Five News Articles on the US Economy - Coursework Example

Five News Articles on U.S. economy The following five articles define the current economic condition of the United s. Impact of low labor output in first quarter of 2013 on U.S. economy has been discussed in the first article. In another article Fed’s monetary policy has been discussed. House Financial Services Committee urges Fed to adopt a rules-based approach. One article has discussed Jeremy Stein’s suggestion that if bond market becomes overheated then monetary policies should be less accommodative. Also, another article explored the U.S. money system, and its author has talked about problems with the use of pennies and nickel in the U.S. payments system. The final article identifies factors responsible for stronger performance of U.S. banks and credit unions. Article 1: Unit labor cost is the average cost of labour calculated per unit of production. Potential output is the estimated maximum production level that can be achieved if all the resources like labor, capital, tools and technology can be fully utilized. Non-accelerating inflation rate of unemployment is the level of unemployment that maintains a stable inflation rate over a period of time. Natural rate of unemployment is the level of unemployment below which the economic system will collapse. Output gap is the difference between actual output of an economy and its potential output. It is positive when actual output is more than potential output, and is negative when actual output is less than potential output. Permanent supply shock is change of supply pattern resulting in change of price level. Temporary supply shocks stay for a short period like those which are caused by natural disasters. Worker productivity is the output of labour per hour. It is measured by dividing the GDP by total labor input measured by hours. Economy’s speed limit is the degree of economic growth caused by productivity without fuelling inflation. It reflects the growth rate of worker productivity. Lower speed limit causes high rate of unemployment (Stilwell). Due to several cold during winter, many workers could not go for work. This caused reduced productivity of American workers during first quarter of 2014. From last year, decline has been by 1.7 percent while in last quarter of 2013 it rose by 2.3 percent. This situation was caused by heavy snowfall leading to economic depression as consumers stayed at home while investors delayed investments. This situation is short term and will be back to normal once winter recedes (Stilwell). Permanent negative supply shock can reduce the level of potential output. Policy makers need to simultaneously pursue stability of both price and economic activity. Divine coincidence occurs when there is no conflict in the pursuing of both price stability and economic activity stability. Temporary negative supply shock can cause output to decline. (Response to a Supply Shock) In response to a temporary supply shock, policy makers can achieve either price stability or economic activity stability, but not both. Hence, divine coincidence does not hold true here. Article 2: Discretionary monetary policy is to control money supply and interest rates for the purpose of stabilizing businesses and lowering unemployment and inflation. Rule-based monetary policy follows established norms in which policy instruments depend upon past, present or future economic conditions. The interest at which a bank lends money to another bank is federal funds rate. Only creditworthy parties are involved in this for overnight borrowing and lending. Under gold standard, the exchange rate is determined by the ounce of gold difference between two currencies. This system was abandoned by the U.S. government in 1971. Dual mandate occurs when an elected candidate serves in more than one public position. Hierarchical mandate occurs when gold price is fixed and then maintained till price is stablilized. Hensarling believes that the Fed’s discretionary policy cannot be understood properly by the investors and so cannot be beneficial to the U.S. economy. He prefers a rule-based approach which can be easily understood and more reliable. During a debate within the FOMC, some participants supported increasing interest rate in middle of the year while others considered it inappropriate (Miller). According to Taylor rule, short-term interest-rate should be adjusted to make it consistent with full employment. Based on this rule, the Fed should be raising its short-term interest-rate to 1.25 percent. Taylor rule gives a higher rate to make it equal with long-run equilibrium level. John Taylor and Janet Yellen have argued that the Fed should follow its own monetary policy rule as it can ensure better economic performance (Miller). Contrary to Taylor’s view, Alan Greenspan blames the global decline of long-term interest rates due to increased savings for the housing boom and the subsequent financial crisis. The Sound Dollar Act eliminates the need of pursuing full employment for price stability by the Central Bank. This Act can be good for U.S. dollar reformation since it gives the Fed single mandate to sustain price stability. Fed’s policy can affect long-term interest rate. Lower interest rate induces higher demand causing explosion of national debt. Low interests are hurting senior citizens who depend on their savings. The Fed has right degree of independence necessary to make difficult choices for the country’s economy. Article 3: Accommodative monetary policy lowers interest rate to boost borrowing thus leading to economic growth. Bond market is overheated when bonds are mispriced and earnings are low. Fed’s benchmark interest rate is the rate at which one depository institution (e.g. banks) lends to another depository institution. Term premium is the excess of earning from maturity of long-term bonds over short-term bonds. At times of recession, policymakers may lower interest rates as way of autonomous easing of monetary policy. Monetary policy should be less accommodative during overheated bond market even at the risk of high unemployment level. Feb has a dual mandate of price stability and maximum employment. Fed policy has so far focused on tightening monetary policy (Torres & Kearns). During recession, Feb used traditional tools like lowering federal funds rate to almost zero and non-traditional tools like lowering borrowing costs for consumers and businesses. Reduction of interest rates increases borrowing of consumers which means more buying of goods. Also, businesses can invest more to increase production making more goods available for consumers. Fed’s use of tools affects the lending pattern of banks as reflected in balance sheets. This in turns affects the investments of nonfinancial firms that depend on banks for funds. Jeremy Stein who is the Federal Reserve Governor states that monetary policy should be less accommodative which suggests that financial stability should be emphasized. In 2013 spring, 10-year notes were around 1.6 percent. During this period, 10-year yields increased from the lows of May 2013 when it was declared monetary accommodation would be reduced to improve labor market. Stein said “dark side of collapsed risk premiums occurs if they return to normal abruptly in a way that causes larger economic effects than the initial compression”. Stein suggested “risk premiums on longer-term debt, or the component of the bond’s yield that compensates investors for owning a longer-term security as opposed to a short-term security” (Torres & Kearns). Article 4: Transaction costs are expenses incurred during buying or selling securities and include brokers’ commissions. Payment system is governed by law and indicates monetary exchange between two or more parties using bank deposits. Commodities like gold and silver have their own value and have use as money known as commodity money. Fiat money has no intrinsic value as its value is decided by government rules. The three functions of money- 1) it is medium of exchange like one can but clothes in exchange of money, 2) it is standard for measuring value of goods and services like how much is to be paid in exchange of clothes and 3) it can be easily stored as liquid asset like it can be stored in banks or at home as it does not deteriorate. Unlike the barter system (goods in exchange of goods), in modern society money is used to decide value of goods, also in that system goods formed wealth and all goods do not have storing capacity. Today, money is wealth which can be easily stored. U.S. economy has fiat money system since it can never get depleted. Ingraham said cost of producing pennies and nickel can be greater than their face value. The second problem is that U.S. government began to lose money on these commodities in 2006. As solution, Ingraham has proposed change of metal compositions of coins and using steel which is much cheaper. As second solution, Ingraham has proposed full discontinuation of pennies and nickels (Ingraham). A survey conducted in 2012 proved that 66 percent of Americans favor pennies (Ingraham). However, I feel in today’s global recession people will be more willing to change pennies to dollars as it will be less costly. One reader commented that pennies can be stored to be sold later on for a fortune. Another reader said that eliminating pennies and nickel can cause loss of money. A third reader associates emotional attachment with retaining pennies and nickels which he said is not reason. A fourth reader said nickel should be exchanged for something cheaper like steel. I still agree that paper bills will cost less and should be more in circulation than pennies and nickels. Article 5: When a country’s economic system is in a growing stage, indirect finances are more popular and as the economic system develops, there is shift towards direct finance. Direct finance is when a company raises funds by selling bonds directly to investors in the market. On the other hand, indirect finance relies on financial intermediaries. Adverse selection occurs when high-risk borrowers take loans which are available to thus increasing the probability of bad debts. To avoid this situation banks gather all the information about potential borrowers. Federal Deposit Insurance Corporation protects deposits in banks by recognizing the attached risks thereby protecting the economic system if the bank fails. A well-functioning financial system means public finances and debts are well managed thus enabling those with excess capital to invest, with minimum of risks, in ventures that need capital. Financial crisis can negatively affect individuals and households with inflation, reduced savings and loss of jobs. Businesses get affected with increased real estate values while governments have reduced revenues from taxes. Financial intermediaries can reduce transaction costs. They can also reduce risks by spreading investments over large number of securities. Credit unions are non-profit organizations unlike banks that function for making profits. Both of them keep safe deposits of customers. With economic recession coming to an end, banks and credit unions have increased earning either by increasing lending and trading, or by erasing troubled loans. During the recession, credit unions continued to lend while banks became more cautious. Thus credit unions helped borrowers to make productive use of assets. Bank profits are still at risk due to interest rates and low demand of loans (Douglas). References Douglas, Danielle, “Banks, credit unions post strong second-quarter profits”, The Washington Post, August 30, 2013, May 22, 2014 from: http://www.washingtonpost.com/business/economy/banks-credit-unions-post-strong-second-quarter-profits/2013/08/29/5d40f8a2-10d6-11e3-85b6-d27422650fd5_story.html Ingraham, Christopher, “Taxpayers lost $105 million on pennies and nickels last year”, The Washington Post, March 10, 2014, May 23, 2014 from: http://www.washingtonpost.com/blogs/wonkblog/wp/2014/03/10/taxpayers-lost-105-million-on-pennies-and-nickels-last-year/ Miller, Rich, “Republicans Opposed to Yellen Flee Paul in Search of Rules”, Bloomberg News, February 27, 2014, May 22, 2014 from: http://www.bloomberg.com/news/2014-02-27/republicans-opposed-to-yellen-flee-ron-paul-in-search-of-rules.html Stilwell, Victoria, “Productivity of U.S. Workers decreased in the first quarter”, Bloomberg News, May 7, 2014, May 22, 2014 from: http://www.bloomberg.com/news/2014-05-07/productivity-of-u-s-workers-decreased-in-the-first-quarter.html Torres, Craig. & Jeff Kearns, “Stein Says Fed Should Weigh Financial Risks in Stoking Job Gains”, Bloomberg News, May 22, 2014, May 23, 2014 from: http://www.bloomberg.com/news/2014-03-21/stein-says-fed-should-weigh-financial-risks-of-loose-policy-1-.html Read More