Global Political Economy - Essay Example

?Have U.S. financial and monetary policies since 1979 strengthened America’s position in the global economy Introduction When having to evaluate the effectiveness of a country’s fiscal and monetary policies it is necessary to focus on the relevant initiatives of its central bank; the economic decisions developed by the country’s government are also important for understanding the potentials of the above policies to lead the national economy to a stable growth. The US monetary policy of 1979 was based on the decisions of Paul Volcker – the chairman of Federal Reserve Bank (Rugman et al. 2003). Paul Volcker, who was appointed in the particular position in August 1979 (Rugman 2003, p.110), introduced a series of radical changes in the US monetary. He decided to focus on the ‘supply of money instead of keeping the interest rates low’ (Rugman 2003, p.110). In this way, the lowering and the stabilization (at low levels) of the inflation were set as the new priorities of the US monetary policy. Through the above practice, interest rates in US were increased from 11% (as in 1979) to 20% (in 1980s), a fact that led to a series implications for the US economy, as explained below. The changes in the US monetary policy as developed in 1979 have been considered as a key point in the American economy, affecting the practices developed by US monetary policy makers up today. The effects of the US monetary and fiscal policies on the country’s economy are discussed in this paper. Emphasis is given on the fact whether these policies have strengthened America’s position in the global economy or not. It is concluded that such target was achieved but not without implications. The high level of the country’s debt is an issue that should be addressed in order for the growth of the country’s economy to be real – in all its aspects. 2. U.S. financial and monetary policies since 1979 and their impact on the American economy As mentioned above, in 1979 the monetary policy of USA was changed; the decrease of inflation has been set as a priority, aiming to support a continuous and stable growth of the national economy. The benefits of the above initiative took a while to appear; financial crises were not avoided, for instance the recession of 1981-1982. Through the decades, the effects of U.S. financial and monetary policies on the country’s economy have been differentiated, in accordance with the local political and social conditions but also with the economic environment in the global market. In any case, the stabilization of inflation at low levels, a key target of the monetary policy makers of 1979 has been achieved. However, periodically, the use of the above policy, i.e. targeting on low inflation, has been proved to be a rather inappropriate practice in order to face the market pressures, a fact which has been highlighted in the literature. In order to understand the effects of the US financial and monetary policies since 1979 on the American economy, it would be necessary to refer to the historical development of these policies, i.e. their range of appearance. Then, their effects on the American economy could be identified and evaluated – taking into consideration the conditions in the global market. One of the key characteristics of the update of the US monetary policy of 1979 has been the following one: emphasis has been given on lowering the inflation and keeping it on low levels. A strict monetary policy was used as a tool for achieving the above target (Allen 1999, p.170). The initial effect of the above policy has been the significant increase of the ‘LDC (less developed countries) borrowing rates’ (Allen 1999, p.170). Because of the above practice, the country’s economy has been negatively affected – the recession of 1981-1982 has been unavoidable. In this context, the initial results of the economic reform of 1979 in US – referring to the increase of the priorities of the country’s monetary policy, as described above – had been negative. A similar assumption is developed in the study of D’Arista (1994); in accordance with the above researchers, the most severe effect of the change in US monetary policies in 1979 has been the increase in the debt burden. It is explained that in the past decades, the effects of debt burden on the national economy were not particularly severe mostly because in the past the debt burden reflected rather the changes in inflation and not so much real debt (D’Arista 1994, p.256). However, in the beginning of 1980s, the debt burden was real, a fact that led to the use of a high level of commodities of the US Federal Bank to secure the debt, a fact that contributed in the appearance of the 1981-1982 financial crisis (D’Arista 1994, p.256). Another effect of the increase of interest rates, as part of the new US monetary policy, was the following one: inflation was continuously increased, a fact that was followed by certain benefits (for instance the value of houses) but had also negative effects, like the increase of the cost of borrowing (Markham 2002, p.73). Regarding the US fiscal policies of the above period, i.e. the 1980s, these can be characterized as quite dynamic, focusing on ‘the reduction of tax, the increased reliance on deficit financing and the reduction of overall spending’ (D’Arista 1994, p.256). The above policies would have the chance to support the growth of the economy; however, such target could not be achieved because of the increase in the debt burden, which, as noted above, was quite high. Moreover, Cargill et al. (1988) noted that the new monetary system may resolves problem such as intermediation, however, it still have risks, not being able to secure the stability of the economy in the long term. The negative effects of the US monetary policy of 1979 on the country’s economy could be understood through the Graph 1 (Appendix); in the specific graph, the increase of the country’s economy in 1940 (as being characterized by an increase in the GDP, in consumption and income levels and in the non-farm payrolls levels) has been followed by a continuous decrease – up to 2000; during the above period, all economic indicators are rather discouraging regarding the performance of the country’s monetary and fiscal policies for the years between 1940 and 2000 (Graph 1, Appendix). In terms of job creation, another indicator of the performance of the economy, the effectiveness of the US monetary policies could be also characterized as rather low, taking into consideration the radical decrease in 2000 in the job creation area – almost near to the zero point. It is assumed that gaps exist in the US monetary and fiscal policies (Graph 2, Appendix); these gaps did not allow the rapid identification of the market risks. In accordance with Dymski et al. (1993) the failures in the US monetary policies have been traditionally the reason for the delays in the growth of the country’s economy. Reference is made especially to the US economic plans of 1990s; it was during that period that under the pressure of the competition in the global markets, fiscal policy makers in US have avoided to develop initiatives that could support the national economy. In this way, ‘fiscal policies were immobilized while monetary policies had to fight the economic crisis’ (Dymski et al. 1993, p.65). The above practice had been part of the U.S. monetary policy of 1979, which has highly affected the national economy; however, the elimination of the value of fiscal policies, in order to enforce the rules of the monetary policies, has prevented the growth of the US economy, a problem that could be considered as related with the severe crisis of the 2007-2008 – if focusing on its potential effects on country’s economy in the long term. Regarding the practices of US policy makers in 1990s – as described above – it is suggested that the review of the country’s macroeconomic policies would be necessary in order for this issue to be appropriately addressed (Dymski et al. 1993, p.65). However, it should be noted that even if a growth of the US economy was not achieved in 1990s, under the terms described above, still, the performance of the country’s economy during the above period was stabilized – compared to 1980s (Graph 1, Appendix). In accordance with Wolfson (1994) the key weakness of the US fiscal policies in 1970s and 1980s was the lack of control on speculative lending (Wolfson 1994, p.109); the significant increase of this type of lending led to the increase of volatility of the national economy and the further increase of inflation. However, the introduction of legislative texts, such as ‘the Economic Recovery Tax Act of 1981’ (Wolfson 1994, p.109) led to the market growth, supporting the increase of investment on commercial property. The developments regarding the US monetary and fiscal policies, as explained above, have not been adequate in order to secure the growth of the national economy in the global market. Even if US currency has been set as a key currency in global commercial transactions, since the position of the US as a major economic force in the global market has not been secured. This fact is highlighted in the study of Batten (1990); in the above study, emphasis is given on the common monetary policy (open market operations) followed by UK and US (Batten 1990, p.3). It is explained that the above practice has led to the stable development of these countries’ monetary policy. On the contrary, France and Japan have adopted a system of financial liberalization, which does not offer a high flexibility in interest rates (as in the case of UK and USA) (Batten 1990, p.3). In the above context, the monetary policy of USA (similar to that of UK, but different in terms of the emphasis given on the control of inflation, as explained above) can be characterized as significant, being adopted by other countries worldwide. The above fact needs to be taken into consideration when evaluating the position of the country’s economy in the global market – as this position is influenced by the country’s monetary and fiscal policies. 3. Conclusion The performance of the American Economy within the global market can be characterized as significant – despite the high exposure of the country to debts. The change of the US monetary policy in 1979, as explained above, has been critical for the development of the country’s economy, even if the above initiative was followed by a series of implications. In accordance with Bernanke (2004) in order for a country’s central bank to gain the trust of the public, it is necessary to be independent from the local government. In practice, this means that the government could not be involved in the development of the country’s monetary policy, a target that is rather difficult to be achieved. At the next level, the figures related to the industrial activity in US for the year 2010 reveal that the country’s economy is increasing (Schlisserman et al. 2010). In a relevant report published by the BBC News (2010) it is noted that between July and September 2010 the US economy was increased by 2%, which is a significant level if taking into consideration the turbulences in the global financial market (BBC News 2010). In another report it is explained that the annual growth of the US economy for 2010 was 3.1%, a figure, which is encouraging, compared to the performance of the economy in the previous years. It is proved that the current US monetary and fiscal policies, which are based on the country’s monetary and fiscal framework of the post 1979 period, are able to support the strengthening of the US economy in the global market; the above target has been already achieve, at a particular level, since the country’s currency is the key currency of global commerce and since the country’s monetary and fiscal policies have been used as the basis for the monetary and fiscal policies of other countries worldwide. References Allen, R. 1999. Financial crises and recession in the global economy. Cheltenham: Edward Elgar Publishing Batten, D. 1990. The Conduct of monetary policy in the major industrial countries: instruments and operating procedures. Washington: International Monetary Fund BBC News. 2010. US economic growth rate quickens. Available from < http://www.bbc.co.uk/news/business-11652821> Bernanke, B. 2004. Panel discussion: What Have We Learned Since October 1979? To the Conference on Reflections on Monetary Policy 25 Years after October 1979, Federal Reserve Bank of St. Louis, St. Louis, Missouri. October 8, 2004. Available from Business Report. 2011. U.S. economy grew 3.1% at end of 2010. Available from < http://www.businessreport.com/news/2011/mar/25/us-economy-grew-31-end-2010-fnc1/> Cargill, T., Royama, S. 1988. The transition of finance in Japan and the United States: a comparative perspective. Stanford: Hoover Press D’Arista, J. 1994. The Evolution of U.S. Finance: Federal Reserve monetary policy, 1915-1935. New York: M.E. Sharpe Dymski, G., Epstein, G., Pollin, R. 1993. Transforming the U.S. financial system: equity and efficiency for the 21st century. New York: M.E. Sharpe Feldstein, M. 1995. American Economic Policy in the 1980s. Chicago: University of Chicago Press Hester, D. 2008. The evolution of monetary policy and banking in the US. New York: Springer International Monetary Fund. 1981. Annual Report 1981. Washington: International Monetary Fund Markham, J. 2002. A financial history of the United States: From the age of derivatives into the new millennium: (1970 - 2001), Volume 3. New York: M.E. Sharpe Rugman, A., Boyd, G. 2003. Alliance capitalism for the new American economy. Cheltenham: Edward Elgar Publishing Schlisserman, C., Chandra, S. 2010. Leading Indicators, Factory Data Signal U.S. Economic Recovery Picking Up. Bloomberg. Available from < http://www.bloomberg.com/news/2010-11-18/leading-indicators-index-in-u-s-climbs-0-5-as-fed-prepares-easing-moves.html> The Economist (2010) Almost a lost decade. Available from < http://www.economist.com/blogs/freeexchange/2010/03/american_economy> Wolfson, M. 1994. Financial crises: understanding the postwar U.S. experience. New York: M.E. Sharpe Bibliography Andrews, D. 2006. International monetary power. New York: Cornell University Press Aulakh, P., Schechter, M. 2000. Rethinking globalization(s): from corporate transnationalism to local interventions. New York: Palgrave Macmillan Northrup, C. 2003. The American economy: a historical encyclopedia. Santa Barbara, California: ABC-CLIO Uh, R. 2006. Financial Institutions and Services. New York: Nova Publishers Appendix Graph 1 – Performance of the US economy – from 1930 up to 2000 (Source: The Economist) Graph 1 – Performance of the US economy, job creation – for 1996-2002 (Source: Witte) Read More