Question

a.     What happened in the 1970's that broke the American dream?

b.     What is the relationship between the US trade deficit and the growth of foreign liabilities on the balance sheets of commercial and investment banks?

Answer 1

Part A)

The American Dream is primarily referred to as the general population having access to luxury and an easy lifestyle with majority of the people having access to all major facilities such as healthcare, nutrition, education etc.

Prior to the 1970's, wherein a situation of stagflation existed which has subsequently been explained, most Americans were of the opinion that the country has enough control over the world resources, and being the capitalist country that it is, people would live a comfortable life and it was a dream for many to live in such as high growth economy.

Now, when we speak of what killed this American Dream in the 1970's, the OPEC which stands for the Organization of Petroleum Exporting countries, imposed a strict embargo on oil imports from a lot of countries including the United States due to certain military and political considerations in Israel. This led to a rapid increase in oil prices in the economy which had a direct impact on inflation. People had to spend a larger portion of their incomes towards getting fuel refilled in their vehicles and transport logistics became extremely difficult to manage in this time period.

This is a situation of Stagflation wherein, the prices of goods and services rose rapidly, due to the rise in prices of oil, but there was no change in growth as people were only spending more money without them earning more, the American Dream was given a big blow as people found it hard to make ends meet let alone living a luxurious life. Prices of goods and services remained high during this period and it was very tough for producers which then had to fire people as a result of low profits. Unemployment rose to about 9% during this period which was very high considering the standards of that time. As unemployment grew lifestyle of people began shrinking and they were left with no option but to give up on their dream of a bright future and healthy lifestyle.

Part B)

Trade deficits in simple terms are a mismatch between the exports and the imports of a country. When countries import more goods and services than they export to others, it results in trade deficits being there in the economy.

This then means that the government is not capable of paying of its imports through funds collected from exports. The biggest option available in that case is to take loans from the general public in the form of bonds or from outside organizations or countries at an interest rates so as to be able to meet its obligations.

As more loans are taken by the government and also by private players from foreign governments, banks or institutions, there is an increase in foreign liabilities as reported by commercial and investment banks as a result of the same.

We can conclude by saying that trade deficits are directly linked to foreign loans as reported by commercial or private banks. As trade deficits in a country rise, foreign obligations also rise because government require additional funds apart from the ones that are collected through exports in order to pay the same to parties or countries from which imports have been conducted.