Discuss the current economic situation in the U.S. as compared to five (5) years ago. Include interest rates, inflation, and unemployment rate in your explanation.
In the last five years, the US economy has continued to make dramatic improvements from the tremendous amounts of uncertainty surrounding the lingering effects of Financial Crisis and the Great Recession. At the time, the government was focused on protecting the financial sector and key industries which were vital to economic growth. The result is that unusual steps were taken to prevent the economy from falling into a downward spiral (i.e. bailouts). This is designed to save jobs and protect the standard of living. (Degrace, 2011)
For example, 1929 to 1932 the economy went through similar challenges. At the heart of these issues, was the large number of margin calls that were generated. This is when investors must deposit additional amounts of money or securities in their accounts after the stock has fallen a certain percentage. If they do not, the brokerage firm can sell their positions to satisfy the loan (through a process known as re hypothecation). (Berton, 2001) These actions were supported by the belief that the markets would continue to move steadily higher. The combination of these factors, created a situation where a large bubble developed. Once it burst, is when a downward spiral occurred. This negatively affected unemployment, manufacturing, consumer spending and the standard of living. (Degrace, 2011)
The aftermath was felt for years to come and launched America into the largest depression ever recorded. The result is 12 million people were unemployed; 1,600 banks failed and $14 billion dollars was lost. This lasted from 1929 until 1933.) According to Jensen (2011) everyone felt that the end was near, only to see worse situations continuing to develop. During the last recession, these programs were instrumental in preventing entire industries from collapsing. A good example of this can be seen with the financial system during 2008 and 2009. If the government had not provided bailouts to: Citigroup, AIG, Goldman Sachs and Bank America. There is a realistic possibility, the entire financial sector would have collapsed. This is because lending activities were curtailed and businesses / consumers did not have access to loans. Once this occurred, is the point the economy continued to become worse until these actions were taken. (Jensen, 2011)
The result is that interest rates were lowered to .5%. At the same time, inflation has remained below 3% and the unemployment rate declined from 9.3% to 6.5%. This is signifying that the economy is improving. Yet, at the same time, the total number of hours worked has declined to 32 from 40. In many cases, employers are hiring part time individuals to lower labor costs. This is creating a situation where unemployment is falling. However, the rates declines are artificially inflated with firms not creating new positions. Instead, they are concentrating on cutback on hours. This is causing the economy to experience an uneven recovery. (Standard and Poor’s, 2014)
Explain the changes in interest rates, inflation, and unemployment rates that your research yielded. Explain one reason for each of the changes in interest rates, inflation, and unemployment rates that you identified in Question 1.
Interest rates were lowered to .5%. This is in response to the tight lending conditions and the government trying to restore confidence. The effects are that interest rates have remained unchanged with the Fed continuing this policy. (Standard and Poor’s, 2014)
At the same time, inflation has remained below 3%. This is indicating that the economy is experiencing stagnant demand. In these situations, consumers are not actively spending money and bidding up the price of various products and services. Instead, they are controlling their spending and focusing on paying down their debt. The impacts are that inflation has remained under control. This has enabled the Fed to keep interest rates so low for such as long period of time. (Standard and Poor’s, 2014)
The unemployment rate declined from 9.3% to 6.5%. This is showing how the economy is improving. However, the total number of hours worked has declined to 32 from 40. In this case, the firm the unemployment rate is falling from firms adjusting their hiring strategy. At the heart of their focus, is on decreasing costs and avoiding paying for added benefits. If they are under 32 hours, the organization can achieve these larger objectives by hiring more employees. Yet, they will not have to cover their expenses for health care and additional benefits. (Standard and Poor’s, 2014)
Identify two (2) strategies based on fiscal and monetary policy that would encourage people to spend money in order to create economic growth.
Two strategies that will encourage consumers to spend money include: lowering taxes and reducing interest rates for margin. Lowering taxes will have a positive impact on consumers by allowing them to have more money. They will spend this at some point in the economy, which contributes to growth. Lowering the rate that investors are paying for margin will encourage everybody to invest in the stock market. Once this happens, is the point more people will focus on savings and help to plan for the future. The key is making these changes responsibly. (Standard and Poor’s, 2014) (Laffer, 2009)
Explain how the two (2) strategies that you identified in Question 3 could affect the unemployment, inflation, and interest rates.
The first strategy will lead to a decrease in unemployment, its reduces inflation and it will keep interest rates low over the long term. This is because consumers are spending additional amounts of money in the economy. The effect is that spending and corporate profits increase. This has a positive correlation on these areas. (Laffer, 2009)
The second strategy will encourage people to invest in the stock market. This is because there are lower standards and interest for someone to purchase stock and other areas. These changes will provide firms with additional working capital at lower rates. Once this occurs, is the point unemployment, inflation and interest rates will decline through providing firms with alternative avenues of financing and encouraging everyone to engage in these activities. (Laffer, 2009)
- Berton, P. (2001). The Great Depression. Toronto, ON: Anchor.
- Degrace, T. (2011). Stock Market Crash of 1929 Causes, Effects and Timeline. Stock Picks System. Retrieved from: http://www.stockpickssystem.com/
- Jenson, G. (2011). Trading Education: Stock Market Crash of 1929 and the Great Depression. Option Trading Animal online Trading Education. Retrieved from: http://www.optionsanimal.com/
- Laffer, A. (2009). Rich States, Poor States. New York, NY: Alac.
- Standard and Poor’s. (2014). S&P Reports. New York, NY: McGraw Hill.