama] is indeed an inspirational personality in some regards but somewhere I think that he came in power with more motivation and zeal rather than having a concrete plan. I want to review US economy and the way he has been taking. I just want to touch some specific issues that I have selected to discuss today as U.S. economy and her problems can’t be discussed in detail in one post. Even then this post is far long than normal.

If we see “The well in problems” USA’s economy so the economic finding of USA is enough to tell what is going on. The situation demands something more than YES WE CAN. Over confidence and ignoring the weaknesses in the country and her economic psyche can deepen the crises more.

Brief Economic Outlook

The main sectors of USA’s economy contains defense, steel, food processing, motor vehicles, aerospace, telecommunications, chemicals, lumber, mining, creative industries, electronics, petroleum, , consumer goods & last but not the least the services sector. The work force in these sectors is about 155 million that include the currently unemployed people.

USA is the still the world’s largest economy having GDP of $14.46 trillion. But equally their public debt is $14 trillion as on January 2011. This 96% debt to GDP herself is enough to define the factor of economic instability. Interestingly in this regards USA is far a worst economy than Pakistan.

They even enjoy high level of GDP per capital i.e. $ 46,442. But equally they have an unemployment rate of 9% as on Jan 2011. The situation is well critical when we hear that about 15% of USA’s citizens are living below poverty line. In addition they have severe problems with their balance of payments and balance of trade.

Trade herself is a big issue. The country with export volume of $1.28 trillion is facing sizzling import figure of $1.948 trillion. The trade deficit of USA that stood around 1% of GDP in 1980 is now grown to the extent of about 5% of GDP.

Main Problems in Economy

I can state many problems like unemployment and outflows of investments but let me speak more technical here.

I can distribute USA’s economic problems in two areas but again firmly connected to financial and economical fallouts.

1-Financial Problems

2-Social Problems with financial impacts

Financial Problems

USA that carries $14 trillion as a public debt is not so distant from the debt ceiling of $14.3 trillion [the amount of debt that they can legally issued]. Even many congressmen are talking about increasing debt ceiling or cutting costs but it actually is not an easy job to do for a country have global and local political aggressions & irresponsive economy to that.

Timothy Geithner, the treasury secretary of USA has already warned Obama administration that the debt ceiling shall be hit by March 31 2011 and they need to counter this worst situation. Even the majority of US people are not agreed to the action of increasing debt ceiling but I think they have really short of ways. In addition there are some secondary problems associated with debt dilemma; mainly the outside investor’s proportion in debt and for sure the debt’s strata that China owns.

The situation is more worsen when we see things in the context of high inflation and joblessness that ends in a public unrest and low public savings.

Another big issue is pension underfunding. To enlighten my readers about the size of this issue I want to quote Brian Gongol whereby he stated in one of his publication:

“The federal Pension Benefit Guaranty Corporation is already $23 billion in the hole; bailout plans if nothing else changes could top $30 billion, or top $100 billion if, for example, several major airlines fail. The situation is looking increasingly like it will become a candidate for a Federal bailout, much like the FDIC in the 1980s during the savings and loan crisis”.

In the midst of the above big issues there is another siren that is military and defense expenditure. It is well evident that about 45% of USA’s taxes have been allocated to defense i.e. mainly cost of past wars and current military expenditure. The point is; the country that carries $14 trillion as public debt spends $1.35 trillion on defense [2010]. This is even worse when Mr. Obama proposes $1.645 as a fiscal budget deficit for 2011.

Now all this shall be affecting the entire society that is so habitual of having benefits from the government & other institutions in term of social security, healthcare & education.

Social problems with financial impacts

The U.S. economy in crises is contributing in social unrest. Increasing inflation, low savings, unemployment, low saving rates & possible reduction in social security benefits are the current symbol of social cum economic chaos.

The issue of pension underfunding that I have discussed above is even connected to common man. If government shall not be in a position to bailout pension funds then it shall have far lasting impacts on U.S. society. This shall entirely change the motivation factor of masses. Even if Government shall bailout these pension plans then indeed it shall end up in a problem on economic level.

National disasters are another side of problems. I want to quote Brian Gongol again where he stated about Overbuilding in Fault Zones, Floodplains, and Coastal Areas:

“Property damage from hurricanes alone in 2004 totaled more than $22 billion. Damage projections for a major hurricane or earthquake in New York City (and one or the other is bound to happen) could be from $20 to $45 billion in a single event, just in that city. The rush to the coasts is already on, and as the nation's median age continues to rise, a larger share of the population is likely to move to warm, sunny locations. The more those populations increase, the higher land and property prices will rise, compounding the damage likely from natural disaster?

Where Obama goes wrong?

In an economy where it is said that in last ten years foreign interests have purchased $ 8trillion of USA’s assets Mr. Obama is looking more interest in carrying punch lines.

U.S. economy is seeing a trend whereby U.S. companies are moving towards Mexico and China to build their manufacturing facilities. On the other hand U.S. president is even more interested to visit countries like India in the hope creating jobs. Yes in fact others shall benefit more than U.S.A. if they try to create jobs in this way of buying jobs. When you are required to save your manufacturing sector from the out flow of investments and production facilities you would never focus worthless economic missions.

The trend of moving manufacturing towards emerging markets in U.S. corporations is going to create a big blow on their foreign trade. In the time when Mr. Obama have to focus strengthening U.S. market places and planning new investments their carelessness is causing existing corporations going out of the country.

Obama and his financial team are working their government like a company. They don’t know that this model can only be successful for small states like Dubai. They are willing to invest all across & having returns. They have forgotten the basic principle that government facilitates and the corporations do business. The way they bailout corporations by carrying equity stakes screw them financially, it destroy the competitive structure of markets & it is anyways a taxpayer’s money that if risked shall go out of development spending.

They better need to focus on policy issues and let the market run at own. This is how actually recovery comes in. Bailouts can never payoff. These cause AIG executives to get $165 million in bonuses when they get a bailout of $173 billion. The U.S. government here is reacting like governments that we have been seeing in Pakistan. They think the money as their own rather than the tax payer’s claim.

In order to address their over aggressive and irrational objectives Obama administration carry reckless spending that enlarged budget deficit to $1.645 trillion.

He is even not interested to unfold U.S. energy resources. This caused U.S. citizen paying massive cost of energy and this is surely going to hurt industry in long run.

Mr. Obama is really unaware that government can never create or save jobs by paying for it locally or internationally. They just need to give state of the art government level planning and facilitation to corporate sector that can ensure sustainable growth in economy and job markets. The jobs that you buy for your people can only cause cash outflows and once you are in short of cash they disappear even if you create with the help of the world’s best emerging economies.

Another mistake of Mr. Obama and in general all U.S. governments is financially supporting countries like South Korea & carrying military operations across the world in the misconception of being superpower. They consider that these types of diplomatic and strategic investments shall pay them off in future but the matter of fact is that the U.S. has been sinking their costs over years even feel insecure.

They consider themselves as master planner at diplomatic and global political level but they are even not novices in this regard. They only have been playing by investing money but when it comes to have desired results they never have other than social and economic costs. Current uprising in the Middle East is the best example of their wrong estimation and analysis. This is also going to cost them in form of business and their possible increase in cost to protect interests in Middle East. They better can do good commercial businesses rather than political one. I think Mr. Obama need to focus the economy that is free of political objectives otherwise they can only lose their economy in the end.

Bottom-line is that the current government in U.S.A. is unable to understand what they have to do. They are more taking issues like random attempts. The basic problem of U.S. administration is their traditional mindset that induces them to say things like YES WE CAN. I think before saying what YOU CAN better you look that what you are today!

Any country that runs economy by emotions can’t be successful rather they have to run their emotions and political plans over the progress of economy. If it is essential to cut your ego for the sake of economy so it is the best deal, it is far better than cutting the size of your country. I think the way Mr. Obama is going on there shall be no concrete economic achievements for U.S.A in next couple or three years, rather they shall lose their key manufacturing facilities that is flowing towards emerging economies. Otherwise they have to bring a rational plan in to be what they are not today!

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Iqra Akhlaq Says:

Very well said sir. I would like you to comment on the facts of Pakistan's economy.

23 - February - 2011 05:01:37 AM

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Mr. Omer

Mr. Omer [1982 born] started  his professional career as a commercial / investment banker after achieving Gold Medal in Finance at master level from University of Karachi in 2006.

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