Hi Everyone,
I apologize for not having blogged in the past week, I had to spend all my time studying for the SATs. I'll post an article in the next few days which will describe why I think the SAT is a bad idea.
Since we're still in the first week of October, I feel it is necessary to blog about the Month-In-Review
Domestic/America:
As mentioned in previous posts, the American stock market is at an all time high. It is highly overvalued. When I say stock market, I am referring to the S&P 500, the Dow Jones Industrial Average, and the Nasdaq 100. The stock market has been climbing steadily for the past four years (since 2009, when it crashed), but in the past two years, the stock market really its pace of growth. In 2012, the stock market reached its pre-market crash levels (2008 levels), and so far this year, its growing at an incredulous double digit rate.
Interest Rates/Unemployment: Currently, Federal Reserve Chairman Ben Bernanke's agressive Quantitive Easing Program continues at the same rate as it did when it first started a couple years ago. The aggressive QE plan calls for the Federal Reserve to purchase $85 billion in US Treasuries and Bonds per month in order to keep interest rates low. The low interest rates are supposed encourage consumers and businesses to borrow money by making it cheaper to borrow. Businesses would borrow money to expand their business by hiring new workers, and investing in new products/innovations. Consumers would borrow money and then spend money on products/services, fueling the economy.
Since the program was enacted a couple years ago, the unemployment rate has fallen by at least 0.1% per month. Although August's and September's unemployment numbers support the decrease, additional research shows that the decrease is simply because people have given up looking for jobs, not because they've become employed. This cancelled the Fed Reserve's plans of beginning to taper off the QE program, because the economy did not recover to a satisfactory level. It is important that the Federal Reserve taper off the QE program soon because with low interest rates over a long period of time comes increases in the rate of inflation. The Fed Reserve plans to keep interest rates between 0% and 0.25%.
Next Federal Reserve Chairman
Janet Yellen, a dove, is scheduled to replace Ben Bernanke as Federal Reserve Chair(wo)man, when Larry Summers, a hawk, withdrew his name from the race early in September. A dove's first priority is to keep unemployment rates low. As a dove, Yellen supports Bernanke's aggressive Quantitive Easing program because it attempts to keep interest rates low. By keeping interest rates low, it becomes cheaper for businesses to borrow money and expand their business (by hiring more workers).
Summers, who was believed to be the successor of Bernanke before withdrawing his name, thought it best to repeal the aggressive Quantitive Easing program ASAP, because it would cause an increase in inflation rates. As a hawk, Summers first priority is to keep inflation rates low, which means that interest rates need to be increased. If it becomes really cheap to borrow money, more people will borrow money (more demand of money) while the supply stays constant, and then the money won't buy as much. People will then borrow more money because of the low interest rates, fueling the cycle.
Stock Market: As mentioned before, stocks are at an all time high. Good news, right? Wrong. As stock prices rise, consumers want to invest their money into stocks, in order to get onto the profit wagon. As stock prices increase, consumers need to borrow money in order to buy stocks (margin trading), and gain profits. With the aggressive QE program and the resulting low interest rates, it is cheap to borrow money to buy the stocks. But, in a couple of months when the tapering begins, interest rates will rise, it will become more expensive to borrow stocks, and people will start selling. When the markets begin going down, everyone will rush to sell, especially those who are investing with money they don't have (margin traders). As a result, the stock market will crash. Additionally, with low interest rates, consumers will spend less money, and if they spend less money, businesses earn less revenue. With less revenue, businesses no longer look profitable, and their stocks are sold. After businesses lose investment money, they begin firing people at the office in order to reduce costs. To read more, click here
In addition, the stock market's growth is not because the companies are consistently beating earnings by extraordinary amounts.
Government Shutdown/Debt Ceiling: It is currently day 5 of the US Federal Government's shut-down. The US Federal Government shut down at 12:00 AM on October 1st, 2013 because Congress could not approve on a budget for the 2013-2014 Fiscal Year. The government's 2012-2013 Fiscal Year ended at 11:59PM on September 31st, and because Congress did not approve a 2013-2014 Fiscal Year Budget, the Federal government has no money to spend. Congress did not approve the Fiscal Budget because the Democratic controlled Senate would not pass a Fiscal Budget passed to it by the Republican controlled House of Representatives. The bill created by the Republicans calls for a postponement/defunding of ObamaCare for a year. The Democrats will not accept that, because they want ObamaCare to be passed now. ObamaCare was created to help make Health Insurance available to everyone through the federal government. Anyone can purchase ObamaCare for cheap, regardless of age, health, income, and pre-exsisting disease. Republicans believe that this plan is too expensive, especially for a nation already laden with debt, so they refuse to pass any legislation that does not postpone the discussion of ObamaCare for a year. I will post a blog discussing ObamaCare tomorrow.
One of the biggest problems caused by the federal government being shut down is the decrease in GDP. America's GDP is supposed to decrease by 15 points for every week that the government is shut down because the federal government employs hundreds of thousands of workers, and if the government's shut down, they will not be payed. If they're not paid, they have no money to spend.
Debt Ceiling: On October 17th, 2013, the US Government reaches its debt ceiling. Congress now needs to pass legislation that will increase the government's debt ceiling. I talk about why there is so much debt in a previous post. If the debt ceiling is not approved by Oct 17th, the US essentially defaults on all of its payments for the first time ever. If this happens, the entire international economy will spiral. The wealthiest nation in the world can no longer pay back its bonds (borrowed money), and can no longer lend money to consumers and banks. Couple that with increased interest rates, increased costs of food because of a lack of subsidies, increased taxes, and the hundreds of thousands to millions of unemployed US government employees, and the GDP of every nation will decrease.
If the US defaults and can no longer pay its payments, its credit rating goes down. The last time the US's credit rating decreased was in 2008, and that resulted in a large recession with an unemployment rate at 12%. If the US Credit Rate decreases, investors will be less likely to invest in US Bonds, or would demand higher interest/yield rates to make up for its risky investment.
Pension Crisis: This was first reported with Detroit's file for bankruptcy. Detroit owes hundreds of millions of dollars as pensions to government workers, and because Detroit is bankrupt, it requires federal government assistance/funds to pay the pensions. Although Detroit is one of the only US cities to go bankrupt, the pension crisis is happening to other cities too. More and more cities are requiring federal funds in order to help give pensions to the retired government employees. The baby boomers (huge number of babies born in the 1940s as a result of post-World War II activities) are at that age when it is time to retire (60's). Those baby boomers are going to need Social Security cash/checks. The federal government now needs to find a way to allocate more money to be used to pay off promised pensions and social security. This will increase the national debt, and cause an increase in taxes.
International:
The international economy as a whole is improving. The BRIC countries, Brazil, Russia, China, and India, a term coined by Goldman's top economist Jim O'Neill in the early 2000's as the countries most likely to grow this year, are still growing, but their growth is beginning to slow down. Brazil is scheduled to have the World Cup Soccer tournament next year, so its economy will boom in the upcoming months, but currently, its economic growth has been slowing down more then analysts predicted. China's economy is also slowing down in terms of growth. The same for India, but India is also facing currency inflation. Over the summer, the Indian Rupee reached its lowest point ever, 70 Rupees bought 1 USD, and more then 100 bought a British Pound. As a result, it became more expensive for Indians to go abroad, both to vacation and to study.
China, India, and Brazil's economies are slowing down because of all the investment that has already occurred. The costs of living/having businesses in those countries has increased ten-fold. Property values, food, and labor costs have sky-rocketed. Governments are attempting to increase foreign investment taxes in order to benefit themselves (corruption) and help their own economy. In addition, America's economy is offering a higher rate of return then foreign investments.
I address India's faltering economy in a previous post, but the general idea is that the government is printing too much money causing inflation and not spending enough money. India's property values have sky-rocketed because of so much foreign investment. The population of its cities has also increased exponentially; cities that were meant for hundreds of thousands of people now have millions of residents. The infrastructure can not handle those many people. The government has allocated/planned hundreds of billions of rupees (crores) to be be spent on improving internal vital infrastructure, but only a couple projects actually go through, due to high levels of government corruption.
I apologize for not having blogged in the past week, I had to spend all my time studying for the SATs. I'll post an article in the next few days which will describe why I think the SAT is a bad idea.
Since we're still in the first week of October, I feel it is necessary to blog about the Month-In-Review
Domestic/America:
As mentioned in previous posts, the American stock market is at an all time high. It is highly overvalued. When I say stock market, I am referring to the S&P 500, the Dow Jones Industrial Average, and the Nasdaq 100. The stock market has been climbing steadily for the past four years (since 2009, when it crashed), but in the past two years, the stock market really its pace of growth. In 2012, the stock market reached its pre-market crash levels (2008 levels), and so far this year, its growing at an incredulous double digit rate.
Interest Rates/Unemployment: Currently, Federal Reserve Chairman Ben Bernanke's agressive Quantitive Easing Program continues at the same rate as it did when it first started a couple years ago. The aggressive QE plan calls for the Federal Reserve to purchase $85 billion in US Treasuries and Bonds per month in order to keep interest rates low. The low interest rates are supposed encourage consumers and businesses to borrow money by making it cheaper to borrow. Businesses would borrow money to expand their business by hiring new workers, and investing in new products/innovations. Consumers would borrow money and then spend money on products/services, fueling the economy.
Since the program was enacted a couple years ago, the unemployment rate has fallen by at least 0.1% per month. Although August's and September's unemployment numbers support the decrease, additional research shows that the decrease is simply because people have given up looking for jobs, not because they've become employed. This cancelled the Fed Reserve's plans of beginning to taper off the QE program, because the economy did not recover to a satisfactory level. It is important that the Federal Reserve taper off the QE program soon because with low interest rates over a long period of time comes increases in the rate of inflation. The Fed Reserve plans to keep interest rates between 0% and 0.25%.
Next Federal Reserve Chairman
Janet Yellen, a dove, is scheduled to replace Ben Bernanke as Federal Reserve Chair(wo)man, when Larry Summers, a hawk, withdrew his name from the race early in September. A dove's first priority is to keep unemployment rates low. As a dove, Yellen supports Bernanke's aggressive Quantitive Easing program because it attempts to keep interest rates low. By keeping interest rates low, it becomes cheaper for businesses to borrow money and expand their business (by hiring more workers).
Summers, who was believed to be the successor of Bernanke before withdrawing his name, thought it best to repeal the aggressive Quantitive Easing program ASAP, because it would cause an increase in inflation rates. As a hawk, Summers first priority is to keep inflation rates low, which means that interest rates need to be increased. If it becomes really cheap to borrow money, more people will borrow money (more demand of money) while the supply stays constant, and then the money won't buy as much. People will then borrow more money because of the low interest rates, fueling the cycle.
Stock Market: As mentioned before, stocks are at an all time high. Good news, right? Wrong. As stock prices rise, consumers want to invest their money into stocks, in order to get onto the profit wagon. As stock prices increase, consumers need to borrow money in order to buy stocks (margin trading), and gain profits. With the aggressive QE program and the resulting low interest rates, it is cheap to borrow money to buy the stocks. But, in a couple of months when the tapering begins, interest rates will rise, it will become more expensive to borrow stocks, and people will start selling. When the markets begin going down, everyone will rush to sell, especially those who are investing with money they don't have (margin traders). As a result, the stock market will crash. Additionally, with low interest rates, consumers will spend less money, and if they spend less money, businesses earn less revenue. With less revenue, businesses no longer look profitable, and their stocks are sold. After businesses lose investment money, they begin firing people at the office in order to reduce costs. To read more, click here
In addition, the stock market's growth is not because the companies are consistently beating earnings by extraordinary amounts.
Government Shutdown/Debt Ceiling: It is currently day 5 of the US Federal Government's shut-down. The US Federal Government shut down at 12:00 AM on October 1st, 2013 because Congress could not approve on a budget for the 2013-2014 Fiscal Year. The government's 2012-2013 Fiscal Year ended at 11:59PM on September 31st, and because Congress did not approve a 2013-2014 Fiscal Year Budget, the Federal government has no money to spend. Congress did not approve the Fiscal Budget because the Democratic controlled Senate would not pass a Fiscal Budget passed to it by the Republican controlled House of Representatives. The bill created by the Republicans calls for a postponement/defunding of ObamaCare for a year. The Democrats will not accept that, because they want ObamaCare to be passed now. ObamaCare was created to help make Health Insurance available to everyone through the federal government. Anyone can purchase ObamaCare for cheap, regardless of age, health, income, and pre-exsisting disease. Republicans believe that this plan is too expensive, especially for a nation already laden with debt, so they refuse to pass any legislation that does not postpone the discussion of ObamaCare for a year. I will post a blog discussing ObamaCare tomorrow.
One of the biggest problems caused by the federal government being shut down is the decrease in GDP. America's GDP is supposed to decrease by 15 points for every week that the government is shut down because the federal government employs hundreds of thousands of workers, and if the government's shut down, they will not be payed. If they're not paid, they have no money to spend.
Debt Ceiling: On October 17th, 2013, the US Government reaches its debt ceiling. Congress now needs to pass legislation that will increase the government's debt ceiling. I talk about why there is so much debt in a previous post. If the debt ceiling is not approved by Oct 17th, the US essentially defaults on all of its payments for the first time ever. If this happens, the entire international economy will spiral. The wealthiest nation in the world can no longer pay back its bonds (borrowed money), and can no longer lend money to consumers and banks. Couple that with increased interest rates, increased costs of food because of a lack of subsidies, increased taxes, and the hundreds of thousands to millions of unemployed US government employees, and the GDP of every nation will decrease.
If the US defaults and can no longer pay its payments, its credit rating goes down. The last time the US's credit rating decreased was in 2008, and that resulted in a large recession with an unemployment rate at 12%. If the US Credit Rate decreases, investors will be less likely to invest in US Bonds, or would demand higher interest/yield rates to make up for its risky investment.
Pension Crisis: This was first reported with Detroit's file for bankruptcy. Detroit owes hundreds of millions of dollars as pensions to government workers, and because Detroit is bankrupt, it requires federal government assistance/funds to pay the pensions. Although Detroit is one of the only US cities to go bankrupt, the pension crisis is happening to other cities too. More and more cities are requiring federal funds in order to help give pensions to the retired government employees. The baby boomers (huge number of babies born in the 1940s as a result of post-World War II activities) are at that age when it is time to retire (60's). Those baby boomers are going to need Social Security cash/checks. The federal government now needs to find a way to allocate more money to be used to pay off promised pensions and social security. This will increase the national debt, and cause an increase in taxes.
International:
The international economy as a whole is improving. The BRIC countries, Brazil, Russia, China, and India, a term coined by Goldman's top economist Jim O'Neill in the early 2000's as the countries most likely to grow this year, are still growing, but their growth is beginning to slow down. Brazil is scheduled to have the World Cup Soccer tournament next year, so its economy will boom in the upcoming months, but currently, its economic growth has been slowing down more then analysts predicted. China's economy is also slowing down in terms of growth. The same for India, but India is also facing currency inflation. Over the summer, the Indian Rupee reached its lowest point ever, 70 Rupees bought 1 USD, and more then 100 bought a British Pound. As a result, it became more expensive for Indians to go abroad, both to vacation and to study.
China, India, and Brazil's economies are slowing down because of all the investment that has already occurred. The costs of living/having businesses in those countries has increased ten-fold. Property values, food, and labor costs have sky-rocketed. Governments are attempting to increase foreign investment taxes in order to benefit themselves (corruption) and help their own economy. In addition, America's economy is offering a higher rate of return then foreign investments.
I address India's faltering economy in a previous post, but the general idea is that the government is printing too much money causing inflation and not spending enough money. India's property values have sky-rocketed because of so much foreign investment. The population of its cities has also increased exponentially; cities that were meant for hundreds of thousands of people now have millions of residents. The infrastructure can not handle those many people. The government has allocated/planned hundreds of billions of rupees (crores) to be be spent on improving internal vital infrastructure, but only a couple projects actually go through, due to high levels of government corruption.
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