The quantitative easing done by the Federal Reserve to assist on the recovery of the US economy only fuels the increasing speculative bubbles in other areas like, commodities, gold, silver, other metals and other non-US related investment instruments. The US economy still seems to be taking its time to recover, creating a U-shapred recovery rather than V-shaped recovery that many hoped.
Why is this so?
Everyone knows that the US economy has been mainly a consumption based economy as consumption takes up 79% of GDP in 2009 (PWT 7.0; Alan Heston, Robert Summers and Bettina Aten, Penn World Table Version 7.0, Center for International Comparisons of Production, Income and Prices at the University of Pennsylvania, May 2011.) If the absolute level of consumption does not rise, the US economy will not recover much, no matter how much fiscal spending is done by the government. Anyway, the US government does not have many fiscal bullets left judging by the budget deficit crisis occurring.
After the Great Recession, US companies would not be ready to hire back US-based staff as they would surely review their internal procedures to find the most cheap but efficient locations in the world to service their operations. As such there could be a shift of operations from US to elsewhere in the world. This prevents US unemployment rate from dropping to the natural rate of unemployment. With US jobs on the line, and US consumers yet to recover from the housing bubble that burst, which saw many losing the value of their properties, the average US consumer just would not have the financial capability to continue consumption to boost GDP and get the recovery moving.
US-based only companies that bucked the trend of globalisation will now suffer as they will see their corporate profits dip due to the reduction in spending by US consumers while Global US companies still being affected by the drop in revenue in the US, will have other regions of the world contributing to their bottom lines. US consumers will see a further pull-back in stocks of US-based only companies, whcih in turn will again affect the purchasing power of US consumers.
What can be done to assist in the US recovery?
An extreme case will be to stop US companies from increasing overseas manpower and pull back all possible operations back to the United States. This will be increasing employment and provide the necessary jobs that people need. However, doing this might be non-profitable to US companies as they would be the ones to bear the burden of higher operational costs.
A possible solution is for the US government to provide incentives for overseas companies to setup businesses in the US, compete with US companies for the US domestic market. This might seem illogical given the fact that US consumers will not have the ability to consume. Let's think about this for a second. The reason why overseas companies will want to setup businesses in US is the belief that they can offer cheaper or more value-added products or services against US companies. US consumers will still need to consume albeit at a reduced amount than previous. Lower cost products will create more savings for US consumers which can be used elsewhere, like paying off bank loans.
There will be a need for a group, either US consumers, US corporates or US government to face further economic burden before things get better. At the present moment, US consumers are still taking the blunt of the problems, but they are the ones that can stabilise the US economy. Before consumer expectations of a recovering economy gets turn back to a recessionary expectation, which consumers will further reduce consumption, assistance need to be provided to the US consumers and they need it now.
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