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Current Macroeconomic Situation in the U.S - Essay Example

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U.S. - CURRENT MACROECONOMIC SITUATION Name of Student (author) Student ID Number: E-mail address: Name of Course: Professor’ Name: Name of University Word Count: 974 October 05, 2011 Introduction This paper gives a brief but concise snapshot of the United States economy at this point in time by looking at some key indicators such as unemployment, inflation and recession threats…
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Current Macroeconomic Situation in the U.S
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U.S. - CURRENT MACROECONOMIC SITUATION ID Number: E-mail address: of of University Word Count: 974 Date of Submission: October 05, 2011 Introduction This paper gives a brief but concise snapshot of the United States economy at this point in time by looking at some key indicators such as unemployment, inflation and recession threats. The state of the domestic economy has always been topmost in the minds of American citizens. It will perhaps be one of the most defining issues that will determine the winner of next year's presidential elections as well. People are understandably worried about the economy as it impact on them directly, perhaps more significantly than other concerns such as a global anti-terror war. The health of the U.S. economy has always determined the attainment of the American dream. It is however, threatened since the implosion of the U.S. sub-prime housing estate bubble in 2007. Discussion The United States Federal Reserve Bank is in tight situation these days as the economy of the country still cannot get out of the deep recession that started in 2008. It has tried almost all the tools it has at its disposal but the lingering effects are still there, with the threat of a recession very real as the economic recovery continues to falter due to a number of external factors such as Europe having big financial problems of its own dealing with the sovereign debt crisis that has a few countries tottering on the edge of default such as the PIIGS (Portugal, Italy, Ireland, Greece and Spain), Japan still reeling from the effects of the tsunami last March and subsequent nuclear catastrophe while China's economy is also starting to slow down already (Sommer, 2011, p. 1). A lack of viable policy options has the Fed chairman Ben S. Bernanke contemplating the revival of an obscure 1960s era of monetary policies known as “Operation Twist” because the economy is clearly in need of help but not sure on what tool to use, possibly something that is different. Unemployment – the severity of the current U.S. recession can be judged by zero growth in new jobs as of August 2011 (latest unemployment data available); this is the first time it had happened since end of World War II (Frean, 2011b, p. 1) and the unemployment rate remained anchored at a stubborn 9.1% despite various measures to stimulate hiring of new workers such as tax breaks for small businesses. Among the measures contemplated is putting crews to work on a variety of infrastructure projects, such as renovating bridges, roads, airports and seaports. This is reminiscent of the New Deal programs by Pres. Franklin D. Roosevelt during the Depression. Its aims can be summarized into the 3Rs, namely: relief, recovery and reform. The economy added a mere 17,000 jobs in the private sector but was offset by 17,000 jobs lost in the public sector as some government units trimmed down their workforce due to budget deficits. Net job gains June and July were revised downwards by 58,000 and the number of hours worked per week also fell. Bernanke himself cautiously admitted the US economy is in real danger of stalling, with the U.S. GDP having shrank by 5.1% instead of 4.1% between Q42007 and Q12009 (Frean, 2011a, p. 1). A total of 14 million adults remained unemployed, little changed since April (BLS, 2011, p. 1). Inflation – the threat of a second recession (double-dip recession) is much greater than a threat coming from inflationary pressures resulting from increased money supply. The U. S. Fed therefore is also contemplating on embarking on a third part installment of its quantitative easing program (QE3) after the QE1 and QE2, although its effects are lower due to diminishing returns (Curtin, 2011, p. 1). The aim of “Operation Twist” is to bring long-term interest rates lower such that businessmen are encouraged to invest that will create jobs and consumers will spend again to increase demand. The downside of low interest rates is another financial bubble might form. Recession – another downside of an easy money policy (derived from low interest rates) is a moral hazard component in which people will spend recklessly again because of easy credit. However, this is a tolerable risk compared to the greater risk of another recession which can have serious consequences on the job employment situation. Short term interest rates is now down to almost zero until well into year 2013. Cutting government spending will not help much; neither is a tax increase will help to dent the new normal of chronically high unemployment because it will increase the costs of doing business. While much of the euro zone has a debt crisis, the U.S. has a jobs crisis that requires creative solutions (Crutsinger & Rugaber, 2011, p. 1). Conclusion One way out of the economic mess is to use expansionary fiscal policy tools although it is a bit limited in its expected positive effects or benefits. The new stimulus proposal of $ 447Bln by President Barack Obama contained in a job-creation bill will be a step in the right direction. It will help to ease the unemployment situation similar to the New Deal initiatives during the Great Depression of the 1930s but there is an important caveat here: the Fed must not monetize deficits as it can lead to higher interest rates that in turn will cause inflation (Baumol & Blinder, 2011, p. 712) which would be difficult to control once it starts. Any stimulus should be temporary only as persistently high Federal budget deficits will risk eroding whatever economic gains are achieved. Budget deficits are not entirely bad per se; they can be a powerful tool to help revive the overall demand and stabilize the economy whenever the private sector is reluctant to pick up the slack. A good monetary policy as advocated by the Federal Open Market Committee (FOMC) is to retain the low interest rates for short term debts for the meantime until the economy recovers fully. References Baumol, W. J. & Blinder, A. S. (2011). Economics: principles and policy. Mason, OH, USA: South-Western Cengage Learning. Bureau of Labor Statistics (2011, September 02). Economic news release: employment situation summary. Retrieved October 05, 2011 from Bureau of Labor Statistics Web site: http://www.bls.gov/news.release/empsit.nr0.htm Crutsinger, W. & Rugaber, C. S. (2011, October 04). Bernanke warns recovery "close to faltering." The Associated Press. Retrieved October 05, 2011 from http://finance.yahoo.com/news/Bernanke-warns-recovery-close-apf-352440448.html?x=0&sec=topStories&pos=5&asset=&ccode= Curtin, S. (2011, August 04). Lance Roberts: QE3 might help the markets, but it won't save the economy. Daily Ticker. Retrieved October 05, 2011 from http://finance.yahoo.com/blogs/daily-ticker/qe3-coming-won-t-save-economy-lance-roberts-161942266.html;_ylt=AujvG6RE6qtayoxJ56Esx9gp2YdG;_ylu=X3oDMTFpbzV1ZDUxBG1pdANET05UIE1JU1MEcG9zAzMEc2VjA01lZGlhRmVhdHVyZWRMaXN0RWRpdG9yaWFs;_ylg=X3oDMTM5ZzJkaWxiBGludGwDdXMEbGFuZwNlbi11cwRwc3RhaWQDZDU2MWU5ZWQtNTE1NS0zZjY3LWFmYjQtMmJjYWM2MWIzNzQzBHBzdGNhdANleGNsdXNpdmVzfGRhaWx5dGlja2VyBHB0A3N0b3J5cGFnZQ--;_ylv=3 Frean, A. (2011a, July 29). America under pressure as recovery stalls. The Times. Retrieved October 05, 2011 from http://www.thetimes.co.uk/tto/business/economics/article3109495.ece Frean, A. (2011b, September 03). Obama on rack after worst day for new jobs since 1945. The Times. Retrieved October 05, 2011 from http://www.thetimes.co.uk/tto/business/economics/article3152919.ece Sommer, J. (2011, September 10). Federal Reserve considers a revival of "Operation Twist": Let's twist again, like we did in '61. The New York Times, p. BU5. Retrieved October 05, 2011 from http://www.nytimes.com/2011/09/11/your-money/federal-reserve-considers-a-revival-of-operation-twist.html?_r=1&scp=2&sq=operation%20Twist,%20Bernanke&st=cse Read More
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