Should the Fed buy bonds? by Cole Brundage

The Federal Reserve has an important role as the central bank of the United States. With the economy in its current state, people are looking towards the wisdom of persons in charge of decision making at these banks to adapt policy to stimulate the economy. Some investors and bankers are suggesting that the Federal Reserve should buy additional bonds. This sort of bond buying, termed as “quantitative easing,” should help stimulate the economy. This sequence would be the third, or QE3. Many point out that the first two sequences of quantitative easing have not done much to help the economy, stating that the unemployment rate has not changed in a positive manner, and the extra boost to the money supply has had limited effect. There has been some growth in the economy, but it has not been as large as one would expect given the amount of bond buying that has occurred throughout QE1 and QE2. This is due to the fact that the actual world economy is not a simple mechanism. The Federal Reserve cannot always rely on its suggested ability to buy bonds and get a proportionate level of economic growth in return. We have learned in class that there are external factors that effect people’s concern for investing and taking out loans. If people are not feeling confident about the economy, they are not likely to invest and take out loans, regardless of the apparent money supply or the interest rate. The interest rate is extremely low, but people are still not confident enough for it to make any major difference in the economy. There are many factors that give people concern, the constant source of news via the Internet never takes economic issues off of people’s minds, and thus they are bombarded with news about economic struggle, and they fear investment and loans. Many experts suggest that the only thing that will heal the economy is the passage of time, and this, I believe, is very true. The interest rate has been low since 2008, people have had several years to get over their fear, but the growth remains very slow. In conclusion, the Federal Reserve will most likely engage in additional quantitative easing. Whilst this may not quickly cause stimulation in the economy due to fear and uncertainty within the population, the basic economic principles suggest that it would. If the quantitative easing does not work, time eventually will. People will eventually forget about what there is to be afraid of, Businesses will begin hiring again, and the economy will begin a more noticeable period of growth.

Source:http://money.cnn.com/2011/10/26/news/economy/thebuzz/index.htm?iid=SF_BN_LN

Miss Millie has a question for ECON 122 students!  Please send your answer to her human, Dr. Kassens, via email within 24 hours.

Question: What is the highest recorded unemployment rate for the US?

L. L. Bean Free Shipping Critique

The article I chose to critique was the article about L. L. Bean dropping its shipping charges for online purchases. The higher ups of the company believe that this will cause an increase in profits in the long run, but I believe that it will have a significant increase in short term costs. Eventually I think it will lead to an increase in consumer demand for the goods sold by the company. Given the choice between similarly priced products, customers will opt for the one that does not have the additional shipping cost. One concept that was not mentioned in the original post was the opportunity costs associated with this decision. While they will probably increase their number of products sold, they will have to sell more in order to balance out the shipping costs that they are waiving for the customers. The company is absorbing these additional costs so there might be a slight increase in retail prices to offset the shipping cost. I do think that this is a good idea for L. L. Bean to do since it will bring in additional revenue as demand for the product increases. I also like the original poster pointed out the concept of how this relates to GDP. They said that this idea of getting rid of the shipping costs will increase demand for the product, which will in turn increase the consumption of this product on a national level, which makes up one of the four factors that determine the Gross Domestic Product rate. I can only think of one negative consequence that may rise from this that goes along with the previously mentioned rise in price. With the absence of an additional shipping charge, more people will want to buy their products which will in turn cause an increase in demand for the products. Due to the increase in demand, L. L. Bean will have to increase their production and increase their supplies of items. Since both demand and supply are rising, the equilibrium price will also rise, causing a rise in retail prices. One thing in the article that I thought was interesting that was not mentioned in the original post was how the company is promoting this new change. The company announced this change by email and television ads, but they are also picking up the bus fare on six city buses in Boston that will be covered in L. L. Bean advertisements.

Critique: Gas Prices

In response to “Why Are Gas Prices Rising,” I don’t wish to go against the authors post, but maybe add more thought to what was given and why the economy has faced such a hardship while trying to deal with the outrageous prices of gasoline. Ever since the on start of the recession, people affected by the decline in the economy have been prioritizing their wants and needs. Whether completely diminishing a good or perhaps settling for an inferior good, people have been able to cut back on a great deal of their spending in hopes to increase their money supply. There are four determinates pertaining to the demand side of the economy; how high a person’s income is, which ultimately decides whether they buy a normal or inferior good, their preferences, the population, and the prices of other goods. When it comes to gas, if one suffers from a low income, they can’t choose the inferior good because there is none. It’s not like if we go to our local grocery store where the gas price is outrageous, we can instead choose to go to Wal-Mart and buy the ‘off-brand’ or ‘out-of-style’ brand of gasoline like we refer to so many other things we buy. And lastly, there is no substitute for gasoline; we can’t choose to put apple juice in our cars because it cheaper than gasoline. Any where we go, we are stuck with a price, given it may vary a few cents depending on the gas station. Gasoline is a good that most people in America need, given the exception of the population that live in large cities and are easily able to commute due to trains, subways, busses, and other forms of public transportations.

Even though the recent prices of gas have most people, including myself, in an outrage, it helps to look at the recent patterns of the price changes that have occurred in the past. Not too long ago, this exact same thing happened. We were paying around $2.00-$2.50 a gallon but it dramatically increased to $3 and $4 a gallon. And yet a few months later, the prices dropped and people quit fussing. Like any other good, gasoline falls in line with inflation and deflation. There will probably never be a set price for gas. Also, as the author of the original post stated, it seems a big reason to blame for these high prices are due to the fighting occurring in Libya. However, Libya produces only 2% of the oil currently pumped out of the ground and is ranked on 17^th with respect to oil-exporting countries. To me, it seems like the circumstances occurring in Libya could not cause such a significant rise in the prices. Lastly, the time of year has an effect on the prices. During the summer months as well as the holidays, gas prices tend to rise due to the increased number of people who travel. I think that since its mid-April, basically the beginning of summer, gas prices will rise regardless of the things occurring around the world. Granted I definitely agree they shouldn’t be this high, but I do expect a price increase.

I think it’s hard to come to an agreement while dealing with such prices, but I think we just need to agree that nothing will ever stay the same. Prices of any good will always be increasing or decreasing but we need to prioritize and find the best solution for each problem we are faced with.

CRITIQUE: LL Bean offers year round free shipping

For my critique I chose the blog about outdoor merchandise companys, LL Bean, and their decision to offer free shipping on any and every order no matter what the quantity or size of shipment. LL Bean is now joining another online apparel company, Zappos.com, to offer a no strings attached free shipping agreement. Although this tactic may work for a short while, I am skeptical to say that LL Bean can continue to pay for the shipping fees for every order without noticing a decrease in their profit margin. This may give them a brief advantage to other substitute competitors, but how could a company know that the other online, catalog stores will not jump on the bandwagon of free no strings attached shipping. With LL Bean being one of the only companies with this offer of free shipping, it will have an advantage over a substitute company because the customer will more likely take the free shipping offer with LL Bean since they offer the same products. I do agree that customers are more likely to "trash" their shopping cart due to the high expenses of shipping and handling; I am guilty of that myself. Especially during holiday seasons, on top of the great deals from sale prices, many companies offer free shipping to online customers. It could be said that this is an example of expansionary policy for the apparel world. The companies want to help stimulate the sale of goods and by doing this more consumers purchase more because they feel like they are getting more for their money. LL Bean chief marketing officer, Steve Fuller, stated that the company was on the fence about offering this free shipping for a few years and they occasionally offered it to see how the customer base would react. Many customers took advantage of this offer and it allowed the decision of the company to be much easier. The fact that LL Bean listened to its customers may also get a higher loyal customer base even if its competitors decide to jump on the bandwagon of free shipping. With the 5.8% increase in sales already from last year, LL Bean is counting on the free shipping to boost sales even more and plan on the increase in sales to offset the cost of providing free shipping. Overall, I feel that LL Bean is making a smart decision by offering free shipping to customers during this economic downfall.

Critique on Federal Lending Crisis

This article talks about the issue of the Fed loaning out large amounts of money to help keep banks afloat during these rough economic times. Smaller banks would take out loans as low as $1,000 and then you have banks borrowing 6 million and still going bankrupt shortly after. Small and large banks all over the country were having severe issues in 2007-2008.
I do believe people should know how much and how often their banks borrow money. Yes, it may discourage them from using the bank but they should know what kind of organization they are trusting their money with. If they are dealing with a bank who is barely keeping their head above water, they might approach and handle situations differently. I am looking at it more as a civilian and not an economist though. I know if I am working everyday for my money, I want to put some place I know it is safe.
I do think it is important for the Fed to offer loans to the commercial banks; because without that the smaller banks will not be able to borrow money. Even though I said people should know how much and how often their banks borrow money, but everyone goes through rough spots. Borrowing money shouldn't be seen necessarily as a bad thing, because again it is basically unavoidable. But if your bank has to borrow 6 million and still cannot operate, something is wrong.
Overall I thought it was a good blog, it gave a good definition of how the Fed worked. I think anyone who didn't know anything about the Fed would have a much better understanding of it just by reading this blog. I would have liked to known a little bit more about what they personally thought about the situation.

Critique-Why Are Gas Prices Rising?

The two articles used in "Why Are Gas Prices Rising?" discuss and try to pinpoint the issues behind gas prices rising. Analysts estimate prices could rise to $4 a gallon in the near future. Such a dramatic rise could hinder our already slow economic recovery. They attribute the rise in prices to the situation in Libya and surrounding areas. Analysts are very worried about protests beginning in Saudi Arabia because they supply 10% of the world’s daily production of oil. If protests began in Saudi Arabia oil prices would skyrocket. To aid the price raises the United States government contemplated using USA's 727 million-barrel reserve oil to aid in lowering the price of oil. Its estimated that for every $0.10 rise in gas prices it takes $14 billion per year out of the consumer’s wallet.

The original blogger mentioned how technology and taxes could potentially affect prices. These were good points and plausible situations. However, not discussed, were some of the current issues affecting this rise in gas prices. Uncertainties and price expectations are affecting gas prices and the economy’s recovery.

Currently, gas prices are rising largely due to uncertainty and expectations about what could happen in Libya and Saudi Arabia. Price expectations are the first part of the inflation equation. In this situation, this number would be very high because consumers are expecting that if the outbreaks continue in the Middle East, production of oil will cease, supply will decrease, and there will be large jumps in prices. Expectations such as this, could lead to an outward shift of the short-run Phillips Curve, as well as, a possible inward shift of the aggregate supply curve.

This rise in gas prices is only going to slow down the United States road to economic recovery even more. Gasoline is a relatively price-inelastic. Meaning consumers will pay any price because they need the good, gasoline, to function normally in their everyday lives. This is easily seen in the Bureau of Economic Analysis’ most recent report. The changes from quarter to quarter of the consumption of gasoline and other energy goods are minimal, at $285.5 billion in 2009 and $284.5 billion in 2010. These numbers show how inelastic gasoline is because its consumption was barely changed even through a recession. This most recent rise in prices means consumers will be putting more of their disposable income towards gasoline instead of spending it on clothes, cars, food, or investing which would all help the economy.

At this point, we can only hope that this rioting ends soon. Not only for the safety of the Middle East, but also so oil prices can decrease and our economy’s recovery can speed up.