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Economists predict tough times ahead for US e -

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KERRY O'BRIEN: According to that old adage, when the United States' economy catches cold the world
sneezes. And while the massive growth of China and India has lessened that impact for Australia,
America's economy is dominant. And as America continues to struggle with the fallout from its
subprime financial crisis, the credit squeeze, job losses and commodity high prices are combining
to deliver tough times there, which analysts predict could persist well into next year.

As consumer spending starts to drop, talks of whether the country is in technical recession has
become academic. As North America correspondent Tracy Bowden reports, the slow down is having a
direct impact on Australia's car industry.

(Excerpt from 'IO USA')

DAVID WALKTER, US COMPTROLLER GENERAL: We suffer from a fiscal cancer.

ECONOMIC COMMENTATOR 1: Our current fiscal policy is unsustainable.

(End, excerpt)

TRACY BOWDEN, REPORTER: This soon to be released documentary 'IO USA' is called an 'Inconvenient
Truth' for the economy. Its message is simple: the world's biggest economy is in big trouble.

(Excerpt from 'IO USA')

ECONOMIC COMMENTATOR 2: We can't pay the bills now.

ECONOMIC COMMENTATOR 3: We are headed over a cliff.

ECONOMIC COMMENTATOR 4: If I performed like that as a physician, my patient would die.

(End, excerpt)

LYLE GRAMLEY, FORMER US FEDERAL RESERVE GOVERNOR: What we worry about is that if credit continues
to tighten, at some point or other it could strangle the economy.

TRACY BOWDEN, REPORTER: Former Federal Reserve Governor Lyle Gramley, who is not given to
exaggeration, describes the country's financial status in grim terms.

LYLE GRAMLEY: I never have seen credit markets seized up as badly as they have been since last
August in my lifetime. I would say that this financial crisis we're going through now is the worst
we've seen since the Great Depression.

JARED BERNSTEIN, ECONOMIC POLICY INSTITUTE: The US economy right now may be in recession, that
question is one that economists ask a lot. But from the perspective of US households it's really an
academic question. For many of them they're experiencing recessionary conditions.

TRACY BOWDEN: With unemployment at four year high and home prices still crashing, the credit
squeeze is spreading across the economy. A surge in global commodity prices including oil and food
has added to the gloom. Now consumer spending has started to drop. At this shopping mall in
Merrylands just outside Washington DC, Linda Allan tells a familiar story.

LINDA ALLEN: My husband and I both live an hour away from where we work, and gas is really hurting
us and on top of that the food prices, I'm not shopping, doing grocery shopping as much, buying the
things that I want, just the bare basics.

LYLE GRAMLEY: Consumer spending is two thirds of the economy, and when that two thirds of the
economy begins to weaken, it affects everything.

TRACY BOWDEN: Despite government assistance to help people stay in their homes, the wave of
foreclosures which triggered the credit crunch shows no sign of slowing. Three out of every 50
owners are behind in their mortgages, with buyers who were previously able to cope, now also

JARED BERNSTEIN: We were hoping this problem would be contained in the subprime sector, maybe a
couple of per cent of the US mortgages. Now we recognise that the problem is going to go deeper, in
part because the spill overs of what's happened in the subprime have now worked their way through
the economy such that the job market is affected, and people are not making the kinds of incomes
they need to finance their loan.

TRACY BOWDEN: Jared Bernstein from the non-partisan think tank Economic Policy Institute is also an
economic advisor to presidential candidate Barak Obama.

TRACY BOWDEN: Do we know what America's total bad debt is?

JARED BERNSTEIN: Our financial sector has written off around $300 billion of bad debt, and
estimates are for that to go as high as $6-800 billion, so the actual extent of our exposure to bad
debt is simply unknown right now and that, by the way, is behind the credit crunch. Investors are
sitting on their hands because they don't know their level of risk exposure, they don't know how
much debt they have is bad debt. And that's one of the things that's causing the system to kind of
freeze up.

TRACY BOWDEN: The US car industry was already in trouble thanks to the number of people buying
smaller imported cars. Now the tight credit market has provided an additional challenge. The
world's largest auto maker GM reported a $US15.5 billion quarterly loss, one of the biggest in its
100 year history. Ford and Chrysler are also having a bad year.

REBECCA LINDLAND, AUTO ANALYST, GLOBAL INSIGHT: Sales are down double digits, they are down 20 per
cent every month, 15, 18 per cent, and this kind of level is just not sustainable. So this year we
are actually looking at US sales to be at about 14 million units, which is 2 million units less
than last year. We are also looking at 2009 to be at about 14 million units, so no recovery really
until 2010.

TRACY BOWDEN: Analyst Rebecca Lindland says the impact of America's financial woes is set to affect
Australia's car industry.

REBECCA LINDLAND: It's very much of a global problem. With the weak dollar, GM and Ford were both
looking at importing some vehicles from the Holden plant in Australia in particular and other
manufacturing plants over there, bringing them to the States, and it's just not feasible any more,
it just doesn't make fiscal sense, so that is a negative impact on Australian manufacturing
directly tied to the weakness in the US dollar.

TRACY BOWDEN: But Lyle Gramley does see an end to the economic turmoil.

LYLE GRAMLEY: We will get through this, we have dealt with problems before.

We are strong and resilient economy, we're not going to fall apart. And indeed if things work out
for the worst, and they could, we will see additional action by the Federal Government to prop up
the economy. And indeed there's talk right now about the possibility of another stimulus package,
some time perhaps even before our national elections in November.

TRACY BOWDEN: The people who are already struggling like Linda Allan back at the shopping mall
aren't holding their breath.

LINDA ALLEN: I don't know anybody who isn't having trouble right now. It's pretty bad.

TRACY BOWDEN: Can you see a time when things will improve for your family?

LINDA ALLEN: Everyone keeps saying after the elections but I really don't think that the elections
are going to have a difference either way.

JARED BERNSTEIN: We are going to likely plod along at a growth rate that's well below our potential
for the rest of this year, 2008, and I'd say most of next year as well. That doesn't mean we are
talking depression by any means, and maybe not even deep recession. It does mean however that the
economy won't generate the kind of growth and economic activity it needs to spin off the jobs and
incomes that people depend on to keep their living standards from sliding.

KERRY O'BRIEN: Tracy Bowden with that report.