Housing prices in the US have been moving up over the past two years despite prolonged economic recession. The economy is being propped by consumer borrowing; if it collapses, a more prolonged downturn will follow.
The world economy is flooded with debt. Intensive borrowing by companies, households and governments is the order of the day. In the world's largest economy, the US, households and companies took on record debts relative to their incomes in the 1990s and are still borrowing more. While the world's second largest economy, Japan is still in the doldrums, German recovery has more or less stopped. Beyond this, the risk is that the heavy build-up of debt in many rich economies in recent years combined with the near-absence of inflation could hamper a sustained recovery. Besides, corporate balance sheets look expanded in many countries round the world. However, it is in America that both households and companies look most vulnerable and hence it is there that the greatest economic risks lie ahead.
Deflation, or falling prices, may be a more serious threat in America and Europe as well as Japan. In general, falling prices encourage consumers to postpone spending in the expectations of cheaper goods tomorrow. America is now buying more and more from China, Japan and other countries that are already in deflation. The growing market share of these increasingly cheap foreign goods helps drive down prices of products made locally. Deflation has begun to feed on itself because the entire business chain has no pricing power left. Bankruptcies continue to rise at both individual and corporate levels. Economists say, the US is in a debt spiral, a debt deflation and until it runs its course it won't end. This suggests that the economy will prove as challenging to America's political leadership as any other issue in the near future. |
