This report presents an overview of the US economy. The economy has been undergoing a lot of turmoil at the current writing, with a generally volatile market and experts disagreeing about technicalities of GDP level depression and/or recession. There have been many big changes in US monetary policy and leadership in the past few years, including Alan Greenspan being replaced with Ben Bernanke, and the current economic crisis has been building for some time, with different proposed solutions. First the Fed wanted to keep raising interest rates, and then it decided to cut interest rates as it did before the Great Depression.
During trying economic times, looking at the process of change and leadership decisions in US monetary policy is a more important issue than ever. This report describes the design of US monetary policy in a general way (a longer paper would be needed to get very specific on this very broad topic), looks at its goals and targets, how it has changed. After the Great Depression, the government learned that it couldn’t just trust supply and demand, that even if the demand were there, if the people didn’t have enough money, they wouldn’t touch the supply.
Keynes then changed the game. Today we are in an economic crisis and similar paradigm shifts and game changes may be necessary. “Inflation is always and everywhere a monetary phenomenon; price stability has important benefits; there is no long-run tradeoff between unemployment and inflation; expectations play a crucial role in the determination of inflation” (Mishkin, 2007). As the above statement shows, an overall determination of the status of the current US economy is complicated.
In terms of business cycles and recovery, many people see room for optimism within US monetary policy objectively, while others are more pessimistic or cynical about the future and say that things will have to be worse before they can be better. Actions of the Federal Reserve have helped to shore up some elements of the economy, but underlying problems do remain. As one source notes, “The Fed has quelled the panic that prevailed in the financial markets until recently. But it still has to nurse an economy weighted down by massive bad debts.
That is likely to require a period of easier money… with banks hoarding, consumer confidence in the pits, and housing still in freefall, it may be too early for optimism” (Coy, 2008). Still another source notes that while some elements of the economy may actually benefit from the current situation, the mass majority of indicators shows a situation in which there are problematic dimensions, including rising unemployment rates as well as bank failures and worries about future failures: “As long as the largest asset on household and bank balance sheets continues to deflate, the credit and consumption hits will keep coming.
The worst is not over… commodity prices and gold will go up. The loser? Oh, pretty much the rest of us” (Economic, 2008). Of course, this is just one subjective opinion of an author, who seems to be somewhat slanted towards an over-valuation of the housing market’s impact. Other authors have other preoccupations. Too many variables can change in the external environment for most prognostications about the future of US monetary policy to be taken totally literally. People look to the past of economic improvements and adjustments to see the future economically.
However, by a strict definition of recession, it seems more and more unlikely that those who are predicting a major recession based on slow but still positive GDP growth, are going to really be able to see the future with any sort of accuracy. Some may argue that, “The US may well be in a recession despite the positive GDP report. First quarter growth could be revised downward as more data come in. Even if the GDP news doesn’t get worse, the business cycle arbiters of the NBER could declare the current mess to be a recession in hindsight based on the weakness in income, industrial production, and employment” (Coy, 2008).
However, this argument does not really take into account the definition of recession in the first place and its inextricable link to the GDP, or how world markets are also affected. “The European Central Bank pursues price stability as its primary goal, while the Federal Reserve System seeks maximum employment, stable prices, and moderate long-term interest rates. The Bank of Japan aims for price stability and for the stability of the payments and settlement system. Thus, in principle, different countries should be expected to run different monetary policies” (Economic, 2008).
There are different goals, but policy remains fairly consistent across boundaries. In terms of how the economy is doing generally regarding some commonly used indicators, as one source states, “Consumer spending on goods plunged 2. 6%, but outlays for housing, medical care and other services rose… heading into the second quarter, while overall payrolls shrunk by 20,000 jobs, services added 90,000… services make up almost 60% of the Gross Domestic Product” (Cooper, 2008). In other words, while some of the indicators are up, others are down, showing a volatile economy in general.
It is important to understand these basics before an analysis of the indicators can really proceed. There are definite signs of a slowdown in some areas, but there are other areas that are more optimistic.
Cooper, J (2008). Services: Heavyweight in a hard fight. Businessweek. Coy, P (2008). The Fed may have more cutting to do. Businessweek. Mishkin (2007). http://economistsview. typepad. com/economistsview/2007/09/mishkin-will-mo. html Economic trends (2008). http://www. clevelandfed. org/research/trends/2007/0507/01monpol_043007. cfm Market laboratory—indicators (2008). Barron’s.