There must be more than seven ways, but these are the ones that seem most likely to my mind.
1. Agriculture: Drought
You don’t need that new car or that new pair of shoes. Most people can put off until tomorrow, or until next year, most of the purchases that they make. But everyone needs to eat, pretty much every day.
The severe drought in California continues unabated. It’s affecting several other States, including Texas. Sooner or later, this will cause a sharp rise in prices.
Then there is the problem of increasing imports from China. A change in policy in China could cause imported food prices to rise. And we could not quickly ramp up production in the U.S. to make up for it. All China would need to do is stop fixing its currency exchange rate, allowing the exchange rate to float. This could cause prices of goods made in China to jump sharply.
Supply and demand governs the prices of many items. A decrease in supply causes an increase in price and therefore a decrease in demand. But not for food. No matter how high the prices go, you still have to buy food. Not many people have the self-sufficiency to grow their own food. So when food prices rise, demand does not fall. People simply take money away from other areas to pay for food.
So a jump in food prices could adversely affect the whole economy, causing buying of almost all items to decrease sharply so that people can pay for food. Food accounts for 15% of each U.S. household’s spending. Housing and transportation are the other two major categories.
2. Healthcare: Pandemic
One in six U.S. economy dollars goes to pay for health care . A typical U.S. household spends 8.1% on health care costs. If a major epidemic hits the U.S. — either Ebola or MERS or another contagious disease — the costs of healthcare could skyrocket, pulling money away from most other sectors of the economy.
In addition, a pandemic might prompt people to avoid crowded places, like stores and restaurants. The result would be a collapse of spending, business income, and employment. Massive layoffs would only worsen the economic situation.
In the modern economy, everything is connected. It’s like a line of dominos or a house of cards. Tip over the wrong domino, and the rest fall in succession.
3. Middle East Crisis: Oil Prices
I don’t have to explain how tenuous the situation is in the Middle East. ISIS continues to make gains and may soon control all of Iraq. Extremists might make a play for power in other nearby nations. And Iran is seeking nuclear weapons. Any of a number of dark scenarios could mess with oil supply and pricing, causing fuel costs Stateside to skyrocket.
Which goods and services would be affected? Only those that depend on transportation by the use of fossil fuels. So, pretty much everything. You would be hard pressed to find goods that are not transported by plane, ship, or truck. And the same is true for services; many people need to drive to work. They don’t have the option of a subway or … bicycle? or … walking? There just are not many options that do not use oil or gasoline.
Then there is the need for home heating oil. You can’t do without heat in the New England or Midwest winter. The cost of fossil fuels and the added costs of various goods and services could weigh down the economy until it snaps.
4. European Economy: Domino Effect
The world economy is one tightly woven fabric. Not so long ago, economists feared that a collapse of the economy in Greece might have repercussions that would gravely effect other nations in Europe and the U.S. The EU nations are still in dire straits. They have poured out vast amounts of money to their populations in social(ist) services. Too many persons receive benefits from the public coffers, and too few persons are paying into those coffers. Any attempt to impose “austerity measures” cutting benefits is met with strikes and violent protests. Something has to give sooner or later.
And when it does, our economy will suffer. To what extent, we don’t really know.
5. The Debt Ceiling (again)
This issue keeps rearing its ugly head. And each time, a crisis is averted at the last minute. But the U.S. debt is currently at about 17.9 trillion dollars. The U.S. Treasury website says: “Under Public Law 113-83, Temporary Debt Limit Extension Act , the statutory debt limit is suspended through March 15, 2015.” If Congress does not act before that date, the economy could be in for a rough ride.
We cannot keep raising the debt ceiling. Eventually, our financing of the public debt by issuing T-bills will fail. There are only so many buyers of this type of financial instrument out there. And if there is a retraction in the world economy, the market for those bills may dry up suddenly. Defaulting on the national debt would wreak havoc with the economy.
6. Death by a Thousand Cuts
The U.S. economy is arguable as fragile as it has ever been. What collapses the economy might not be one event, but a large set of events: all of the above plus several other negative effects. A set of detrimental effects on the economy might have a synergistic effect, increasing their harm many fold. It’s death by a thousand small cuts. Or it’s the straw that breaks the camel’s back. Many things combining to cause one massive collapse.
7. War in the Middle East
I’ve saved the worst for last. Aside from the effect on oil prices, if Iran gets nuclear weapons, or if ISIS (ISIL) or some other terrorist group gets nuclear weapons, the situation would be dire. A rogue nation like North Korea or Iran might use a nuclear bomb against us. A terrorist group might use a nuke or a dirty bomb. We would be forced to go to war.
War is very costly, in terms of human lives and suffering, certainly. It is also very costly to the economy. Think World War 2 shortages and food rationing. And if a dirty bomb or nuke were used on U.S. soil, the effects would be devastating. It’s a worst case scenario. But we have to consider the possibility. Nuclear proliferation continues unabated, despite the valiant but weak efforts of politicians.