The End of America?

Throughout this crisis, I have been approached repeatedly by people from all walks of life asking the question – Is this the end of America as we know it? Are we finally at the point, where the country and its economy have begun the downward spiral that will end the hegemony of the United States since World War II?

I am 41 years old and this is at least the third bout of self confidence I have seen the US economy struggle with. Those earlier struggles in 1973-75 and 1981-82 coincided with relatively long and deep recessions. And experience in 1990/91 and 2001 were relatively lighter and less brutal. I notice that the current recession shares a great many similarities with those earlier downturns and I may go as far as to say that the current recession incorporates the worst qualities of the two deepest prior post-war recessions. The hit to consumer confidence and the nation’s psyche are understandable.

Low energy prices helped sow the seeds of the housing boom and bust of the early 1970s, which also allowed monetary and fiscal policies to be far looser than they otherwise would have been. Then problematic inflation since late 1960s drove up demand for hard assets – real estates – especially gold could not be purchased privately back then and interest on savings accounts were limited by law.

And in the eighties, it took another couple of recessions to finally cleanse the system of inflationary pressures built up in the 1970s. The 1980s recession was primarily by President Carter’s attempt to rein in inflation by imposing credit controls. The prime rate shot up to 20%. The only thing reined in, however, was growth.

And in the 1990s and early 2001, the US economy was greeted by short and shallow recessions and that many of the excesses build up during the boom times did not have enough time to completely unwind. The hangover of these periods has made a rerun in everything in life.

As we saw a generation earlier with the first oil shock, this recession will become a major transformational event as it marks the end of the era of easy and abundant credits, just as the 1973/75 which marked the end of the era of cheap and abundant energy. Monetary policy ultimately ended virtually every recession during the postwar era and it will likely to again play a prominent role in ending this downturn. There is no quick fix, however, which means that once the economy does recover, the pace of economic growth will have trouble sustaining the pace of growth seen in the 1980s and 1990s.