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PDtax, Master's Degree
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Economic Questions

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On the importance of savings and investment, identify a government policy that you believe either promotes or stifles economic growth and defend your response.


 


From an economic growth and prosperity level, we have to look at the role of the financial system. We know that high inflation means higher interest rates, which lead to less purchasing power and more investing (investors like higher interest rates!). However, lower interest rates spark more lending for business growth, home and auto purchases, etc. How has economic policy affected the lending institutions today? If inflation rises how will it affect the economic recovery in the U.S.?


 


Today we see a lot of activity within the international trade arena as the U.S. deficit has soared to a record high. Trade is designed to create bigger market opportunities, so why is the balance of trade so out of balance for the U.S.?


 


State what you think will cause market fluctuations over the next few years as the economy struggles to recover. What areas of the economy should be closely watched as indicators of future activity?


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On the importance of savings and investment, identify a government policy that you believe either promotes or stifles economic growth and defend your response.

The quantitative easing policy of this administration will promote economic growth, just from the effect of the low cost to borrow money. Projects will be more profitable with lot cost money. Purchases of homes and cars can be easier. Refinancing of existing debt means increased standard of living for debtors.

However, lower interest rates spark more lending for business growth, home and auto purchases, etc. How has economic policy affected the lending institutions today? If inflation rises how will it affect the economic recovery in the U.S.?

Lending institutions have hedged their interest rate bets (they resold many of their mortgage loans). Their cost of funds (what they pay depositors) can be reduced to almost nothing, so that lenders can still profit lending money at 3.5% on a mortgage they may resell. They are much less subject to interest rate risk (think variable rate loans).

If inflation rises, the cost of money rises very quickly. Yields to depositors will increase, but demand for borrowing will decline in the short term. It will have a significant impact on economic recovery, since much of the current recovery is interest rate driven, and not due to real increases in GDP or in demand for new employees to make things in the US.

Today we see a lot of activity within the international trade arena as the U.S. deficit has soared to a record high. Trade is designed to create bigger market opportunities, so why is the balance of trade so out of balance for the U.S.? The US balance of trade is misunderstood. Importing goods and services can be a good thing if the business cycle is in expansion, and customers demand the goods and services. In declining or recession periods, trade deficits are not a good thing, because people who would ordinarily produce domestic goods and services are not.

State what you think will cause market fluctuations over the next few years as the economy struggles to recover. What areas of the economy should be closely watched as indicators of future activity? Free trade will force the US to compete with world producers, and wages will drop to world levels. Debt issues that are consuming other countries, and their resolution, will paint a picture the US may need to follow. The first time that the US struggles to sell all the Treasuries it offers will cause market fluctuations. Any threat by the Federal Reserve not to sell debt at these record levels will also signal trouble for the markets. The current debt ceiling negotiations could threaten the US not paying its bills on time for the first time ever and would be catastrophic.

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