In an environment of ultra-low interest rates, inflation is gradually rising across various nations. For major economies seeking a painless exit strategy, any sign of volatility is enough to prompt a change in course. First, the debt crisis in several European countries sounded an alarm for the United States, followed by the still-sluggish housing market and inconsistent employment data, leading the market to worry about whether a double-dip recession in the U.S. might become reality.
As the European debt crisis intensifies, many investors have turned their attention to the U.S., which suffers from a severe imbalance in its assets and liabilities. The White House projects that the U.S. fiscal deficit will reach $1.56 trillion in 2010, accounting for more than 10% of total GDP; total government debt has expanded to $9.3 trillion, representing over 60% of GDP.
In terms of numbers, the U.S. debt burden is indeed worrying; however, it is worth noting that the U.S. differs significantly from debt-ridden European countries in its financing conditions. Regarding recent events, after Greece encountered a crisis, it still required the EU and the IMF as a final resort. Furthermore, constrained by the Treaty of Lisbon, the EU can only provide financial assistance if risks become unmanageable. In contrast, the U.S. can directly repurchase treasury bonds in the secondary market through the Federal Reserve, or even absorb newly issued treasury bonds in the primary market through term facilities established during this crisis. From this, it can be foreseen that the U.S. will not suffer the same fate as Greece due to debt issues for the foreseeable future.
Regardless of the economic system, the labor market is a critical component of economic growth. The U.S. unemployment rate has continued to climb since the outbreak of the financial crisis, peaking at a 26-year high of 10.1% last October. A total of more than 4.7 million jobs were lost, an increase of over 30% compared to the 3.6 million jobs lost in 2008. Although the unemployment rate fell back to 9.7% in the first quarter of this year and non-farm payroll growth showed improvement, 30% of the new jobs in March were short-term positions created by the decennial U.S. census. More importantly, if the chances of re-entering the labor market after long-term unemployment become increasingly low, persistently high unemployment could become a chronic ailment for the U.S. economy. This would diminish the momentum of economic recovery and could ultimately become the cause of a double-dip recession.
In summary, while the U.S. may avoid an immediate debt crisis, high unemployment and a sluggish housing market cannot be resolved in the short term. Furthermore, the effectiveness of the fiscal stimulus packages introduced after the financial crisis began to wane significantly at the end of last year. If no new positive factors are introduced in the next two years, the U.S. economy may experience a double-dip recession.
