Note: For this analysis, I had to rely on secondary sources for quantitative data on the American economy, because the primary sources, the US Government surveys and websites, are closed due to the government shut-down.
Background:
By now, everyone in America should know about the upcoming Fiscal Cliff. America's government is spending $60 billion USD per day, and only raking in $30 billion per day from taxes and bonds. As a result, there is a $30 billion deficit per day. For the past 10 years, that deficit has been increasing steadily.
In 2011, the deficit reached the equivalent of America's GDP (roughly $15 trillion). The debt ceiling at that time was America's GDP. If America reached the debt ceiling, the government would default on all its payments. It would no longer be able to operate, or pay its hundreds of thousands of employees, or pay back bonds, or give out Social Security, Welfare, and Food Stamps. The only way to avoid defaulting on all the loans was to increase the debt ceiling, which Congress did at the very last minute. Because Congress waited until the last minute to increase the debt ceiling, investors panicked and the stock market tanked. The economy then went through a mini-recession, and America's credit rating was downgraded.
How the deficit got to this point: America's huge national deficit can be attributed to a variety of reasons. During the Bush administration, taxes and interest rates were decreased, while federal government spending increased to an all time high (nearly $1 billion per day spent just in Afghanistan/Iraq). Bush enacted those policies to encourage spending because the economy was still in a recession from the 2000 Financial Crisis. The Bush-era tax cuts lasted from 2003 to 2012, so for those 9 years, the government was getting more then 10% less in taxes then it got before the tax cuts. The Iraq war that began in 2001 and ended just last year required the federal government to spend nearly $1 billion per day to pay troops, and maintain equipment over seas. Bush also created a variety of new government programs which required a lot of federal funding, like the NSA, TSA, and the Department of Homeland security. During this time, America was spending a lot more then it was taking in from taxes. Obama is also responsible for some increase in the national deficit through his economic aid programs, and tax cuts for the poor.
Back to the present: America is expected to hit the new debt ceiling that was created in 2011 in the middle of October. Secretary of the Treasury Jack Lew expects the federal government to run out of money on October 17th, this Thursday. Similar to 2011, Congress knew that America was going to hit the debt ceiling months ago, but did not vote on any legislation to increase it, or decrease national spending. In addition to the debt ceiling crisis, Congress also has to deal with the Federal government shut down. The 2012-2013 Federal government Fiscal Year ended on September 31, 2013. The 2013-2014 Fiscal Year for the government started at 12AM on October 1st, 2013. But, Congress did not pass a 2013-2014 Fiscal Year Budget before the new Fiscal Year began, and still has not passed the new budget 14 days later. As a result, most Federal government programs are shut down, with the exception of defense/security, and Food Stamps/Welfare. For every week the Federal government is shut down, America's GDP is supposed to decrease by 15 points, because the government is no longer able to pay its hundreds of thousands of employees, or pay for its various programs.
The Cause: The Affordable Health Care Act/ObamaCare is most widely attributed to the cause of the government shut down and the delay in increasing the debt ceiling. The Affordable Health Care Act attempts to make HealthCare available for all Americans, despite their wealth and pre-exsisting conditions. It also attempts to make HealthCare mandatory for everyone (that's the only way a program this expensive can work) by fining those who do not sign up. The Act also imposes a higher tax on medical companies' profits, and attempts to decrease the cost of medicine.
Republicans, who have a majority in the House of Representatives, do not want to pass the Affordable Health Care Act, because it charges the young, wealthy, and healthy more in order to compensate for the old, poor, and obese Americans. Republicans also believe that the Act is too expensive, and will raise the national deficit even more, which would cause an increase in taxes, which would damage the pace of America's recovering economy. The Affordable Health Care Act upsets Republicans because it makes the government the primary medical insurer, instead of private health insurance companies that compete against each other (free market/competition). Republicans will only pass a bill/act if it contains clauses that explicitly stop funding for ObamaCare/the Affordable Health Care Act until next year, when they plan to debate it more.
Democrats, who have a majority in the Senate, support ObamaCare because it aligns with their principles of making health care available to everyone, especially the poor. Democrats refuse to pass any legislation that delays funding for ObamaCare.
Because financial bills/legislation must go through both the House of Representatives and Senate and get over 2/3rds vote, no legislation has been passed. The Federal Government's 2013-2014 Fiscal Year Budget was not passed because neither parties were satisfied with the wording of the budget. The Republicans wanted postponement of ObamaCare, the Democrats refused and voted against it. The same situation is happening to the debt ceiling, Democrats will not pass a Republicans bill that calls for an increase in the debt ceiling, and a postponement of the Affordable Health Care Act, and the Republicans will not settle for the Democrat's bill which calls for an increase in the debt ceiling, and no wording of postponement of the Act.
Bottom Line: America's Federal Government has been furloughed for the past 14 days, and no increase in the debt ceiling legislation has been passed because neither political party is willing to cede to the other.
The vast consensus is that hitting the debt ceiling is going to cause a devastating result, one that will cause a recession that makes the 2008 recession look pale in contrast.
Radical Republicans: Some radical Republicans are okay with America hitting the debt ceiling.
Some of those Republicans are die hard in their principles and would rather see America go into economic chaos then cede to the Affordable Health Care Act, which they believe is a violation of their freedom, and should have been ruled unconstitutional by the Supreme Court.
Other Republicans realize that increasing the debt ceiling is just going to be causing problems later down the road, so we might as well hit the debt ceiling now, because we're going to hit it eventually. Those Republicans are somewhat right in their theory. America will just keep on piling debt on top of debt, and eventually that debt pile-up will lead to doom. The increase in debt would also cause an increase in interest rates, because in order to sell its bonds, the American government needs to increase its bond yields so that the bonds still remain interesting to investors. The increased bond yields would also cause an increase in taxes, because the government cannot rely only upon bonds to pay off its interest on the bonds.
Other Republicans believe that the American government could cut back on its spending, without increasing the national debt ceiling. The government gets approximately $30 billion per day through taxes and bonds, so if the government were to reduce foreign aid, federal arts funding, grants, and release some of the federal work force, it could get its spending down to $30 billion or less per day. The government could also get rid of ObamaCare, the Federal Communications Commission, and the Department of Education, making state governments responsible for managing their own education.These Federal government decreases in spending will decrease the $60 billion the government currently spends daily to an amount almost equal to the $30 billion it takes in. This will slow down our rate of hitting the debt ceiling, and will manage to pay bills when we hit the debt ceiling and are no longer allowed to borrow money.
The Republican party has been trying to reduce the federal government's spending for months now, and they feel that the debt ceiling is their only leverage against the Democrats to succeed in reducing Federal government spending.
Effects of hitting the debt ceiling: If America hits the debt ceiling on October 17th, the Federal government will need to decide how to prioritize its payments.
The government has an obligation to pay its workers, Seniors and Veterans Social Security, and the unemployed/poor Unemployment Benefits and Food Stamps. But, the government also has an obligation to pay off its current debt, which is in the form of interest on bonds. The government will not be able to do both, so it must decide which one to do. If it chooses to violate its first obligation (Social Security, pay, Food Stamps) it risks domestic uprising/anger, a decrease in GDP, and causing starvation to its poorest citizens. If the government fails to pay its interest on borrowed bonds, the government risks getting its debt rating downgraded, causing an increase in interest rates and bond yields, and economic chaos as investors pull out of the stock market.
If America's debt rating is downgraded, investors will be less likely to invest in America's government by buying bonds because America will be a risky investment, since it defaulted. Additionally, America's bonds will have to have a higher yield because its bonds are a risky investment, and investors are more likely to invest in a risky investment if the rate of return matches the risk. This will cause an increase in America's taxes, because the American government will need money to pay for its current expenses, and pay back its yields on borrowed bonds.
Even though we have not hit the fiscal cliff just yet, consumer confidence has wiped out the last two years' gains. Consumers are worried about Congress's constant bickering, and lack of ability to produce a bill/legislation that can be passed and will increase the debt ceiling. Investors right now are mixed, but they are preparing for the worst. For the past two weeks, the stock market has been decreasing, because of fear of the fiscal cliff. Recently (Friday and today), there have been more talks about a temporary increase in the debt ceiling, which caused investors to gain some confidence and re-invest in the markets.
Wharton Business School's top negotiators came up with some humorous solutions to the crisis. One of the possible solutions was to have both sides visit 5th graders in a middle school, explain the problem to them in simple terms, and ask them for their solutions. Another possible solution was to have both sides write up their proposals, and submit them to Nelson Mandela, who would choose the fairest proposal.
Additional Questions: There is also the question of how long Congress should increase the debt ceiling for, and if there should be any wording about defunding ObamaCare. If Congress increases the debt ceiling for two months, a reasonable amount of time to change the country's finances, the issue comes up during Christmas time, an awful time as Congress and the American people will be in Christmas/vacation mode. In addition, US Consumer spending is supposed to be at an all time high during the Christmas season. If the issue of the debt ceiling comes up in mid December, consumers will be worried about the future, and save their money, instead of spending it on Christmas/holiday gifts. As a result, companies will not get the revenue they need to post profits, lose investment from foreigners, and might fire workers in the beginning half of next year to reduce costs.
If Congress postpones the debt ceiling for 3 or 4 months, the issue comes up during the Federal Reserve's tapering off the Quantitive Easing program. (Jan-March 2014). Investors will already be worried about the effects of increased interest rates on the markets, and if they have to deal with the fear of America hitting the debt ceiling, they might panic, and sell, causing a mini-recession.
If Congress postpones it any longer, Congress will basically forget about the issue, and will only start arguing about it a couple weeks before America is scheduled to hit the debt ceiling, just as they did in 2011 with the debt ceiling, 2012 with the tax increase, and now 2013 with the Fiscal Year Budget and the debt ceiling. However, if we push the debt ceiling up just enough to sustain the US Federal government's spending for the next 7 months, the issue will come up right before Senate and House of Representative elections. I believe only then will the Congressmen actually come up with a good solution for the problem, otherwise they will not be voted back into office.
Hit the Debt Ceiling: The Republicans who believed that the US would survive if it hits the debt ceiling are right. The author of a Wharton Blog cites Harvard Professor Howell Jackson's scenario where the US hits the debt ceiling, and has to prioritize its payments. Professor Jackson states that the federal government has "plenty of tax revenue to cover the interest" on the bond yields, with some left over to pay its other bills. Professor Jackson is arguing that the US government can prioritize its payments without borrowing money once it hits the debt ceiling. The government can prioritize paying off its interest on bonds with the tax revenue money, and use the left over money (there should be a decent amount) to pay other bills, like the salaries of its employees. Prioritizing paying off the interest will prevent America from defaulting, getting its credit rating downgraded, and the panic that comes after the world's strongest economy is downgraded. The only problem with prioritizing the interest rate payments is that will take longer and longer to pay the employees, because they can only be paid a tiny bit every day, and most federal government programs will need to take a cut.
In other news, JP Morgan & Chase posted its first quarterly loss since CEO Jamie Dimon took over in 2005. JP Morgan, the biggest US bank by assets, posted its $380 million loss (compared to its $5.7 billion profit last year) due to rising legal expenses, and reduction in new mortgages. Dimon attributed the bank's decrease in new mortgages as consumer wariness of the possibility of increased interest rates this year.
Federal Reserve Chairman Ben Bernanke was expected to decrease his aggressive Quantitive Easing Plan to $60 billion per month in September, but postponed it due to lack of economic growth. Bernanke, a dove, created the Federal Reserve's Quantitive Easing Program involving the Fed Reserve buying $85 billion in US Treasuries and Bonds per month in order to lower interest rates, which would cause a decrease in the unemployment rate. If interest rates were low, consumers would be more likely to borrow money, and then spend the money. Businesses would benefit from the increase in consumer spending, and also borrow money to hire more workers, and invest in new products/services. Bernanke planned to taper off the QE Program in September because the unemployment rate was decreasing at a steady pace, and was at 7.3%. However, Bernanke noticed that the unemployment rate was not decreasing because businesses were hiring more, it was decreasing because the unemployed were giving up on finding jobs. As a result, Bernanke did not taper off the QE Program, and is expected to continue it until he retires from the Chair in January 2014. His successor, Janet Yellen, also a dove, is expected to continue the QE program until the unemployment rate reaches about 6.5%. The only problem with the QE program is that it encourages inflation, because consumers and businesses are now increasing the demand for money, while keeping the supply constant.
An up and coming issue is the number of baby boomers about to retire. Baby-boomers are considered as babies that were born post World War 2 (1940's - 1960's), because the economy was improving (Great Depression is over) and because everyone was just in a good mood to be back from a war that they won, and a war in which USA essentially saved the world. There are about 80 million of those baby boomers, and they are all about to retire. When they retire, many of them will begin using Social Security, Medicare, and getting their pensions. The federal government needs to begin saving up for those unprecedented expenses, even though the government is already laden with debt. Mark Duggan, a Wharton Business professor estimates that the number of Americans aged 65 and up will increase by 90% by 2030, while the number of Americans aged 18-64 (those who pay taxes) will only increase 10%. Another problem for the US government; the government owes more people money then it is getting. The US needs to begin planning for this now, and one of the best ways is by reducing the national deficit. This means cutbacks on spending. Duggan also suggests that the government change the way Social Security is measured by changing the pay average from 35 years to 40 years, which decreases benefits for them, and increases the number of years they work. Besides the baby-boomers needing Social Security and Medi-Care, many city and state government workers need Social Security payments from the federal government, because the states they worked at do not have the funds to them. A perfect example is Detroit, laden with hundreds of millions in government worker pensions. Michigan can not pay it off, and is requesting Federal government assistance, like many other states.
Background:
By now, everyone in America should know about the upcoming Fiscal Cliff. America's government is spending $60 billion USD per day, and only raking in $30 billion per day from taxes and bonds. As a result, there is a $30 billion deficit per day. For the past 10 years, that deficit has been increasing steadily.
In 2011, the deficit reached the equivalent of America's GDP (roughly $15 trillion). The debt ceiling at that time was America's GDP. If America reached the debt ceiling, the government would default on all its payments. It would no longer be able to operate, or pay its hundreds of thousands of employees, or pay back bonds, or give out Social Security, Welfare, and Food Stamps. The only way to avoid defaulting on all the loans was to increase the debt ceiling, which Congress did at the very last minute. Because Congress waited until the last minute to increase the debt ceiling, investors panicked and the stock market tanked. The economy then went through a mini-recession, and America's credit rating was downgraded.
How the deficit got to this point: America's huge national deficit can be attributed to a variety of reasons. During the Bush administration, taxes and interest rates were decreased, while federal government spending increased to an all time high (nearly $1 billion per day spent just in Afghanistan/Iraq). Bush enacted those policies to encourage spending because the economy was still in a recession from the 2000 Financial Crisis. The Bush-era tax cuts lasted from 2003 to 2012, so for those 9 years, the government was getting more then 10% less in taxes then it got before the tax cuts. The Iraq war that began in 2001 and ended just last year required the federal government to spend nearly $1 billion per day to pay troops, and maintain equipment over seas. Bush also created a variety of new government programs which required a lot of federal funding, like the NSA, TSA, and the Department of Homeland security. During this time, America was spending a lot more then it was taking in from taxes. Obama is also responsible for some increase in the national deficit through his economic aid programs, and tax cuts for the poor.
Back to the present: America is expected to hit the new debt ceiling that was created in 2011 in the middle of October. Secretary of the Treasury Jack Lew expects the federal government to run out of money on October 17th, this Thursday. Similar to 2011, Congress knew that America was going to hit the debt ceiling months ago, but did not vote on any legislation to increase it, or decrease national spending. In addition to the debt ceiling crisis, Congress also has to deal with the Federal government shut down. The 2012-2013 Federal government Fiscal Year ended on September 31, 2013. The 2013-2014 Fiscal Year for the government started at 12AM on October 1st, 2013. But, Congress did not pass a 2013-2014 Fiscal Year Budget before the new Fiscal Year began, and still has not passed the new budget 14 days later. As a result, most Federal government programs are shut down, with the exception of defense/security, and Food Stamps/Welfare. For every week the Federal government is shut down, America's GDP is supposed to decrease by 15 points, because the government is no longer able to pay its hundreds of thousands of employees, or pay for its various programs.
The Cause: The Affordable Health Care Act/ObamaCare is most widely attributed to the cause of the government shut down and the delay in increasing the debt ceiling. The Affordable Health Care Act attempts to make HealthCare available for all Americans, despite their wealth and pre-exsisting conditions. It also attempts to make HealthCare mandatory for everyone (that's the only way a program this expensive can work) by fining those who do not sign up. The Act also imposes a higher tax on medical companies' profits, and attempts to decrease the cost of medicine.
Republicans, who have a majority in the House of Representatives, do not want to pass the Affordable Health Care Act, because it charges the young, wealthy, and healthy more in order to compensate for the old, poor, and obese Americans. Republicans also believe that the Act is too expensive, and will raise the national deficit even more, which would cause an increase in taxes, which would damage the pace of America's recovering economy. The Affordable Health Care Act upsets Republicans because it makes the government the primary medical insurer, instead of private health insurance companies that compete against each other (free market/competition). Republicans will only pass a bill/act if it contains clauses that explicitly stop funding for ObamaCare/the Affordable Health Care Act until next year, when they plan to debate it more.
Democrats, who have a majority in the Senate, support ObamaCare because it aligns with their principles of making health care available to everyone, especially the poor. Democrats refuse to pass any legislation that delays funding for ObamaCare.
Because financial bills/legislation must go through both the House of Representatives and Senate and get over 2/3rds vote, no legislation has been passed. The Federal Government's 2013-2014 Fiscal Year Budget was not passed because neither parties were satisfied with the wording of the budget. The Republicans wanted postponement of ObamaCare, the Democrats refused and voted against it. The same situation is happening to the debt ceiling, Democrats will not pass a Republicans bill that calls for an increase in the debt ceiling, and a postponement of the Affordable Health Care Act, and the Republicans will not settle for the Democrat's bill which calls for an increase in the debt ceiling, and no wording of postponement of the Act.
Bottom Line: America's Federal Government has been furloughed for the past 14 days, and no increase in the debt ceiling legislation has been passed because neither political party is willing to cede to the other.
The vast consensus is that hitting the debt ceiling is going to cause a devastating result, one that will cause a recession that makes the 2008 recession look pale in contrast.
Radical Republicans: Some radical Republicans are okay with America hitting the debt ceiling.
Some of those Republicans are die hard in their principles and would rather see America go into economic chaos then cede to the Affordable Health Care Act, which they believe is a violation of their freedom, and should have been ruled unconstitutional by the Supreme Court.
Other Republicans realize that increasing the debt ceiling is just going to be causing problems later down the road, so we might as well hit the debt ceiling now, because we're going to hit it eventually. Those Republicans are somewhat right in their theory. America will just keep on piling debt on top of debt, and eventually that debt pile-up will lead to doom. The increase in debt would also cause an increase in interest rates, because in order to sell its bonds, the American government needs to increase its bond yields so that the bonds still remain interesting to investors. The increased bond yields would also cause an increase in taxes, because the government cannot rely only upon bonds to pay off its interest on the bonds.
Other Republicans believe that the American government could cut back on its spending, without increasing the national debt ceiling. The government gets approximately $30 billion per day through taxes and bonds, so if the government were to reduce foreign aid, federal arts funding, grants, and release some of the federal work force, it could get its spending down to $30 billion or less per day. The government could also get rid of ObamaCare, the Federal Communications Commission, and the Department of Education, making state governments responsible for managing their own education.These Federal government decreases in spending will decrease the $60 billion the government currently spends daily to an amount almost equal to the $30 billion it takes in. This will slow down our rate of hitting the debt ceiling, and will manage to pay bills when we hit the debt ceiling and are no longer allowed to borrow money.
The Republican party has been trying to reduce the federal government's spending for months now, and they feel that the debt ceiling is their only leverage against the Democrats to succeed in reducing Federal government spending.
Effects of hitting the debt ceiling: If America hits the debt ceiling on October 17th, the Federal government will need to decide how to prioritize its payments.
The government has an obligation to pay its workers, Seniors and Veterans Social Security, and the unemployed/poor Unemployment Benefits and Food Stamps. But, the government also has an obligation to pay off its current debt, which is in the form of interest on bonds. The government will not be able to do both, so it must decide which one to do. If it chooses to violate its first obligation (Social Security, pay, Food Stamps) it risks domestic uprising/anger, a decrease in GDP, and causing starvation to its poorest citizens. If the government fails to pay its interest on borrowed bonds, the government risks getting its debt rating downgraded, causing an increase in interest rates and bond yields, and economic chaos as investors pull out of the stock market.
If America's debt rating is downgraded, investors will be less likely to invest in America's government by buying bonds because America will be a risky investment, since it defaulted. Additionally, America's bonds will have to have a higher yield because its bonds are a risky investment, and investors are more likely to invest in a risky investment if the rate of return matches the risk. This will cause an increase in America's taxes, because the American government will need money to pay for its current expenses, and pay back its yields on borrowed bonds.
Even though we have not hit the fiscal cliff just yet, consumer confidence has wiped out the last two years' gains. Consumers are worried about Congress's constant bickering, and lack of ability to produce a bill/legislation that can be passed and will increase the debt ceiling. Investors right now are mixed, but they are preparing for the worst. For the past two weeks, the stock market has been decreasing, because of fear of the fiscal cliff. Recently (Friday and today), there have been more talks about a temporary increase in the debt ceiling, which caused investors to gain some confidence and re-invest in the markets.
Wharton Business School's top negotiators came up with some humorous solutions to the crisis. One of the possible solutions was to have both sides visit 5th graders in a middle school, explain the problem to them in simple terms, and ask them for their solutions. Another possible solution was to have both sides write up their proposals, and submit them to Nelson Mandela, who would choose the fairest proposal.
Additional Questions: There is also the question of how long Congress should increase the debt ceiling for, and if there should be any wording about defunding ObamaCare. If Congress increases the debt ceiling for two months, a reasonable amount of time to change the country's finances, the issue comes up during Christmas time, an awful time as Congress and the American people will be in Christmas/vacation mode. In addition, US Consumer spending is supposed to be at an all time high during the Christmas season. If the issue of the debt ceiling comes up in mid December, consumers will be worried about the future, and save their money, instead of spending it on Christmas/holiday gifts. As a result, companies will not get the revenue they need to post profits, lose investment from foreigners, and might fire workers in the beginning half of next year to reduce costs.
If Congress postpones the debt ceiling for 3 or 4 months, the issue comes up during the Federal Reserve's tapering off the Quantitive Easing program. (Jan-March 2014). Investors will already be worried about the effects of increased interest rates on the markets, and if they have to deal with the fear of America hitting the debt ceiling, they might panic, and sell, causing a mini-recession.
If Congress postpones it any longer, Congress will basically forget about the issue, and will only start arguing about it a couple weeks before America is scheduled to hit the debt ceiling, just as they did in 2011 with the debt ceiling, 2012 with the tax increase, and now 2013 with the Fiscal Year Budget and the debt ceiling. However, if we push the debt ceiling up just enough to sustain the US Federal government's spending for the next 7 months, the issue will come up right before Senate and House of Representative elections. I believe only then will the Congressmen actually come up with a good solution for the problem, otherwise they will not be voted back into office.
Hit the Debt Ceiling: The Republicans who believed that the US would survive if it hits the debt ceiling are right. The author of a Wharton Blog cites Harvard Professor Howell Jackson's scenario where the US hits the debt ceiling, and has to prioritize its payments. Professor Jackson states that the federal government has "plenty of tax revenue to cover the interest" on the bond yields, with some left over to pay its other bills. Professor Jackson is arguing that the US government can prioritize its payments without borrowing money once it hits the debt ceiling. The government can prioritize paying off its interest on bonds with the tax revenue money, and use the left over money (there should be a decent amount) to pay other bills, like the salaries of its employees. Prioritizing paying off the interest will prevent America from defaulting, getting its credit rating downgraded, and the panic that comes after the world's strongest economy is downgraded. The only problem with prioritizing the interest rate payments is that will take longer and longer to pay the employees, because they can only be paid a tiny bit every day, and most federal government programs will need to take a cut.
In other news, JP Morgan & Chase posted its first quarterly loss since CEO Jamie Dimon took over in 2005. JP Morgan, the biggest US bank by assets, posted its $380 million loss (compared to its $5.7 billion profit last year) due to rising legal expenses, and reduction in new mortgages. Dimon attributed the bank's decrease in new mortgages as consumer wariness of the possibility of increased interest rates this year.
Federal Reserve Chairman Ben Bernanke was expected to decrease his aggressive Quantitive Easing Plan to $60 billion per month in September, but postponed it due to lack of economic growth. Bernanke, a dove, created the Federal Reserve's Quantitive Easing Program involving the Fed Reserve buying $85 billion in US Treasuries and Bonds per month in order to lower interest rates, which would cause a decrease in the unemployment rate. If interest rates were low, consumers would be more likely to borrow money, and then spend the money. Businesses would benefit from the increase in consumer spending, and also borrow money to hire more workers, and invest in new products/services. Bernanke planned to taper off the QE Program in September because the unemployment rate was decreasing at a steady pace, and was at 7.3%. However, Bernanke noticed that the unemployment rate was not decreasing because businesses were hiring more, it was decreasing because the unemployed were giving up on finding jobs. As a result, Bernanke did not taper off the QE Program, and is expected to continue it until he retires from the Chair in January 2014. His successor, Janet Yellen, also a dove, is expected to continue the QE program until the unemployment rate reaches about 6.5%. The only problem with the QE program is that it encourages inflation, because consumers and businesses are now increasing the demand for money, while keeping the supply constant.
An up and coming issue is the number of baby boomers about to retire. Baby-boomers are considered as babies that were born post World War 2 (1940's - 1960's), because the economy was improving (Great Depression is over) and because everyone was just in a good mood to be back from a war that they won, and a war in which USA essentially saved the world. There are about 80 million of those baby boomers, and they are all about to retire. When they retire, many of them will begin using Social Security, Medicare, and getting their pensions. The federal government needs to begin saving up for those unprecedented expenses, even though the government is already laden with debt. Mark Duggan, a Wharton Business professor estimates that the number of Americans aged 65 and up will increase by 90% by 2030, while the number of Americans aged 18-64 (those who pay taxes) will only increase 10%. Another problem for the US government; the government owes more people money then it is getting. The US needs to begin planning for this now, and one of the best ways is by reducing the national deficit. This means cutbacks on spending. Duggan also suggests that the government change the way Social Security is measured by changing the pay average from 35 years to 40 years, which decreases benefits for them, and increases the number of years they work. Besides the baby-boomers needing Social Security and Medi-Care, many city and state government workers need Social Security payments from the federal government, because the states they worked at do not have the funds to them. A perfect example is Detroit, laden with hundreds of millions in government worker pensions. Michigan can not pay it off, and is requesting Federal government assistance, like many other states.
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