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US, the world's largest economy, has been reeling under recession since early 2001, engulfing the whole world. Monetary policies failed to arrest the adverse effects of the resultant economic upheaval. Excessive borrowings have been held responsible for this global economic cataclysm. During the growth phase, both the household and business sectors borrow indiscriminately, anticipating an eternal economic expansion. However, when the economy is in a downturn, borrowings mismatch earnings and future cash flows. Sectors find themselves in a vicious circle. Under present circumstances, a rebound requires dilution of the borrowings burden to restore confidence and bring back productive efficiency and consumption propensity.
The good news is that the inventory stocks of the corporate sector are fast depleting. This may, in turn, increase production, aggregate income and consumption. The economic indicators also seem to be encouraging. However, it is still the burden of excessive debt that is haunting the US and the global economy as well. Given the severity of the recession, the question is whether the end to recession is in sight or not.
The global economy is in a tenuous state, given the precarious economic condition of US, Europe, Japan and the ongoing meltdowns in Turkey and Argentina. The risks are enormous. The lamenting situation of the Japanese economy (where debt amounts to 130 percent of GDP), increasing appetite for debt in Germany (from 85 percent of GDP in 1991 to 120 percent of GDP in 2001) and a stumbling Europe with the ever-weak euro explains the strength of the US contagion effect. Unfortunately, the negative multiplier effect on the global economy has proved to be more synchronized now than at any time since the 1930s.
During the 1990s, the US economy witnessed the longest economic expansion, attracting a predominant share of global capital inflows. This acted as a significant driver of world economic expansion through international trade. However, immediately after the burst of the bubble in early 2001, all reasons to applaud the impressive growth rates in the 1990s suddenly vanished. Growth declined, most notably in US, after almost a decade of strong and uninterrupted expansion. The September 11 terrorist attacks worsened the situation further. The severity of the jolt was felt around the world. The IMF confirms this by stating that every major region is likely to suffer a deeper slowdown in 2002, than previously expected.
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