The Main Reasons Why US Faces Recession
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Recession is a normal economic cycle that happens from time to time. In my article, Understand Recession in Simple Language, I said that the main reason that caused recession is the fear of people. Once something happens on the market and makes people worry about their financial future, they will stop spending money and hence activate the economic chain effects until recession happens.
What has actually happened that make people worry?
This is the issue that we are going to discuss below…
Reasons that caused the great American Slow Down
Reason #1: The Housing Burst
The housing burst seems to be appearing everywhere. According to this news, home price in 10 major metropolitan areas fell a record 8.4 percent in the year through November last year. This definitely will make people who are counting on their housing equity to survive or retire worry and stop spending money. The home is still the biggest asset for a lot of Americans. Once something happen to their home, they will become worried and panic until they start to cut spending. This is the starting point to recession.
Reason #2: The subprime mortgage
Generally speaking, a subprime mortgage allows people with poor credit or cannot afford a house to have a chance to get the standard housing loan that would not available for them conventionally. The theory is quite simple. As long as home prices continued their rapid appreciation, home buyers who cannot afford the housing payment can leverage on the new equity created by a rising home price. However, housing burst that happens around nation has greatly broken this simple theory for many people. Many people are starting to suffer from the mortgage payment and foreclosures happening everywhere. As more and more people suffer from foreclosures, less and less people are willing to spend money and hence slow down the economy growth.
For more information, you can check this article which has a great explanation about the subprime mortgage and housing burst.
Reason #3: The sky rocketing gasoline price
I have a great site for you to keep track the gasoline price, Gasoline and Diesel Fuel Update. If you go to the site and look at the chart, you would see that the price is on the uptrend right now. I bet you are hearing a lot of stories about how people around you are suffering from the gasoline price and starting to worry that they can’t afford their lifestyle due to their current income. Needless to say, they will start taking care about their budget and reduce their spending due to the worries.
Reason #4: Food inflation
According to MSN Money, food price rose 4% in 2007. This is considered as high percentage compared with average 2.5% annual rise for the last 15 years. However, the Department of Agriculture says that 2008 could be worse, with a rise of as much as 4.5%. Along with the rising price of gasoline, Americans and people around the world have to suffer financially due to the food inflation. This has pushed the level of worry among the consumers to a higher level.
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3 Responses to “The Main Reasons Why US Faces Recession”
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This is an excellent article. I agree with your analysis of why we are experiencing an economic downturn. People are fearful that their economic condition might change for the worse.
Interesting article and good information! The subprime mortgage crisis definitely contributed to all this…I just wonder sometimes why some banks were affected more than others even when they had a large amount of subprime lending.
For instance, there was a time in Ohio when a newspaper article mentioned talks of suing JP Morgan Chase based on their high % of subprime lending and their foreclosure rates in Ohio (I guess that never went through) and yet Chase has bought Bear Stearns and is one of the banks claiming to not have been affected as much.
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