What's Complicating Bernanke's Balancing Act by James Cooper - Essay Example

The Federal Reserve was created to guide the nation towards a stable financial system. It's goal is to maintain stable prices, low inflation, and moderate long term-interest rates. Keeping inflation low though monetary policies is one of the ways to ensure a stable economic preformance. The article also talks about how proposed protectionist policies threaten to increases overall inflation. The author believes that present interest rates are too low, and that globalization makes it harder to determine the right interest rates to promote economic growth.

Usually, high demand for goods and services would result in increased interest rates by the Federal Reserve to slow down demand and thus curb inflation. This is appropriate if the demand exceeds economic ability to produce those goods and services. However, a global market changes the dynamics of traditional economic systems, giving the Federal Reserve less control over the economy. Indeed, prices of goods and services are determined by overseas market factors aside from those in the United States.

The issue of globalization, which is the expansion and growth of international economic activity, has always been a fiercely debated issue. It is a complex process operating in various levels which can lead to increased competition, government borrowing, trade, etc. These factors have variable effects depending on the government's policies and management. The author's conjecture is that globalization resulting into an "interdependency" among economies will help prevent an economic crisis in the United States from happening (although the dollar could weaken due to the economic success of other foreign currencies). I agree. Nations are turning into one global network where standards of living depend on the value added to that network.

It brings about gains thorough consumption and exchange between the nations involved. A significant amount of economic growth seen in the late 20th century is owed much to globalization and the free trade. One of it's drawbacks however, is the imbalance in world trade.Article 2: "U.S.: The Double Whammy That Could Ignite Inflation" by James Cooper, March 20, 2006 in BusinessWeek Online The article talks about how the decrease in productivity together with the rise of labor costs could potentially hike up inflation at economically debilitating levels.

Last year, productivity increased-a good performance, considering the economy was weak during the year's end. However, the growth rate has progressively declined over the past three years, which is not a good sign. The correlation between labor costs and productivity was also explored in the article: the increase in labor compensations has slowed productivity, and the trend is likely to continue. Typically, productivity helps offset labor costs. However, if productivity is low, companies will be forced to raise prices to compensate and keep profits healthy.

As such, this will affect Federal Reserve decisions regarding interest rates. The Federal Reserve can help curb inflation levels by imposing higher interest rates to lessen demand and stabilize economic performance. Economists concur that an economy will be better off if inflation is low, thus economic policies should aspire for stability in prices. A fast growth without inflation could be possible with higher productivity, and the author postulates that this is could be done through companies' utilization of technological innovations.

For the most part, I agree with this conjecture. The issue about technological and economic changes is not new. Innovations in the Industrial Revolution caused a huge leap