Year End Special Report: Beset by Foreign and Domestic Troubles, 2012 America will Continue Its Economic Decline

In 2011 America’s economy continued to be in a depression: The unemployment rate remained high, credit levels dropped precipitously and the country’s two political parties held talks that unraveled. People from all walks of life are concerned whether or not these kinds of issues will continue into 2012.

Compared with 2011, the domestic and international environment in 2012 means that the American economy will face a grim challenge. American officials remain divided in how to handle the economic issue; namely, whether to use financial leverage to stimulate the economy. The Federal Reserve could introduce some new kinds of unconventional quantitative easing (QE3) in either the first or second quarter.

Although the issue of the short-term stability of the American economy is at the foreground of discussions, long-term growth obviously faces the threat of stagnation. At the same time, there are significant economic issues that are hard to resolve. The magazine The Economist forecasts that in 2012 the U.S.’ GDP will increase by only 1.3 percent.

Columbia University’s professor of economics, Richard Clarida, thinks that in 2012 the American economy can be predicted to realize stable growth and see inflation rates kept at a low level, and government officials will continue to use financial leverage to implement small policy changes to stimulate the economy.

He told reporters that the U.S. market is currently flooded with liquidity and the incentives that are likely to accelerate the rapid flow of large amounts of money are not favorable to healthy economic growth. He suggested that America now needs stable monetary and banking policies.

According to the Federal Reserve’s latest report, “[T]he unemployment rate remains elevated […] business fixed investment appears to be increasing less rapidly, and the housing sector remains depressed.”

As the Fed has said, unemployment remains a serious issue. In September, unemployment dropped to 9 percent, but analysts say this is because people have given up looking for work at the end of the year, not because the number of jobs has increased. The Economist suggests that U.S. unemployment rate is really at 9.6 percent — and if the number of part-time workers looking for full-time work were included, the number could be as high as 15 percent.

2012 is an election year; voters are interested in the economy and unemployment, which were critical in the election of President Obama. However, electoral politics can interfere with economic decision-making. Obama’s ambitious $447 billion package to promote employment faced a difficult vote in Congress and had to be broken down into several smaller measures to face consideration. Even so, there was little hope for the motion.

In American democracy, representatives of the two parties quarrel endlessly on critical issues. For example, when faced with defaulting on American debt, the government shut down, leading the rest of the world to question the U.S.’ ability to handle international economic issues. The international rating agency Standard & Poor’s historic downgrading of America’s credit rating was due to a lack of faith in country’s political decision-making process.

In 2012 the external challenges to the U.S. economy will come from Europe. As the Euro-zone crisis continues to develop, the region will likely fall into a recession. The U.S. banking and financial problems will face enormous pressure due to Europe; the U.S.’ securities and commodities trading market volatility may be further exacerbated.

Although the Euro-zone countries have reached an agreement to strengthen financial regulations, international rating agencies have stepped up pressure on these countries; a multinational credit rating downgrade may be imminent.

America should make a greater effort on the European debt crisis issue — after all, this problem is closely related to its own interests, though for a variety of considerations it has not fully intervened. If left unchecked, and if the Euro-zone crisis continues to worsen, the U.S. economy is bound to pay a heavy price, especially in the financial and banking sectors.

If the international situation improves, the U.S. economy may be able to restore the momentum of steady and rapid growth. Unfortunately, the harsh reality of 2012 is that the U.S. economy will probably continue to sink into depression.