The Likely Impact of the U.S. Recession on Negotiations with North Korea

Abstract

IntroductionThe last six-party talk in Beijing ended on December 11, 2008, when negotiators were unable to reach an agreement on the issue of verification over the accuracy of the nuclear inventory given by North Korea in June 2008. The sticking point was North Korea's refusal to let international inspectors take samples from soil and waste at its nuclear facilities, which the United States had maintained was critical to reach an agreement. Complicating the issue, however, is the rapidly declining U.S. economy, as indicated by the real gross domestic product (GDP) that fell rapidly beginning in the fourth quarter of 2008. This paper reviews the state of the U.S. economy, measuring how serious the economic recession is, and then speculates on how the state of the U.S. economy may affect the future of negotiations with North Korea. The paper concludes with some suggestions on the direction North Korea and the United States might consider taking in the middle of the U.S. economic recession.History of the Credit Crunch of 2008Although there is no consensus on its exact duration, the beginning of the is believed to be in the early 1980s. The good times of the Great Moderation are characterized by significant reduction in fluctuations and improvements in aggregate output, employment, and inflation. for the Great Moderation include (a) improved monetary policy, (b) financial innovation, (c) increased global integration, (d) better inventory controls, and (e) good luck in the form of smaller exogenous shocks. As Federal Reserve Chair Ben S. Bernanke opined during his discussion of the Great Moderation at the 2004 meetings of the Eastern Economic Association, Explanations of complicated phenomena are rarely clear cut and simple, and each ... probably contains elements of truth.1 It may be premature to give credit to any or all of these explanations. It is yet to be known whether the latest Great Moderation is in a temporary halt or is over until the next Great Moderation appears on the horizon many years from now. The end of the Great Moderation did not begin with subprime mortgages. The end started long before the Great Moderation even began.Securitizing mortgages in the United States has a long history. 1968, the Government National Mortgage Association (Ginny Mae) was allowed to securitize FHA/VA mortgages backed by the U.S. government for resale in a secondary market. 1970, the Federal Home Loan Mortgage Corporation (Freddie Mac) started selling government-backed mortgage-backed securities (MBS). One writer noted, In 1981, the Federal National Mortgage Association (Fannie Mae) began issuing MBS, and soon after 'private-label' securitized products emerged for prime loans without the backing of the government.2 1982, the Alternative Mortgage Transaction Parity Act allowed variable-rate mortgages as an alternative to fixed-rate mortgages. 1986, the Tax Reform Act ended tax deduction for interest on loans with the exception of mortgage loans. All these changes played a role in leading to the 2008 credit crunch. It is important to note that these changes, standing alone, are nothing wrong. But they were abused during the early years leading to the 2008 credit crunch.During the Great Moderation of the 1990s and the early part of the 2000s, the rate of inflation was low and the economy grew steadily. During the same period, countries in Asia and the Middle East started to save an enormous amount of money. From 1996 to 2007, industrialized countries went from a current account surplus of $14 billion to a current account deficit of almost $500 billion. At the same time, noted a White House report, developing countries went from a current account deficit of $82 billion to a surplus of $760 billion.3 The influx of this capital lowered interest rates. These new wealthy were not satisfied with low interest earnings, and they searched for high-yielding assets. …