The US Economy over the Last Three Years - Example

Running Head: THE US ECONOMY OVER THE LAST THREE YEARS The US Economy over the Last Three Years [The Writer’s Name] [The Name of the Institution] The US Economy over the Last Three Years Introduction The U.S. Federal Government, if looked through an economist’s spectacles, is at a stand still right now. With the most topical matters on Capitol Hill with the banks going under and financial constancy non existent, the federal government does not even know which direction to go. The Federal Government is the authority and power. The Federal Government adapting a check and balances method to allocate and adjust issues as it recounts to the U.S. Constitution. The Federal Government depends on the world to function correctly so that the efforts on their part can operate efficiently for everyone. At this point in our economic times the Federal Government is operating poorly economically, socially, and is on the recovery side politically, with our new administration President Barrack Obama, and because of this, the United States is at the worst financial situation is has faced in a long time, but a change is coming. (Torbat, 2008, 10-13) In the 1929, the United States of America was hit by the biggest depression in history. The Great Depression not only affected Americans, but the nations who relied on our exports and traded with the United States. The stock market crash of October 1929, or “Black Tuesday,” was considered the beginning of the Great Depression. However, the stock market crash was not the only cause of the depression. Many other events led to the Great Depression: the European country’s inability to pay off their war debts led to the United States lessening their foreign trade. Additionally, speculation in real estate and stocks caused prices to rise out of control. The overproduction of materials and unemployment were another cause that was a result from machines replacing them. Banks also gave too much credit to people that were not able to pay off their loans (Economist 2007, p.4). Why does this sound so familiar, because we are in the mist of the Great Depression all over again? The Federal Government has managed to repeat the same exact issues that existed eighty years ago. The stock market is experiencing a different company crashing, or going out of business, on news broadcast each day. There is some company claiming bankruptcy, selling out, or just closing their doors. US Economy and War on Terror The Iraq War led the United States to not be able to pay off its debt to all the involved parties in the war, which includes the foreign government troops and foreign support in the effort of the war. Additionally, the real estate market crashed due to the financial institutions that have no money to lend to people for homes and other investments. In our marketplace, companies are overstocked in some industries and under stocked in others. Industries rely on each other to produce, and supply for the demand. When the demand is down, but the supply is still there what will happen to the goods and services. Then if the supply is low and the demand is low, people are fired, companies go out of business and the unemployment worker rate gets higher. Since there is no demand for what use to be supplied to industries unemployment is at an all time high. The Federal Government is the biggest client of all the United States and even abroad, but if the United States can not afford to buy and sell products and services to companies the economic sounds system in place is bound to crash (Boyes, 2007, 110-13). Finally, the financial institutions loaned too much money to people who could not afford to pay it back. Housing loans, automobiles loans, business loans, credit cards, etc, all contributed to the deficit the United States Federal Government is in today and has to resolve so that the nation can function properly again. President Obama Economic Policies Currently, the new elected President of the United States, President Barrack Obama, is faced with the same issues as former President Roosevelt. He arrived in office, just as Roosevelt, facing the same issues and seriousness of the Nation’s economy. President Obama had to come up wit ha plan to correct the issues of the United States and its financial issues. He is working with both sides of Congress, the House and the Senate, to start resolving the suffering of the world’s industry. Just as Roosevelt had his three R’s: relief, recover and reform, so will President Obama; this problem has been placed in the lap of the Federal Government to resolve and provide for the people of the nation an environment that all can prosper, spend, save and live again. President Obama is in the beginning stages of the 2009 “New Deal”, and a resolution should be seen soon, but it will not be resolved over night. The problem has been stacking up for years and a solution is in sight, but it is not going to happen magically. The Nation is going to have to work together to resolve this matter, hopefully learn from their mistakes and creating new avenues so this will not happen again. It has been said that, “It is an alarming amount of money, that is needed to resolve the deficit, but we will need to spend that kind of money to kick- start the economy” (Bogardus, 2008, 22-24). President Obama has the same idea in mind as Roosevelt, to focus on putting the money that will be loaned to industries and financial institutions back in to the economy so get the nation in its life cycle again. The Federal Government with the leadership from President Obama has created in the new deal, to create 2.5 million more jobs by January 2011. There jobs are called “green jobs” (Barrell, and Holland, 2007, 34-41). Green jobs are jobs dedicated to President’s Obama’s commitment to clean power using alternative energy. President Obama has come up with a solution to the employment problem and at the same time strengthening and saving the economy money too. Rebuilding Economy and Federal Government At this point the Federal Government is in the planning stage of the relief efforts to rebuild the economy trend, experienced by Americans. President Obama has stepped up to the plate and is working to relieve, recover and reform the downfall of the economy. If history is bound to repeat itself then there is nothing to fear. The U.S. economy will recover and this will go down in the history books once again. At the beginning of 2008, companies in the U.S. private sector added 130,000 jobs in January and unemployment rate raised to 4.9%. The Institute for Supply Management's index of manufacturing activity rose to 50.7, which is back above the 50 threshold that indicates expansion consistent with GDP growth of roughly 2%. Nearly 93% of purchasing managers said that turmoil in financial markets was having no effect on their companies' ability to obtain regular or additional financing. (Barrell, and Holland, 2007, 34-41) After Quarter 2 and Quarter 3, the U.S. economy has stumbled. (Barrell, Davis, and Pomerantz, 2006, 194-216) It was declines in residential investment down 23.9% and in inventory investment that almost wiped out the gains in consumer sector spending increased by 2%, business investment jumping 7.5%, and exports up 3.9%. (Barrell, and Holland, 2007, 34-41) Economic Recession and Unemployment Since the financial crisis is more and more serious, the unemployment rate is increasing, which also increased the violation of credit system. According to the report in New York Times, the credit card providers have cancelled 21 billion bad loans in the first half year. And the analysis indicates that the lost in the next one and a half year, the credit industry will lost at least 55 billion dollars. The credit card lost cost 5.5% of the whole bad loans in the U.S. This percentage may increase till more than 7.9%, which happened after the collapsing end of the internet bubble in 2001. (Shiller, 2008, 99-102) We have 5 credit cards per family in the U.S. Only visa card and master card have exceeded one billion. How many among the billions of credit card will still be “good” in the future? Compared with the amount of sub-prime lending crisis, the 900 billion debts in the credit card is not huge. However, in a market that 70% of the economy is supported by personal spending, the impact is worse and worse. (Shiller, 2008, 99-102) Where there is problem, there is an answer. When financial crisis came, the U.S. government is also not sitting there doing nothing. On October 2nd, the $700 billion bailout finally comes out after being rejected once. The Amount is even increased to 850 billion! 250 billion is used immediately for rescuing the financial organization in debt. 150 billion is used for cutting tax and help people who could not pay back their credit debt. (Boyes, 2007, 110-13) This bailout plan is intended to increase the confidence of investors, avoid the continuously fear-dropping of the global financial market, stable product prices, avoid property cheap selling by bankruptcies like Lehman Brothers, prevent financial crisis from becoming economic crisis, and avoid the vicious cycle of financial crisis and economic crisis. The Bailout Package The cons of bailout are also obvious. The reason why it takes two times vote for the bailout to come out is due to the rejection of the public. And that is also why Bush called it “rescue” rather than “Bailout”. Many people think that “Bailout is just wasting tax payer’s money to pay debt for tycoons and big brothers in economic system; it is for the benefit of the Wall Street rather than American economy recovery”. (Amadeo, 2008, p.19) When Japanese economy suffered depression, Americans “suggest” Japanese government not to rescue since “free market” needs to make effect for “survival of the fittest”. However, when the financial crisis reaches the U.S., our government spends huge to rescue the Wall Street. Hundreds of economists sign to boycott this bailout since the rescue content is not clear and might cause negative effect. They think that this bailout is more like a financial compensation that might result in a long-term opposite market cause-effect relation. (Anonymous, 2008)This financial crisis is still going, and nobody knows how long it will continue, maybe several months, maybe longer. Some economist says that our economy in the U.S. may not really come out of the effect of this crisis in nearly 10 years. We cannot change what has happened. However, there is one thing we can do, which is learning from this crisis and prevent another one. Some international analysts think that the three main reasons caused this economy turmoil are the long term low rates of Federal Reserves, the ramification market is too far away from the real market, and the financial culture is still waiting to complete, especially the first reason. After the long term economy boom, the Federal Reserve decreases the interest rate year by year after 911. Since the first two years, the decreasing is too much that the real interest rate is even negative sometimes. Although the interest rate is increased 17 times after that, Federal Funds rate is increase from 1% to 5%, American Dollar is still in long term Devaluation. (Amadeo, 2008, p.19) Interest rates are one of the main economic indicators for how the U.S. economy is doing. Forecasters use interest rates as a research tool in order to try and predict future economic growth. Interest rates are also what will make or break an industry including the automobile industry. The housing market plays an important role in regulating interest rates for auto sales. Of course the higher the interest rates, the less people are willing to buy the product. There are incentive programs being offered by larger auto dealers, in order to make consumers more willing to purchase the vehicle regardless of the interest rate, but consumers will shop around until they find the “best deal” which not only includes the price of the vehicle but the interest rate on the loan. Economists suggest interest rates should stay balanced through the year 2007, but will continue to rise through 2008 and into 2009. This can mean dismal circumstances for the auto industry, which would also affect the unemployment rate, which in turn could have a huge impact on the economy all together. Conclusion The consumer financial education also needs to be increased. After the crisis happened, many people do not know what compound interest is, do not know how to calculate the future mortgage costs, but still apply for the mortgage that they would never pay back. Many consumers do not have the sense of risk. This financial crisis is a huge strike, but may also be a good thing. Changing is not only a slogan. The value of the United States Dollar is ever-changing. World currencies are bought and sold on the open market daily, which accounts for their inherent fluidity. The reasons for these fluctuations are many, and far too complex to cover in entirety here, so let’s take look at the most prevalent factors: Many foreign states purchase and hold foreign money in reserve to hedge against monetary peaks and valleys. They do this for the same reason an individual investor would diversify his or her portfolio to protect their investments against a sharp decline in a certain industry. In many instances, the reserves kept in U.S. Dollars constituted the majority of countries holdings. Obviously, the steady decline in value did not sit well with them! To protect their interests, these countries are slowly and steadily replacing their holdings with currencies that are faring better in exchange. This loss of foreign confidence further contributes to the decline of our Dollar. The area of foreign investor confidence holds another strong catalyst for the downward slope: our National Deficit. The concern here is not so much our insolvency, but whether or not government powers lack of action to prevent this devaluation is proof of an intentional lowering of the relative value of our debt when it is time to repay it. Granted this is only a theory, but it is one that weighs on the minds of foreign investors nonetheless. In the fast paced world of commodities trading, a weak dollar drives the price of raw goods up, which in turn is a catalyst for inflation. The widely accepted benchmark for this has always been the price of oil. Since ‘Light Sweet Crude Oil’ has always been exclusively traded in U.S. Dollars, the effects of its price change resonate throughout the commodities market and directly affect the value of the dollar. If the dollar is weak, oil-producing companies are not getting the same value per barrel from their oil. To offset this, OPEC has traditionally used a myriad of tactics, such as curbing production, to inflate the price of oil on the open market and thus raking in large profits. This is a vicious cycle that, in and of itself, has the power to induce inflation. Appendices United States - Monthly Data Data Series Back Data Oct 2008 Nov 2008 Dec 2008 Jan 2009 Feb 2009 Mar 2009 Unemployment Rate (1) 6.6 6.8 7.2 7.6 8.1 8.5 Change in Payroll Employment (2) -380 -597 -681 -741 (P) -651 (P) -663 Average Hourly Earnings (3) 18.28 18.34 18.40 18.43 (P) 18.47 (P) 18.50 Consumer Price Index (4) -0.8 -1.7 -0.8 0.3 0.4 -0.1 Producer Price Index (5) -2.6 -2.7 (P) -1.8 (P) 0.8 (P) 0.1 (P) -1.2 U.S. Import Price Index (6) -6.0 -7.4 -4.6 -1.2 (R) -0.1 (R) 0.5 Footnotes (1) In percent, seasonally adjusted. Annual averages are available for Not Seasonally Adjusted data. (2) Number of jobs, in thousands, seasonally adjusted. (3) For production and nonsupervisory workers on private nonfarm payrolls, seasonally adjusted. (4) All items, U.S. city average, all urban consumers, 1982-84=100, 1-month percent change, seasonally adjusted. (5) Finished goods, 1982=100, 1-month percent change, seasonally adjusted. (6) All imports, 1-month percent change, not seasonally adjusted. (R) Revised (P) Preliminary United States - Quarterly Data Data Series Back Data 4th Qtr 2007 1st Qtr 2008 2nd Qtr 2008 3rd Qtr 2008 4th Qtr 2008 Employment Cost Index (1) 0.8 0.7 0.7 0.7 0.5 Productivity (2) -0.5 2.6 4.7 2.2 -0.4 Footnotes (1) Compensation, all civilian workers, quarterly data, 3-month percent change, seasonally adjusted. (2) Output per hour, nonfarm business, quarterly data, percent change from previous quarter at annual rate, seasonally adjusted. Data extracted on: April 23, 2009 1 National Debt Graph: Bush Goes for WWII Stimulus Accessed on 27-04-09 from http://zfacts.com/p/318.html http://usbudget.blogspot.com/2008/12/federal-reserve-balance-sheet.html http://usbudget.blogspot.com/2008/12/federal-reserve-balance-sheet.html References Amadeo, Kimberly “Value of the U.S. Dollar”. About.com US Economy (March 03, 2008) p.19 Barrell, R. and Holland, D. (2007), 'Banking crises and economic growth', National Institute Economic Review, 302, pp. 34-41. Barrell, R., Davis, E.P. and Pomerantz, O. (2006), 'Costs of financial instability, household-sector balance sheets and consumption', Journal of Financial Stability, 2, 2, pp. 194-216. Bogardus, K. (December 12, 2008). New Deal: Business Likes Obama Plan. The Hill Economic Journal February, 2009, 22-24 Boyes, W. (2007). The New Managerial Economics (1st Ed). Houghton Mifflin. 110-13 Economist (2007), "CSI: Credit Crunch", The Economist, vol. 385, no. 8551, pp. 4. Greenlaw, D., Hatzius, L, Kashap, A. and Shin, H.S. (2008), 'Leveraged Losses: Lessons from the Mortgage Market Meltdown', US Monetary Policy Forum, February 2008, 53-56 Shiller, R. J. (2008), The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do about It, Princeton University. 99-102 Torbat, A. (2008) Global Financial Meltdown and the Demise of Neoliberalism, Global Research, Center for Research on Globalization, 2008-10-13. Read More