The Global Economy: Survey of the United States, Japan and European Union

Consumer spending increased steadily, assisting the U.S. economy in leading the sustained recovery since 2002, even amidst corporate scandal. Yet, record levels of national debt exceeding over $2.3 trillion (~20% real GDP) has been accumulated as a result and a trade deficit in excess of 4% of real GDP requires over $1 billion a day foreign capital inflow to compensate for this widening trade deficit. U.S. foreign policy has greatly contributed to a heightening deficit as defense spending increased dramatically upon America's commitment to fight the war on terror. U.S. military activities in Iraq between January and September 2003 are expected to cost in upwards of $58 billion, according to top budget officials at the Pentagon. Rebuilding costs for America's postwar commitment to Iraq likely will cost as much as $100 billion and take three years to accomplish. The Defense Department has indicated that military actions in Afghanistan are costing Americans $1 billion each month. This raises concern that much of this burden could fall on taxpayers' shoulders and cause a drag on the economy.

The Fed has stepped in to assist in encouraging consumer spending and stimulating overall growth in the lowering of interest rates to a 45-year lows of 1.0% compared to 6.0% during the onset of 2001. The central bank intends on leaving rates low for a considerable period, as the impact on the economy takes nine to 18 months to feel the effects of Fed rate cuts. The fiscal policy, which includes federal income tax cuts, child tax credits and a repeal on the double taxation of dividends, has come out at a timely period, as consumer confidence and the labor market have been consistently lackluster. This supportive monetary and fiscal policy should result in moderate growth at around 2-1/2% in 2003, rising strongly to 4% in 2004. One concern is how this record deficit spending, which the Congressional Budget Office has put at $480 billion for 2004. This is a very major change from the $127 billion surplus of the 2001 fiscal year and the actual impact of such fiscal policy has yet to be measured out in the U.S. economy over the coming year.

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