Some interesting facts on the US economy

Should the economic downturn of the US economy play out then the impact on our economy will be noticeable. Countries are moving away from the Greenback to the Euro and Yen. NZ trades more and more in these other currencies as well.

I have studied some of the facts around what is happening in the US economy and set them out as follows:

• Many of the US population eat highly processed food and subsequently have health costs double that of any other nation in the world.
• The US is a large continent with 300 Million people. To put this into perspective, Australia has 30 Million people and New Zealand has 4 Million people.
• It is the largest consumption economy in the world. They produce 2% of world oil yet consume 25% of it.

I have recently returned from Philadelphia where you can see how bad the food is. I actually tried to eat some of their staple diet and it made me feel ill. Whilst there, I met a New Zealander who was setting up a new company. My daughter had offered to cook him a meal and all he wanted was a feed of vegetables. He pleaded with my daughter to just cook him vegetables. It is of no surprise; there is sugar in everything. The coke is so sweet it is awful. Bread is full of sugar too and there is so much preservative in it that you can leave it on the bench for 2 weeks and it still looks like fresh bread!

The subprime market is a big problem. People are defaulting on their mortgages. The housing loan book for the US is $62 Trillion. That's an awful lot of money. The defaults are $2 Trillion but rumours are that there could be as many as 28% of people in trouble. The loan books have been bundled up and sold to lenders outside of the USA. It is this that is causing the world wide credit worry. The banks overseas have got these defaulting loans in their loan book and they all have to post losses and put more money in. More than that, a 3% deposit is all that is needed to purchase a house in the US as all loans are 97%. But it gets worse, because you can actually borrow the 3% deposit from another lender.

Put on top of that their falling incomes. The US used to be a big manufacturing country providing work for their population. The manufacturing has now been shifted to China. Many US people have lost their jobs and now don't earn as much money. They are therefore now dependent on cheap products from China to survive.

The US deficit is around $800,000 Billion per annum. Much of that money is being loaned to the US by China, Japan and Eastern countries. So it gets even more intriguing because the US is in hock to other countries by billions, but those countries need the US to buy their cheap manufactured goods. If they were to discontinue providing money to the US then the results would be most interesting. The World Bank and Alan Greenspan expect the US economy to slip into recession in 2008. How would that impact on other countries?

A bright light for the US is the world food shortage. The US has huge agriculture capacity and as the world food shortage plays out they may be able to increase production and improve revenue flows. Currently, the US economy is distorted with tax benefits to grow corn for biofuel. The biofuel is a very inefficient use of resources and is causing a distortion in grain supply for the world and as a result pushing up prices.

And what of the war in Iraq? This is taking up a lot of US money to fight. Apparently, in the beginning, the US troops couldn't get enough fuel to their machines to keep the forward momentum going. They also have to buy 98% of their fuel from other countries and if they are fighting wars then the fuel has to be sourced from somewhere.

You can see why Emirates Airline is so successful. They have their own fuel.

So the impact on the New Zealand economy could perhaps be:

Continued demand for all food
Continued uncertainty as the economy weakens causing our dollar to strengthen
Continued grain shortage in the world
Continued nervousness as the US stocks and shares will become increasingly volatile

We are no longer dependent on the Greenback and are trading in other currencies. The US economy in recession will impact on the world. It is, however, only one of the larger economies and their problems may not impact on NZ as much as we might think.