Friday, November 20, 2009

U. S. Economy Heading Towards Another Crash

Both Canadian and American governments have boldly declared the worst economic downturn since The Great Depression over, finished, D.O.A.

Don’t know what the economists in those countries are smoking, but the facts don’t backup that claim.

Unemployment in both countries actually rose last month over previous ones, and in the United States, there are other faltering factors all pointing to the possibility of another credit crunch and crash.

American consumer spending is still contracting, and although the price of

Barack Obama and Michelle ObamaImage via Wikipedia

homes rose slightly in the summer in the States, those prices are falling again – mainly because people aren’t buying homes – or any big ticket items. Credit card rates in the States have also dramatically increased, despite the U.S. Federal Reserve’s extension of generous interest rates to banks.

All of these symptoms were part of the problem which led to the original economic slump, and could easily be the cause of another one – just as bad or worse. If the American economy fails again so quickly, the recession (some might call it a depression) would be far worse, as many still haven’t recovered from the current economic mess.

So what is going on in one of the most powerful nation’s on the planet? Why is the economy heading back into the depths of fiscal hell?

U.S. President Barack Obama’s own economic recovery plan is partly to blame – despite its intent to revive the ailing American economy.

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Credit card rates were suddenly jacked up recently, even for many Americans who had excellent credit, and pay their bills on time. Thanks to a law passed in May by Congress, requiring banks to give 45-days notice before raising rates – to give the banks time to abide by the new regulations, Congress didn’t make the law effective until February 2010. Naturally, all the banks hiked their rates well before the new law took effect.

This meant many people who weren’t expecting their rates to increase, suddenly were hit with major credit card rate increases.

Though this new law will also go further to harm the economy, by severely restricting the available credit issued to consumers. As banks are more limited in terms of their ability to raise their rates, many who can’t pay their bills on time will have their credit cards canceled. Many more with less than stellar credit histories will be turned away.

The faltering economy has already reduced the available amount of credit issued to consumers. In the third quarter of 2006, banks sent 2.1 billion direct mail credit card offers, according to research firm Mintel, this year in the same quarter that number was only 391 million.

Clearly credit card companies and banks are monitoring current and potential customer spending habits more closely. Some credit card companies have even gone as far as to cancel customer cards just for using their credit cards at businesses which typically are used by consumers with poor credit histories – even if they themselves have excellent credit ratings.

President Obama’s economic recovery plan was supposed to build consumer confidence, which in turn would get people spending, and that would charge the economic engine, driving us out of the global economic downturn.

Instead, many of the policies are doing just the opposite, creating fear – on the part of banks and credit issuers – which reduces the amount of money consumers have available to spend. This slows the economy down, as consumer spending drops – as it has.

American money sucksImage by Stickbob via Flickr

Although the credit card freeze wasn’t the best issued legislation by the American government – they should have included some plan to ensure credit card issuers wouldn’t hike rates immediately to avoid the new law – part of the blame does go to the credit card issuers themselves.

These credit issuing companies intentionally raised their rates to avoid a new law, geared towards protecting their customers. By forcing credit card companies and banks to provide 45-days notice prior to a rate increase, it gives the card holders an opportunity to determine if they can continue to afford the credit card, and if not, to cancel it before they get into serious financial trouble.

By jumping the line by raising rates ahead of the 45-day notice period law, these credit card issuers have taken away their customer’s right to choose the best route to take for their own financial well being.

Still, all the warning signs are screaming that the American economy is heading towards another dive – whether this one will be as dire as the one we’re still in remains to be seen. But all the positive hoopla the American government is spreading is pure propaganda – we are not out of fiscal hell – not yet.

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