The nominal balance of trade would almost certainly drop, probably to a deficit of $25 billion a month, as the US takes in fewer imports due to low demand for consumer goods and business inventory. Exports would also drop because an economic crisis in the US would spread quickly worldwide. This is because of the tremendous size of the US GDP in relation to that of any other country. The drop in imports would be a signal that business activity had slowed in China, the rest of Asia, and Europe. Demand for consumer and business goods would drop in most regions, forcing a nearly universal cut in jobs outside the US. The most recent nominal balance of trade showed a deficit of $44.8 billion.
The budget deficit would grow beyond the $1.5 trillion expected this year. Treasury receipts fell to $2.1 trillion in the federal fiscal year 2009 and are down to $1.7 trillion so far in the 2010 period. If history is any guide, receipts in a second recession could drop by as much as $200 billion a year as tax receipts from both business and individuals falter. Aid for the unemployed could total $50 billion to annual federal government outlays. Unemployment insurance will cost Washington $44 billion this year. As states run out of money to cover benefits, more of the burden could fall to the federal government.
8. National Debt
The rise in the deficit and a rapid increase in the American national debt has caused S&P to downgrade the country’s credit rating from AAA to AA+. The total outstanding public debt is currently $14.7 trillion – the highest it has ever been. This continues to cause concern among investors who purchase U.S. treasuries. The inability of the Treasury to rein in spending will cause borrowing to increase. This in turn could bring the government’s debt rating down even further, causing US borrowing costs to rise. Increasing costs will then raise the amount needed to run the government by increasing the amount needed to service debt.
9. Stock Market
If the performance of the equity markets in 2008 and early 2009 is any indication, the S&P 500 could drop from its current level of about 1,200 to a low of 676, which it hit in March 2009. This would take trillions of dollars off business balance sheets and from consumer retirement and brokerage accounts. Businesses would become less likely to invest in new plants, equipment, and services. Many individuals would see a large part of their retirement disappear. That would cause a huge drop in consumer spending as people attempt to preserve cash, perpetuating further drops in the stock market.
The effect on most of the financial services industry would be catastrophic, particularly at the regional and community bank level where a number of home and commercial real estate loans are held. The FDIC would be forced to borrow money from the Treasury to cover bank closings. The number of failed banks could reach the level of the Savings & Loan crisis, during which over 700 banks and mortgage lenders were shuttered. There is already fear that defaults on EU debt could sink some of the large banks in Europe. Bank of America’s stock price and widespread branch closures are a sign of stress on the U.S. bank system.
11. Interest Rates
As the great majority of economists have pointed out, the Fed has already dropped interest rates to zero. This means the central bank is out of ammunition and QE3 won’t help.
Douglas A. McIntyre