The Incessant Dispersion of Money in the Economy During the Great Depression - Research Paper Example

The economic slump which has overtaken the country by surprise has turned the lives of people in a 180. The progression from how the country moved from point A to point B where it has reached the point of a recession gives economists and everyone something to think about. It was baffling to even consider that what used to be the strongest economy in the whole world became an almost flat lining patient waiting for a cure. The effects are not only on a national level but on a global scale as well. All of a sudden, Wall Street is crumbling and foreclosures of private companies are looming. The wonderment of the Reagan era and its resentment of Authoritarianism were shaken. On the verge of becoming a full blown depression part 2, all eyes are directed to the next steps the government will take to ensure the future of the United States of America as a solid economy capable of withstanding these tough economic times. With a new government in tow and radical ideas set forth through the initiative of a new president, the U.S. government is turning things for the better. Gradually alleviating what could have turned into an even worst scenario had the crisis been mishandled gravely. The current economy, least to say, is not in its best health at the moment. But all hopes reside that things will get better as the months go by. This is a test of time for a country which had led the world as a superpower due to its economic prowess. Its longevity in maintaining this status can only be determined through a steady growth in the revival of a booming economy that it had enjoyed for so long. This ascertains whether or not power is still entrenched in the West or will it move to a different location. The potential of the country for innovation, which made it great in the first place, is the main ingredient in strengthening the economy. This can be seen through a steady output in the numbers of various economic indicators during the previous year. If this will continue, the recovery of the economy is at bay. Economic Indicators The year 2009 posted a $14.3 trillion Gross Domestic Product (GDP) for the United States. Estimated to increase annually by 3.3% in the first quarter compared to the last quarter of 2010, the Bureau of Economic Analysis released advanced data that the current GDP augmented by 4.1% to $147.6 billion. This, according to BEA, is established on insufficient source data which is subject to revision from the agency where the second output will be released May 27. This increase reflects the participation from Personal Consumption Expenditures (PCE), nonresidential fixed investment, exports, private inventory investment. Furthermore, the reduction in government expenditures and residential fixed investment contributes to the said release (2010). Statistics in the disposition of personal income also shows steady progress in growth. Current-dollar personal income rose to 3.9% with $115.1 billion compared to 3.1% or $92.5 billion in the last quarter. Personal current taxes is now at $73.3 billion relative to the reduction of $1.9 billion of the previous quarter. Personal outlays boosted a 5% growth to a 3.7% during the previous term. Personal saving which is disposable personal income minus personal outlays recorded $340.8 billion with $429.3 billion previously (Bureau of Economic Analysis, 2010). The importance of these figures contributes further to the analysis of economic indicators and its impact on the economy. Time Magazine presented an infograph of different numbers and statistics which summarizes activites and figures for 2009. The highest unemployment rate was recorded in El Centro, California at 30 %. The 14.4% U.S. mortgages past due or in foreclosure which is in 7.5 million was also logged the previous year. Arizona, California, Connecticut, Illinois, Mississippi, North Carolina, Ohio, Pennsylvania and Michigan were the nine states who weren’t able to send a balanced budget in time. The BEA shows a monthly and more comprehensive monthly numbers for personal income and outlays. Personal income was set at $36 billion (0.3%) while disposable personal income or DPI rose to$32.3 billion (0.3%) in March. Personal Consumption Expenditures or PCE augmented to $58.6 (0.6%). February documented personal income at $7.1 (0.1%), DPI at $4.3 billion (less than 0.1%) and PCE at $56.4 billion (0.5%) according to the revised estimates of the bureau. Simultaneously, salary disbursement and private wage swelled last March to $11.8 billion against $6.8 billion the previous month. “Goods-producing industries’ payrolls increased $2.2 billion, in contrast to a decrease of $1.1 billion. Services-producing industries’ payrolls increased $9.6 billion, compared with an increase of $10 billion. Government wage and salary disbursements increased $1.8 billion, compared with an increase of $0.9 billion” (Bureau of Economic Analysis, 2010). A Socialist America In February of 2009, the flurry of state-enacted stimulus packages prompted Newsweek Magazine to declare in one of their issues that “We Are All Socialists Now.” The article by Jon Meacham and Evan Thomas indicate the nation’s move apparent to its policies something that is ideally socialist in essence. But the authors maintain that the nation remains center-right especially in terms of culture and instinct. In the time that the crisis is beyond the country, it will default back to the free-market economy of capitalism as it had been before. But in the prevention of a similar crisis, the conventional GOP policies will remain for at least 30 years. Alternative energies will be the goal of everyone regardless of political affiliations and federal money will remain necessary for infrastracture development that no one can afford to decline (2009). The article further argues that “Whether we like it or not- or even whether many people have thought much about it or not- the numbers clearly suggest that we are headed in a more European direction. A decade ago U.S. government spending was 34.3 percent of GDP, compared with 48.2 percent in the euro zone- a roughly 14-point gap, according to the Organization for Economic Cooperation and Development. In 2010 U.S. spending is expected to be 39.9 percent of GDP, compared with 47.1 percent in the euro zone- a gap of less than 8 points. As entitlement spending rises over the next decade, we will become even more French” (Meacham & Thomas, 2009). Ben Bernanke and the Federal Reserve Time Magazine has feclared as person of the year Federal Reserve chairman Ben Bernanke. An seemingly unlikely candidate to begin with, the prestigiuos magazine has vaid reasons in choosing this government official. Bernanke is hailed for being the most influential person in ensuring that the economic crisis do not turn for the worse. His aggressive planning and policies contribute to the gradually stabilizing U.S. economy. It might have taken a while for the Federal Reserve to take due and necessary actions but the moment this happened, it was the Economics professor’s time to show what he is made of. A Princeton scholar, Bernanke is interested in the Great Depression and knows all aspects of this event in history inside out. He knows what propelled it to occur, what could have prevented it, what could have ended it earlier and most importantly, what should be done to stop it from happening again. He calls it ‘the holy grail of macroeconomics’ and a great challenge to try to solve. He is one of the many believers that Hoover’s move in tightening spending and balancing budgets was a grave mistake. The Keynesian logic of an assertive government through the use of its own money is vital in re-establishing confidence and stimulating demand for the strength of the market. People spending backed by the government is necessary so that the money goes back to the economy and the process of hiring, manufacturing and selling of goods continues (Time Magazine, 2010). The Federal Reserve is deemed to be one of the least understood branches of the government. Under the leadership of Bernanke the Fed tries is hardest to try and explain what it is they are trying to do including holding conferences such as town meetings. He is also adamant that they think out-of-the-box in looking for new solutions in improving the economy. He dropped interest rates in the lowest they could possibly get in 2008 to boost the economy. This has remained for more than a year after. Through Bernanke’s initiative, the Fed has overtaken private creditors and now private markets are operational once again, in the process proving his detractors wrong. They now hold the record in inserting more liquidity into the shoddy housing market since the 1940s and cutting mortgage rates dramatically. The decisions they have made rather seem peculiar in common perspective. Allowing Lehman Brothers to falter yet rescuing AIG. Helping Bank of America engulf Merrill Lynch, the takeover of Bear Stearns and public takeover of Fannie and Freddie. These inconsistencies baffle people in the decision-process involved (Time Magazine, 2010). Last September Bernanke had the confidence to declare the recession was taking its last breath but insists that it would still feel like it had before. This is because companies will be thinking twice before hiring and unemployment rate may take some time to recover as businesses may be hesitant to hire due to the preceding events. Despite all of these, the Federal Reserve forecasts a 7% unemeployment rate until 2012 and a steady but limited growth in the coming years. It is a given that they cannot lend at below zero percent interest rates but there are liberals such as Paul Krugman, an economic Nobel laureate, calls for granting more stimuls packages to crashing businesses. On the other hand, this could possibly lead to a collapse due to asset bubbles and incrasing consumer prices if money is not managed well in the coming days (Time Magazine, 2010). One thing is for certain, there is no one-track solution to all of these problems. What the Federal Reserve has done for the economy is commendable. There is no doubt that a recession is much much better than a recession any given time of the day. The actions Ben Bernanke has taken may be out of the ordinary but the current economy tells us that they have worked. More tha anything, this was the medicine the economy needed. When he first entered the department in 2002, nobody knew especially him that this would happen but it did. The quick resolves that he has shown prevented what could have been an economic downfall for the ages. The current heat that the he and the Fed has taken from legislators shows an almost ingrateful and confidence lacking perspective from them. Bernanke is an economist at heart. He is no different from any other American, his house is still in mortgage and his car remains a Ford Focus he has yet to complete payment on. Comparison of Changes in Personal Income (PI), Personal Consumption Expenditures (PCE), Wages and Salaries (WS) and Personal Savings (PS) Month PI PCE WS PS October 2009 20.8 55.8 13.5 -31.3 November 2009 46.1 53.2 14.1 -3.7 December 2009 52.5 37 3.3 19.8 January 2010 48 31.2 48.5 -55.1 February 2010 7.1 56.4 10.7 -54 March 2010 36 58.6 16.8 -28.2 Derived from the Bureau of Economic Analysis Report 2010 A Graphic Representation of the Previously Shown Table The Business Cycle Model and the Economy The Business Cycle Model suggests the two basic phases in the cycle, this would be expansion and contraction where transitions are divided between peak and trough. This being parallelled to the economic activity of the United States, the recession would be under the category of contraction. As unemployment rate increased and businesses closed down, the state of the economy spiraled into contraction, past its transition from expansion. If this had continued and reached zero it would have scaled into a full depression. The fall of the financial system transitioned into un uncontrollable scale that none of the private sectors could handle for themselves due to the housing bubble and the credit crunch. The fact that it is progressively showing improvement is advantageous to the economy of the country instead of the worst case scenarios that some have already predicted. The bright side is that all figures indicate that this will not last as long or evolve into another Great Depression and that is an achievement on its own. The economy is starting to recover from the recession. Our economic indicators can prove this. The increase in salaries and wages is telling us that most businesses are back to operation from the goods-producing industries to the manufacturing industries and services-producing industries. The activities of these sectors result to the higher level of confidence for the consumer to spend because of their expectations of being compensated. This is the Keynesian principle at work which is recommended by economists in ensuring that the economy doe not stagnate and cause the slump to continue. The money cycle proves that spending is good for the economy and savings, especially during these times, will cause more harm than good in the economy. The fact that there were months where savings is at a negative level shows that there is consumer confidence in spending due to anticipation of compensation. This may also be indicative that they are having some capability of paying off debts and in specific cases such expenses as taxes like in the month of January. The economy is heading towards expansion after this contraction. It will be years before its next peak will be achieved and I personally doubt that it will be within the same level as the previous one. But it will remain a steady and powerful force in the world prospect as long as there is continuous support from freethinkers and innovators of the country. Recent studies have indicated that economic power is heading towards the East of the globe and there is little that could prevent this. With the hardworking labor force of China, its economy is booming into becoming the next big thing in the world market. This may be true but the United States will remain as a force to reckon with and the dollar will continue to be the currency standard as far as the foreign market is concerned. The currently enforced plan of action which includes calls on patriotism to encourage consumers to prefer American brands over foreign brands may be a direct opposition on the rules of free market and of capitalism which the country has so vehemently emphasized but this is what is necessary at the moment. Furthermore, the direct hand that the government is placing in the functions of what used to be companies which were completely private owned imposes the guidelines and regulations as mandated by the government and the Federal Reserve plays a major role on this. Currently, without the stimulus packages that the nation has endowed, the would have had an even greater blow as Wall Street was already like a chicken running with its head cut off. There was no other logical choice but to enter the mix and help out through lowered interest rates at the expense of the government’s budget. Many may disagree with this move but otherwise there would have been no money going around fueling the economy and it would have spurred an even greater problem. Keynes’ suggestion that expenditure and income will never meet putting a gap between natural and real GDP reins true. This is the main reason why there was a recession due to the mortgages which the buyers were not able to pay. Delinquent payers were caused by the overconfidence of the lenders in the consumer’s potential and actual capacity to pay. Moreover, Keynesians suppose the idea that economy is self-regulating and the incessant dispersion of money in the economy is contributory to its growth and expansion. This was what went wrong during the Great Depression. They encouraged a Puritan spending attitude and the economy decline because there was nothing rolling in. Equipped with this knowledge, the current administration aims to prevent this by injecting more government money into the economy and ending this recession. Bibliography Bureau of Economic Analysis. (2010). Gross Domestic Product: first quarter 2010 (advance estimate). U.S. Department of Commerce. Felton, N. (2010). The year in briefing. Time , 12. Freedman, M. (2009). Big government is back- big time. Newsweek , 14-17. Meacham, J., & Thomas, E. (2009). We are all socialists now. Newsweek , 13-17. Time Magazine. (2010). The 2009 Time person of the year: Ben Bernanke. Time , 20-44. Read More