Page 42 - Accelerating out of the Great Recession

THE DAMAGED ECONOMY

economy but also on its trading partners around the world. This
explains why the drop in GDP in exporting countries such as
Japan, Korea, and Germany was much more severe than in the
United States. It also explains why China—as exports came
under tremendous pressure and 67,000 factories (including more
than half the toy factories in the Pearl River Delta) were closed
during the first half of 2008—initiated a $586 billion economic
stimulus program. Therefore, notwithstanding the huge strides
made in developing economies, it is a fact that when the United
States falters, the world is still inevitably affected. Over time,
this will change. For now, though, companies all over the world
will feel the effects of the slowdown in the United States.
In 2007, the already-high debt burden of U.S. consumers
reached 100 percent of GDP. This was mainly driven by the real
estate boom that saw the average price of U.S. homes rise by 70
percent in the period since 2001. Many people bought houses
they could not afford, betting on further price increases to pay
back their loans and relying on seemingly cheap debt fueled by
historically low interest rates. Others took out home equity
loans—which allowed them to monetize the rising market value
of their homes—in order to fund consumption. The overall sav-
ings rate of U.S. private households dropped to –2.7 percent in
August 2005, the lowest level since the Great Depression. But
there is a view that the credit overhang was caused not only by
the real estate boom but also by increasing income inequality
and stagnating middle-class real earnings in the United States
since 1983. As real earnings fell, middle-class Americans were
forced to borrow in order to maintain living standards and pay
for health care and education.
The change of fortune has been sudden and precipitous—
and the effect on consumer demand has been and will continue

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