Kate Higginson- U.S. Fiscal Cliff Could Lead Global Recession, OECD Says

             The article reviewed the OECD’s predictions of what will happen in 2013 when the US goes over the “fiscal cliff”.  The article discusses many of the same things we have reviewed over the past semester.  Recently we discussed the fiscal cliff, meaning the end of the Bush tax cuts, and what we thought would be a good plan of action, whether to go off the “fiscal cliff” or to continue to patch up the problems.  If we do go off the cliff, as the OECD predicts we will, the shock of the fiscal cliff could put the US into a recession again.  After reading the article I think it is best if we do go off the cliff even if the repercussions are harsh.  Obama needs to negotiate with the Republicans and reach a budget agreement, we need to increase taxes, cut spending, and have a higher debt ceiling.  All of these options we discussed in our class.  The federal deficit is currently huge, meaning our government’s expenditures exceed the government’s revenues.  In 2013 according to the OECD there will be 607 billion dollars in federal spending cuts and tax increases.  This will effect consumer confidence, which we recently discussed meaning the consumer no longer feels optimistic about our country’s current economic state and their own financial stability.  The consumer confidence will diminish rightfully so because without extreme measures made in the new fiscal year the federal deficit will come to 1.04 trillion dollars in debt.  In class we mainly focused on the US economy and what will happen here if we go over the fiscal cliff.  But if our economy declines, the current European Crisis will be greatly affected also.  Possibly causing us to enter a global economic recession. 

            The article also talks about what actions the Federal Reserve will take if we go over this “fiscal cliff”.  In class we discussed in great detail what the job of the Federal Reserve is.  It is their responsibility to ensure there is enough money and credit available to sustain economic growth without inflation and they can affect this because they are in control of the money supply.  In my opinion if we are to go over the fiscal cliff the Fed will have to buy more bonds and securities to ease the financial conditions of out county.  In the article OECD predicts that the unemployment rate will decline to 7.5% by the end of 2014.  This has been a very slow recovery for the labor force as we discussed in class yesterday.  The unemployment rate is a lagging economic indicator meaning there is a lot of uncertainty with the economy so actions that affect the unemployment rate aren’t taken until after employers are sure the economy is stable or unstable.  Because the unemployment rate is countercyclical, meaning it moves in the opposite direction of GDP the OECD predicts the US’s GDP to grow by 2.2% this year.  The article discussed a lot of information that we covered in class and it is going to be interesting to see what happens when we finally do go over this “fiscal cliff” that everyone is anticipating.  

Source: http://www.bloomberg.com/news/2012-11-27/u-s-fiscal-cliff-could-lead-global-recession-oecd-says.html

Kayla Janney - Going over the fiscal cliff - 11/26/12

     

      After reading the article “Going over the fiscal cliff would give US an austerity crisis, not a debt crisis” I was able to apply concepts that have been covered in class.  The article talked about how the country faces more than half a trillion dollars in tax increases and spending cuts next year, starting in January.  With the intent to increase taxes and cut spending, workers would have less money to take home from their pay checks, this would cause GDP to decrease, which would put our economy into this “financial obstacle course” that economist believe our country is facing.  With workers having less money in their pockets to spend and help raise GDP, our country is more than likely going to go back into a recession.  I feel that this is necessary to try to get the country out of the debt that is it currently in though.  Even though families will be paying more in taxes, in the short run it will hurt the economy, but the country always ends up getting out the horrible situation like it has been in before.  Congress says that under the current laws that are in place, there will be massive spending cuts and major tax increase for 2013.  If we consider all the effects of government debt on the economy, a large public debt is likely to reduce long-run economic growth; which we are facing today.  We can see that the long run of high spending and low tax rates have depressed the growth rate of the economy.  As we have had lower tax rate, this has caused a decrease in public saving.  Since there are low savings, this has caused investments to decline as well.  There needs to be a change in fiscal monetary policy in order for aggregate demand to remain constant.  As our economy is fragile at this time we could not handle the large tax increases without falling into a recession.  As the fiscal cliff sounds much more intimidating than an economic obstacle course, if our economy can slide down, our economy will eventually be able to climb back up.  There need to b changes in our economy in order for our economy to ever grow again.  The leaders need to face economic reality and tackle the debt that we are in today.  It is important that they act upon this issue in order to get our country at a growth rate again.  Our economy needs to invest money into our own economy in order for it to continue to grow.  Yes sending jobs, etc to China is cheaper but it’s causing a lot of American’s to be without jobs which is playing a huge hurt role on our economy.  We live in an economy where individuals are scared to invest money because they are not sure from day to day if they will have a job the next day.  Congress needs to get our country back on track, it will take another recession to get our economy back on its feet, but it is a decision that needs to be made before our country continues to grow in more debt. 

Source: Going over the fiscal cliff

Kayla Janney

[Zandra Ribas] Fed’s Lacker Warns More Bond Purchases Risk Inflation

Bloomberg Businessweek published an article last week regarding Federal Reserve President Jeffrey Lacker's opposition to the new Fed policy of tying continued central bank stimulus to the U.S. unemployment rate. Lacker is very much concerned, as many other economists and bankers, that the Fed policy of the last three years is going to create high inflation levels in the future. The Fed has stated its goal of keeping interest rates abnormally low to at least the middle of 2015.

At the recent Fed meeting on October 24, four Fed members approved this new criteria for their interest rate policy, which was first proposed by Chicago Fed President, Charles Evans. Lacker's opinion is that using one main economic indicator to set interest rate policy is wrong because it can distort the overall economic condition of the United States. Ben Bernanke, Fed Chairman, has advocated and set forth this same monetary stimulus for three years now; however, Lacker claims this policy has not produced the type of growth which was the goal. In addition, the Fed was hoping to ignite the housing market, which had been hit hard since 2007, but this has really not happened either for a variety of reasons, including tighter credit and lending standards and unemployment. Because certain structural and long term unemployment levels are beginning to set into the rate, this is also not a good indicator for interest rate policy.

Although the Fed is supposed to be an independent body from the executive and legislative branches, Lacker has proposed allowing Congress to intervene with the Fed to set some limits on how much money can be continued to be printed. Basically Lacker feels the Fed is losing control of the currency and needs restraints. If the U.S. economy should pick up in the next couple years, inflation could really become an issue here. Already prices of various commodities priced in dollars like gold, oil, and food have escalated tremendously in costs over the past few years because of Fed policy. The dollar has also taken a 20 percent decrease in value over the past couple years against other currencies.

Lacker is also strongly opposed to Fed mortgage security purchases because he feels the government needs to start not being so heavily involved with the housing industry, as Freddie Mac and Fannie Mae. These bureaus which supply mortgage monies are backed by tax payer dollars and both needing hundreds of billions of additional funds, while still not creating a healthy real estate market. Lacker is, in essence, opposed to the Fed purchasing its own debt because this will all end very poorly if it should continue.

Fed’s Lacker Warns More Bond Purchases Risk Inflation

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