Economics

Oligopoly is a term used to refer to a market system in which a particular market sector or industry is dominated by a small number of players, called oligopolies. Since the number of players in an oligopoly is small, strategic marketing policy adopted by one of them is likely to catch the attention of the others. A decision of one of the players or marketers influences the decision of other firms competing in the same market and vice versa. Because of this interdependence in strategic planning, collusion in oligopolies is a very probable occurrence.

Oligopolies differ from monopolies in that for the latter, there is a single entrepreneur or seller of a good or service. While addressing monopolies, two cases exist. In a pure monopoly, a single company has complete control over the design, realization and sale of a particular product (a good or service) for which there are no substitute in the market (Perloff, 12). In this respect, governmental policy regarding the permitting, prohibiting or regulating pure monopolies has direct implications in the industries but on the economy.

A pure monopoly can rarely exist, thus the term is used relatively rather than absolutely. That is why a firm may be classified as a monopoly despite having competition from relatively smaller dealers of the same product or dealers offering products that are somehow similar and to some extent can be substituted to its own. A firm offering a wide range of product can also be regarded to as a monopoly even if it enjoys a monopoly on only one of its products.

Monopolistic entities have the advantage of being able to maximize their profits by charging higher prices as there are no substitutes for their products in the market. They have the flexibility and ability to define market trends owing to there not being external competition (Swenson, 16). They have a higher degree of liberty in setting prices unlike competitive markets which have little if any control over the market prices of their products.

In a competitive industry, a firm can only charge a single price for a product, which in most cases will be similar to the price its competitors are charging for the same product, but monopolists charge prices higher than they would have had there been competition in the market. They can also maximize profits by charging different profit-maximizing prices for different consumer categories. Depending on consumer characteristics, monopolists can charge customers according to income levels, profession or education levels (    Lipsey, Chrystal, 22). Monopolistic markets are characterized by equitability between firm and industry, control over price and output, discrimination in prices of products and high barriers to new entries.

The other market structure is perfect competition, characterized by the existence of many firms offering the same product or solution to a pool of many clients. In such a market, stakeholders or players are at liberty to exit on will or for their benefits. Products offered are homogenous, that is similar in nature and there is a wide variety to choose from. The market in itself dictates the price of product, and the price charged for a particular product is very close to the cost of manufacture (or production) and there is no leverage. However, in the long run these firms end up making normal profits as an attempt to increase price will only shift customers to any of the readily available and affordable alternative products; making the firm lose market share and profitability.

Oligopolies have existed for as long as trade has. As outlined earlier, oligopoly defines a situation where only a few industry players are offering a certain product or service. The operation of an oligopoly contradicts the nature of a free market. Unlike monopolies, oligopolies cannot dictate the price and availability of goods and services but they can often collude and become friendly competitors for the sake of their maintaining profitable prices and stable markets (Greenhunt, 27).

The new trend in oligopoly is the composition of large multinational companies that have identified a particular product category to specialize and dominate. Over time, only two to four of these corporations succeed in maintaining a profitable market share as the least strategic are run out of business. New entries in the particular market are very difficult as the new entries can be chocked up by the oligopolies whose interest is to maintain the status quo.

The opposite of an oligopoly is an oligopsony. This is a market segment in which the buyers are few. An example is the culinary herbs horticulture industry where McCormick and Durkee are among a handful of companies that buy the majority of the total world production of these herbs. To the farmers, this is a disadvantage as the named buyers are at liberty to fix prices not depending on demand and supply but to increase their margins of profitability. To the firms that resell the finished goods, they constitute an oligopoly as they have the advantage of being the only ones stocking such merchandise (Lipsey, Chrystal, 32). They thus act as the sole interface and sectarian custodian between the producers and the eventual retailer and consumer segment.

To further explain this market structure, let me address the conventional retail shopping sector. To consumers (that is, shoppers), Safeway, Wal-mart and Kroger are an oligopoly grocery wise. To the food manufacturing industry and food brokers, they form an oligopsony. The manufactures and brokers constitute an oligopoly from the supermarkets’ perspective while to the small scale grocery producers, they are oligopsonies.

Other examples of similar scenarios are as follows: Since Borders and Barnes & Noble claim a majority share in all books sold in the United States, they have substantial power over all the book publishers in the country. Thus they are in a better bargaining position to enforce their conditions while sealing deals with book publishers. The Viacom and ClearChannel media groups own most of the radio stations in the country. Thus as an advertiser or a music recording professional, you will be obliged to deal with them in almost entirely their terms (Tucker, 23). Others are the Big Five music recording companies in the music industry and other oligopolies existing in the film, television and beer industries.

It is important while talking about oligopolies to address the competition matrix and the effect the structure has on the market. Clearly, Safeways, Krogers and the other big retailers either swallowed up or ran out of business the other smaller retail shop chains. The only competition they face if from bigger convenience stores and discount or duty-free retail outlets and convenience stores or general merchandise chains.

The competition in the market place has shifted from the confines of including the traditional peers and the attention has been drawn to an increasing emergence of a complex network of diversified potential rivals. The challenges of an economic downturn coupled by rising unemployment levels and decreasing consumer capacity has prompted oligopolies to diversify their operations to new frontiers or go international to remain profitable. Grocery supply chains have added pharmaceutical and the drugs to their line of business and vice versa (Greenhunt, 26). The ultimate result is that most pre-existing oligopolies have been destabilized and desperation has kicked in; as collusion a lot has been deemed insufficient a tool for remaining profitable and afloat in the face of new competition emanating from outside the oligopoly or industry.

The saturation and consequent stagnation of the video market is another clear demonstration of the competition matrix. The video market has been undergoing almost no growth, and as the industry attains its limits, even the major players are struggling and the small players like local video stores become insolvent. One reason for this is the emergence of so any competitors in this narrow domain. Convenience stores, supermarkets and other grocery outlets sell and rent videos. To make matters worse, there are so many local libraries offering videos on borrow and return basis, on absolutely no charge; and there are so many online video stores where these videos can be bought. Add in the competition from television, video gaming and music and the picture is now very clear.

Competition matrices are emerging everywhere in a rate faster than ever before as most firm strive to stand above their base competence. They are especially more pronounced especially in the retailing industry. This is due to the ease of competing because with an already existing retail outlet or grocery store, the cost of incorporating a drug store or a café is lower than while starting from scratch. As a matter of fact, many convenience stores are adopting this approach to make their shops desirable destinations offering a variety of options in goods and services (Tucker, 41). The contrast is that very few powerful companies would be willing to venture in some fields outside their specializations, like auto manufacturers would not find it profitable to start manufacturing soft drinks. However, they still have to guard themselves against emerging alternatives that could overshadow their product categories.

It would seem likely that the competition matrix would liberate the markets and inhibit oligopolies. On the contrary, it validates them more. In the face of stiff competition, companies struggle to maintain leadership in their areas of specialty by stepping up countermeasures to fend off encroachment in their market categories. This intrinsic consolidation of capital and financial muscle flexing only serves to hurt the smaller players in the specific categories, eliminating competition and binding the markets.

The most common method oligopolies employ to maintain their affluence in the markets is to flood the market with products or services very similar to emerging competitive alternatives. These products are tailored in almost the same way to create an illusion of the introduction of variety. This obliterates the minor operatives offering the real variety and pushes them out of the market. The beer industry is on e particular industry where this technique is applied (Perloff, 45). A brewery will, on encountering competition after introduction of a variety of alcoholic beverages, repackage its products and give them names suggesting they are a different product but in essence, they are exactly the same. This phenomenon is called pseudo variety.

To illustrate pseudo variety, one only needs to study the case of Anheuser-Busch. This famous brand owns the trademarks of the Budweiser franchise. While it would not be likely that a retail outlet would flood its shelves with the regular Budweiser beer, the company introduces pseudo variety, having the Light, Dry, Ice and Ice Light generics on the Bud franchise. An experienced drinker would find little if any difference in the taste of all these beer brands.  They are essentially American lager and American light lager, with the latter being a variant of the former on account of a lesser alcohol content. The real variety in beer can be found in The Great American Beer Festival where over sixty categories are exhibited, including fruit beers, bitter, porter, pilsner and wheat beers. But with close imitations flooding the shelves in all major retail outlets, these beers do not have any chance of penetrating the markets (Swenson, 52). The apparent illusion is the presence of diversity in products, but in essence the reality is only diversity in packaging. This is very restricting for the consumer and the markets. Through pseudo variety, oligopolies occupy all the space available in the shelves and in the mind of consumers.

Oligopoly and high concentration in the markets and availability of friendly financing offers companies an opportunity to engage in new ventures. This translates into the growth of conglomerates and their consolidation of majority share in the market. Increased diversity by these firms can be harmful to the economy. The venture into so many specialties, ranging maybe in entertainment, automobiles, luxury accessories, insurance, banking, publishing and so on results in operating in different market categories with diverse profit models and consumption patterns. This will often lead to inefficiency in management and integration efforts, leading to high rates of disintegration and crashes (Lipsey, Chrystal, 63). Take for instance the disasters associated with Vivendi venturing into the entertainment industry or Time-Warner entering a partnership with America Online to venture into the technology industry.

General Electric claims a majority market share of over 50 percent in the aircraft engine manufacturing industry. This sector is an example of the well defined oligopolies. It has only three stakeholders. But General Electric, despite enjoying such a lucrative share of the market, is to endure persistent threat of this dominance from its competitors, Pratt & Whitney and Rolls Royce of the United Kingdom. The result of this cut throat competition is that the three firms bid for contracts at such low levels that the probability of drawing any profits in such deals tends to zero, with the bid only able to cover the cost of production (Tucker, 30). The only hope of reaping any capital returns lays in the maintenance of the aircraft engines sold.

Oligopolies create a loophole through which the salaries and compensations of chief executives can be inflated. The levels of compensation being offered in the market can not be compared to the normal relationship existing between supply and demand. Despite a massive increase in the number of Business Administration Masters graduates from the universities, the cost of hiring a chief executive officer have continued to rise dramatically. It should be noted that increasing the compensation levels of the existing top executives does not augur well in terms of creating a new pool of potential chief executives for the market. In this respect, the chief executives in oligopolies are very much in the driving sea in determination of their serving conditions (Lipsy, Crystal, 44). The Business roundtable, an association of executives who set standards of engagement is blamed for misguiding advice concerning guidelines for compensation. The result in massive excesses in compensation amounts was a major contributing factor to the collapse of big corporations on and during the economic recession.

Oligopolies encourage the exploitation of customers while safeguarding the interests of the firms concerned. They do this through the establishment of intricate cartels which are sly enough to escape the eye of the public to avoid regulation and possible prosecution. There is a valid relationship between trade unions or industry welfare collusions to cartels. Trade associations that seem neutral and honest act as cover-up for price fixing activities. Consumers in America lose billions of dollars annually though overcharge in goods and services though illegal price fixing scandals orchestrated in an oligopoly (Greenhunt, 34). The structural characteristics of oligopolies match the ideal operating environment of cartels - a high concentration, fewness of the entrepreneurial players in the area of specialty, a high consumer density and homogeneity in product or service on sale. Bearing in mind that oligopolies are increasing in number and power, one can only expect the return of cartels to haunt consumers and industry regulators.

There are various reasons as to why corporations merge their operations. They include synergy and eventual benefit to stock holders and the consumer, greed and the fear of interruption and to increased immunity from competition. But for powerful firms like the merger between JP Morgan Chase and Bank One, the reason for merger it is clearly conceivable immunity from Government regulation. These are super oligopolies, institutions that, by virtue of the gigantism in their portfolios are too important to the economy to crash (Perloff, 79). In such a scenario, imminent failure by such super oligopolies will immediately necessitate Government action to rescue them from trouble even if the cause of failure is bad management or illegal undertakings on the part of their executives.

Super oligopolies have to their advantage that their structure is too complex that regulators, competitors and the financial markets can not clearly conceive the nature and/or legality of their actions from outside, and consequently cannot challenge or enforce regulations on them. Such oligopolies amass enormous influence on political circles and are in a position to intimidate critics and newsgroups or analysts who develop an interest to publish possible vices being done by them (Tucker, 102).

As oligopolies continue to thrive, their maximum potential impact is just starting to be felt. It is estimated that the top three banking institutions in the country will have almost an equal if not more influence on currency supply as the Government. Acting as the custodians of colossal amounts in investor and consumer credit, government policy may have to be dictated by the decisions of these three banks.

Inflation is defined as the increase in the general price levels in an economy over a period of time, there are a lot of factors that contribute to the inflation level in an economy, one of the many reasons is the interest rates that are prevalent in the economy. What happens is that if the interest rates are then the people would like to save more and spend less of their disposable incomes, this would lead to lower aggregate demand levels and might result in deflation, on the other hand if the interest rates are lowered then people spend more of their disposable incomes because the opportunity cost of saving is higher and they would rather spend. The CPI level according to the report in question at the given time is 1.1% and is expected to shoot up to 2%, the government’s aim is to keep the CPI level between 1-2%, that is why the bank of England in its latest meeting has decided not to tamper with the interest rate at this point of time because they run the risk of going above or below the inflation level target that they have set themselves. It is necessary to maintain the CPI level in this range only because a lot of financial calculations are based on the interest rate level and it is imperative that it is kept within this range or else the whole economy could be damaged quite considerably and the repercussions would have to be faced for a very long time. These factors play a very important role in the growth of the economy in medium as well as long term and hence they would have to be considered very carefully so that the economy is not damaged in the long term, short term negative effects would be there but that would have to be dealt with for the betterment in the long term of the economy.
The other factors in consideration were:

Demand:
The demand level was going up as the world economy over all showed signs of positive growth but still had some considerable amount of recovery to make to get back to the pre financial crisis level, households were still hesitant in spending lavishly as the economy has not fully recovered from the initial shock. Due to this decrease in consumption the companies have also decreased their level of spending on capital by almost 10%, this is one of the reasons why the interest rates cannot be increased in the economy right now as this would lead to further reduction in capital expenditures by the company and have even more adverse effects on the economy and would also contribute to further slumping and more unemployment.
GDP:

The gross domestic product is basically the total produce of the economy in monetary value terms, the report suggests that in the 3Q of this year the GDP fell by around 0.4%, there is a need to push the economy out of the recession and the a decreasing GDP is not a good sign for the economy at all. The interest rates were kept constant to promote capital expenditure and they were expected to reach 200 billion pounds through capital financing for companies through the bank. The committee also found that the economy is recovering and in august they had expected a much more substantial fall in the GDP growth rate than 0.4% which goes to show that the banks policies were working in favor of the economy. The GDP is a very important consideration in an economy because it is a vital sign of growth of for the economy and globally the markets are dependent on each other, hence a strong UK economy would be a positive sign for the rest of the world as well, if the GDP growth rate is maintained global players would be more inclined to do business with UK firms and this would result in more demand for the pound and would push up the demand hence making the exchange rate better for the economy.

Inflation:
The inflation rate for the same period of time last year was 5.2% but it has fallen quite considerably and is now 1.1% largely due to a lack of demand in the economy because of the financial crisis that the economy is facing, this could be owing to the fact that the wages have seen a downward trend in the economy because the pounds exchange value has gone down considerably and producers face considerably higher prices on the imported items. Lowering the interest rate is not in favor of the economy as this would push down the pound sterling value even further in the exchange market and would result in deepening of crisis at home. These were the considerations that were taken into account before reaching the policy decision for the 3Q, in retrospect the bank would feel that it had taken the right decision because there were dangers in increasing and decreasing the interest rates, the economy would need to do a little better then only there would be any chances of tempering with the interest rates to bring about a major change in the economy.

Economic indicators such as the inflation rate, the real gdp growth rate, personal incomes and average hourly earnings rate are used to determine the state of an economy. The gross domestic product (gdp) refers to the measure of the total market value of all final goods and services that are produced in the economy in a given year. (McConnell & Brue, 2005). Real gross domestic product (real gdp) refers to the gdp that has been deflated or inflated so as to reflect the changes in the price level. It is also referred to as the adjusted gdp. The unemployed people are those with the ability and willingness to work and thus seeking work. The unemployment rate refers to the percentage of the labor force that is unemployed. A government budgetary deficit is an excess of its expenditure while a government budget surplus is excess taxes or higher revenues than its expenditure. (McConnell & Brue, 2005).

Currently, the US is recovering from a deep recession which emerged in the late 2007 and which was thought to have emanated from the housing as well as the financial sector. There had been an increased demand for houses emanating from the reduced interest rates, increased income growth from the past history of economic prosperity as well as increased house prices. The financial sector which triggered the financial crisis considered to be the worse to hit the US since the great economic recession of the 1930’s played a significant role in driving the US economy and later the world economy into an economic recession. (www.federalreserve.gov). The financial institutions increasingly offered non prime loans with unconventional terms which further increased the demand for the houses. In response to the increased demand for houses the housing industry registered a tremendous growth as more houses were constructed leading to increased employment opportunities. Industries related to the housing sector also thrived and the increased returns from this sector translated to increased growth in the real as well as the per capita gdp. After some time the house prices begun to drop leading to massive losses for both the individuals as well as the financial institutions who had led a lot of money without proper security. Other sectors were also affected as the houses had been used as securities in other sectors. Soon, most financial as well as insurance companies such as Lehman brothers, the Fannie and Freddie as well as the AIG were either filling for bankruptcy or risking closing down. Tight measures had to be adopted by the operating financial institutions that made the interest rates very high deterring individuals and businesses from accessing credit. Without the finances, economic growth was negatively affected as investment was highly compromised. On anticipating reduced demand, firms reduced their production leading to increased layoffs or unemployment. Increased unemployment led to reduced incomes which lowered the domestic demand. Since the US is a super power, the world economy was greatly affected and the foreign demand also declined. The countries that relied on the US financial institutions for funding were adversely affected. In response to this, fiscal as well as monetary policies were embraced. The economic stimulus act of 2008 which involved tax incentives and tax rebates was introduced with the aim of increasing the money supply in the economy and consequently boosting the economy. Little progress was recorded from the $150 billion tax rebate program introduced by the US president George Bush leading to the introduction of the government bailout programs which aimed at ensuring that the financial institutions were empowered to remain operational. Another intervention by the government includes the recent Obama $787 billion dollar stimulus program.

The monetary policies introduced by the Federal Reserve included a reduction of the federal funds which refer to the amount of money that financial institutions keep with Fed against the set deposits liabilities. Lowering these funds meant that the financial institutions had more money at their disposal and they could easily lend households as well as business thus

boosting the economic growth. Fed also introduced facilities such as the Term Auction Facility, Asset Backed Security Loan Facility (TALF) as well as the Treasury’s Troubled Asset Relief Program (TARP) which all aimed at increasing the money supply in the economy. The adopted policies yielded positive results as the economy has improved gradually and although the flourishing economic growth is still a distant dream there are many improvements. (www.federalreserve.gov).

According to the Bureau of Economic Analysis (BEA), the US real gross domestic product from labor and property increased by an annual rate of 2.8% although it had decreased by 0.7% in the previous quarter. The increment in the real gdp growth rate was attributed to the increased consumption expenditures, exports, government spending as well as increased government as well as private investment. In the third quarter there was a 1.2% increment in the real gdp sales without including the private inventories from what had been recorded in the second quarter. The current dollar gdp also increased by 0.8% to $115.1billion. (Bureau of Economic Analysis, 2009).

According to the Congressional Budget Office (CBO) the federal budget was estimated to be $1.6trillion which is equivalent to 11.2% of the country’s GDP, a rate similar to the one registered in the Second World War. This deficit can be attributed to the increased government expenditure to boost or rather revive the economy through the economic stimulus programs as well as the weak revenues from tax rebates and incentives. (Congressional budget Office, 2009). Various factors will ensure that the US records moderate economic growth. These include the weak economic conditions in the global economy, the financial markets that have not fully recovered as well as the people’s desire to increase their savings for sometime before investing. BEA estimates that the US current account deficit which measures the extent of trade of goods
and services, the receipts as well as payment of incomes and the net current transfers to have decreased from $104.5 to $98.8 billion. (Congressional budget Office, 2009).

If I were given the chance to choose three words to describe my entire personality, I would choose honesty, challenge and kindness. These terms appeal to me the most because they aptly describe how I deal with life. Being honest is one of my desirable qualities. I always tell the truth when someone asks for my opinion. By saying what I believe is true helps in promoting a transparent relationship between me and other people. Through this, I am able to be who I am and people accept me for the real me. There are no pretensions which make interaction and communication more fruitful. However, there are times that people find my honesty a little bit offensive. There are types of people who cannot handle the truth because they are afraid to face the bleakness of reality. For me, this kind of attitude hinders individuals from exploring their utmost potential. But since I am aware that we are all living in a diverse world wherein not everyone is the same, I opt to respect their differences and distinctiveness. In order to avoid further conflicts from occurring when mingling with other people, I have decided to express my honesty in a polite and courteous manner. Also, I try to explain my point of views so that other people would not misunderstood or misinterpret my opinions.

Furthermore, I love facing different challenges. For me, having this kind of experiences helps in developing my skills which will be essential in my future career endeavors. More so, dealing with challenges makes me stronger as a person and it makes my experiences more memorable. There is a saying that states that the more you exert an effort in doing something, the more valuable it becomes.  In line with this, I can say that my experiences in military school were unforgettable and have become a significant part of my life. It is in this type of learning environment that I was able to test my commitment and dedication in attaining my goals. It was not easy to study in a military setting. There are a lot of rules and everyone is expected to follow them to the finest details. Also, all the students must respect the hierarchy of ranks. Given this, I have decided not to be intimidated by all the rules and regulations. Instead, I used this situation in motivating myself to work my way up in the organization. Because of this, I was promoted to different ranks and positions throughout my stay in the military school. I can say that this is one of my achievements because I was able to showcase how I can confront challenges and turn them into something positive which have helped in my personal and professional growth.

Aside from this, I can confidently point out that I am also a kind person. Most of the time, I would put my wants and needs on hold to attend to other people’s needs and wants. For me, I get a sense of fulfillment in doing these things even if I do not receive something in return. I believe that it is more important to lend a hand voluntarily rather than assisting other people just for the sake of getting something in return. The true reward for kindness is seeing the smiles on the faces that I have helped.

At Boston University, interdependency and long-term impact pervades teaching and learning at all levels are promoted in order for the students to stand out in their chosen fields. Through this, I can utilize my being honest, kind and love for challenges to help me find my niche in this reputable academic institution. More so, I believe that through these attributes, I can contribute in making Boston University a more conducive place for learning. I can participate in various academic as well as extracurricular activities to enrich my knowledge and to widen my network of contacts. I believe that through kindness, honesty and fondness for challenges, I can be a step closer in the attainment of my goals.

The position of the United States of America as the world’s super power rests upon two pillars; the military and the power of the dollar in the economy of the entire world. The U.S dollar serves the role of being the world’s reserve currency (Engdahl). In spite of the recent problems in the U.S economy, the dollar still remains the strongest currency in the world economy. These problems have been associated with the recent borrowings by the U.S government placing the economy of the country in a serious crisis. The U.S entered a critical financial phase since the collapse of the stock market in 2001. The question is whether the dollar is still achieving its limits as the world’s reserve currency since for the last thirty years; the dollar system has been building on debts. The U.S domestic burdens on debts have reached startling levels especially in the last decade (Engdahl 1).

This paper will address the value of the US dollar in the light of the current economical crisis facing the nation as well as the entire world economy. It will aim at finding out the future of the U.S economy, considering the impact of the global economic crisis on the value of the dollar as well as the debts owed by US to the foreign lenders. This paper will also try to find out how the U.S government got itself fixed in serious debts and what can be done to ensure that the economy regains its global financial position and clears up its debts both internally and externally (to the foreign lenders). It will try to find out a viable solution to the US economy that will be applicable both in the short run and the long run. Such a solution will ensure that the US dollar remains viable as the world’s reserve currency as well as that the levels of alarming unemployment and crippling inflation are reduced, at least back to the situation that it was a decade ago (Engdahl 1)

Why the US Debt and Dollar?
What most people (including the U.S citizens) do not understand, is how the function of US deficits and Dollar System are related. The United States has been pursuing a deliberate trade deficits policy and budget deficits mostly on the past two decades. It has been with the proper understanding of the consequences of debt funding and deficit financing that the U.S government chose to adopt the borrowing policy (Engdahl 1). This therefore means that there must be benefits tied to deficits and borrowing over operating on equity and internal funding. What then are these advantages? Can they be adapted by the private investment sector and the business people to improve profitability and sustainability in the crowded business environments? In addition, how will the private sector and the taxpayer affected by the deficit funding that has been a deliberate action by the government? Could it be at the expense of the citizens or for their benefits?

The understanding of the above questions will improve the course work by bringing into light the operations of the US economy, the private investment sector and business environment. Such information relates directly to management, business and economics and is very crucial to this course. In addition this study will enable the reader to be in a position to predict the situation of the economy in the near future and hence make informed decisions or recommendations where it applies.

The dollar and the debt crisis over the recent years is a topic that has filled the headlines and news bulleting and needs to be studied, analyzed and understood in a precise manner. This issue cannot be overlooked since it does not only affect the Americans but the world as a whole. How the dollar crisis will be resolved will determine the position and the direction of the world’s economy in the future.

The Facts and Information
The Current Level of Debts
Without doubt, American overseas debt and borrowing has increased extensively, but consequently has individual earnings and wealth. The entire domestic liability has risen evidently over the past decade, but consequently have output and revenue (Will). This fiscal harmony nonetheless is burdened by substantial risk of worldwide imbalances which may cause disturbance and confusion in future. The “debt-and-credit differences” of the huge national financial systems continue to rise; the “balance-of-payment deficits” of the United States exceed every national surplus. During 2005 the deficits were $790 billion, which compared to gross national product (GDP), exceeded 6%. This year, it is likely go beyond $800 billion, or 6.5% of Gross Domestic Product. Furthermore, the federal government goes on to suffering enormous budget deficits which expand the state debt and increase weight to the global concern. (Will).

Currently the United States is borrowing an estimate of $700 billion per annum from overseas lenders to be able to fund the existing gap between payments to and receipts from other parts of the world. This amount equals to approximately $5500 per household. This borrowing involves severe costs to the United States government and economy. Statistics have predicted that if there will be no improvement on the current account deficit, the U.S eternal debt will have raised to 64 percent of the total GDP(gross domestic product) by the end of 2014.the U.S dollar is seriously shrinking and the seriousness of this financial crisis is being overlooked. In the beginning of October,2009(as the new fiscal year begun) there was more than $200 billion dollar cushion connecting debts that the united states owed and the maximum credit limit imposed by the law (Bivens 14)

The process of generating debt both domestic and foreign, so as to maintain the US economy has gathered a lot of momentum such that it risks demolishing what still remains of the US economy and especially in the manufacturing and technology base. Henry Kissinger cautioned that the United States risked wiping out its middle class, its key tactical industries through outsourcing to India, China and other inexpensive areas. At present, only eleven percent of the whole workforce is remaining in the manufacturing. The US economy is caught inside its own trap: American jobs, technical professions and factory jobs have been vanishing permanently in the process of US factories sourcing to India, China and other poor areas. If Washington dares to pressure China and other countries involved to cut their exports they will be risking killing the goose which lays blonde dollar eggs. Who will purchase the growing dollar debt? (Lachman).

Private union traders have desperately been attempting to sell their bonds. However, in adopting the borrowing system, the US government aimed at ensuring that they maintain dominance. The U.S entered a critical financial phase since the collapse of the stock market in 2001 so as to lock the world into reliance on a US money system. As long as the world acknowledged US dollars as money worth, the US enjoys exclusive advantage of being the only printer of these dollars (Will). The trick was to make world accept. Unfortunately, this has been blown back to America itself. The government has recently been engaging in agreements and activities to ensure that the rest of the world will continue to accept the US dollar as the standardizing currency of money worth. Such countries are for example china, Dubai and Japan. Engdahl suggests that the reason for this turnover of events is because the world economy is said to have achieved a growth of five percent regardless of the global crisis. This growth is predominated by the Asiatic countries (such as Japan and china) explaining the reason why they have become a threat to the power of the US dollar (Will).

The Looming Risk
Despite the fact that the world economy registered some growth, it is still exposed to a great looming risk due to the economic international imbalance portrayed by the balance of payments shortfall of United States and the equivalent surpluses of creditor nations. Americans alone consume seventy percent of world's reserves, whilst Japan, China and the other developing states are funding the deficits and building up American IOUs (Will).

Although the borrowing by the US government involves grave costs to its economy, these costs remained hidden for a number of past years, mainly by the past low rates of interests. The low interest rates resulted from an attempt by the Federal government to stimulate economic recovery following the recession in 2001 and downturn of domestic investments. However, the risk lays in the fact that this good scenario cannot last indefinitely because once the rate of interests rises, then the cost of borrowing by the US will create grave consequences in the economy. In addition the treasury has increased the money that is in circulation due to declined velocity. Although the US treasury has managed to increase the money in circulation without inflation, the risk is that incase the velocity of distribution of the money is unexpectedly increased, this huge rise in monetary base might interpret into an extremely high inflation. (Will 1)
The Evidence of the Dollar -Debt Crisis

The evidence of the dollar-debt crisis is all around us and no one can hide from it. It is invading the daily lives of all Americans, in any corner of life. Turning on the radio and every other medium there is news about the hundreds of people losing jobs, the retirement funds being decimated, increasing numbers of people on the streets as well as the advanced levels of insecurity. The dollar is seriously shrinking! And there are factors pulling the dollar down, foreign debts being on the top list (Sennoholz 2)

At the beginning of the fiscal year in October this year, the debt ceiling of the United States (self imposed) stood at $12.104 trillion dollars. At this rate, it has been reputed that by December this year the debt will get to the roof. However, like it has done in the past, the US government is expected to raise the debt ceiling through the lawmakers so that it can prevent financial insecurity for the people around the world who have invested greatly in the US strength. The lack of a renewed credit boundary would cause a decline in credibility of U.S. Bonds thus creating financial insecurity for many people. (Sennoholz  2)

The Response
The appetite for gold like an investment alternative is growing. This is pure indicator of the loss of value of the dollar. The investors are arguing that the only commodity whose value will never be zero is gold. In addition, in the last decade statistics show that there has been an inclination by the Americans and non Americans to hold back liquid cash instead of investing. Unlike in the past the level of both domestic and foreign investments in the US bonds has reduced to a noticeable figure. In addition, there has also been a reduction in the purchasing power by the general public since people prefer to hold more cash. There has been a raise in the demand for dollar holdings as a security against depression and the falling of currencies (Eicher).

Analysis of Data
This section will analyze the facts and information previously gathered about the dollar and the debts in the US to come up with an overview of the meaning, implications and consequences of the data as well as the course of action needed.

The Current Level of Debts
From the data gathered on this information, it is clear that the US government has adapted a deficit funding for approximately a decade ago and the debts levels from overseas countries have been building up for almost every fiscal year. This implies that the government has failed to strike a balance between receipts from and payments to the overseas lenders and hence the debt continues to build up gradually. The current debt levels and dollar value are a clear evidence of the financial trap facing the United States.

The Looming Risk
The event of the American government failure to pay its debt is not only likely, but also unavoidable and imminent. The narrow dark holes into which sense and reason vanish on an every day basis are quickly going to crumple under the accumulation of their absolute size. One amongst the pointer favoring this situation is what has been happening in the U.S. Treasuries auction market as was seen in the previous section. Taking an example of what happened recently $30 billion public sale in 5-year notes did not succeed to stir the attention of traditional principal dealers. The public sale was saved by an unidentified “indirect” bid (Eicher).

Much as the US government has managed to maintain the inflation rates low and still pump more money into the economy, it will not be able to continue with this trend indefinitely because in the event that the circulation of the money increases unexpectedly, then it might create very high inflation and make the situation worse. Therefore, this policy will only serve the economy for a short duration before a permanent and more viable plan of action is engaged.

The Evidence of the Dollar -Debt Crisis
The United States Federal Reserve recommended recently it would step up the treasury-buying business (Eicher). This has been interpreted as a form of market supportive action. However, it is an evidence of increasing worry and anxiety on federal government as the understanding dawns that the demand for treasuries is increasingly evaporating. The raising order for gold as form of investment that has been witnessed recently which has put gold to a four month high is an additional proof that investors across board are gravitating more to gold and further from United States dollar.

Despite the evidence of a fall in the expected value of the dollar, the US dollar still remains the strongest currency in the world. Therefore, majority of what is happening right now is not entirely because the dollar has lost its value-it is still the most valued in the world! Nonetheless, the joblessness and decimation of retirement plans can be seen as more of a multiplier effect that has resulted from the inability of the government to settle debts and sustain international standard. The response has been heavily felt from the investors in American bonds who now prefer to invest in gold as a form of investment in the place of the US dollar (Eicher). This is a direct response which shows a lack of confidence by the investors in the dollar.