...growth is around 1.5 percent in the second quarter of 2013. The Fed’s target for inflation was 2 to 2.5 percent and the core personal consumption expenditure has fell to a new low in 50 years of its existence. Couple the fact that the exchange rate is too unstable to provide any relief with the interest rates nearing zero have led to the inflation of asset prices. Because of these economic conditions, if the Fed tries to tighten its money now then the possibility of deflation becomes more realistic which would slow down the economy and also burst the asset bubble. If the Fed decided to taper QE and deflation loomed then there are four possible impacts on the economy. The first impact is that the real interest rate will increase. The nominal rate would be held constant while the inflation decreases and deflation increases. This increase in the real interest rate will severally discourage investment and spending in the economy. The second impact on the economy would be that as direct result of a rising deflation the demand for cash rises...
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...Define Deflation Deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). This should not be confused with Disinflation; a slow-down in the inflation rate (when inflation declines to lower levels such as 1%). Inflation reduces the real value of money over time; conversely, deflation increases the real value of money. This allows one to buy more goods with the same amount of money over time. Economists generally believe that deflation is a problem in a modern economy because of the danger of a deflationary spiral, which leads to depression. A longterm recession is a depression and depression leads to deflation to the economy. Deflation is caused by a shift in the supply-and-demand curve for goods and services, particularly a fall in the aggregate level of demand. That is, there is a fall in how much the whole economy is willing to buy, and the going price for goods. Because the price of goods is falling, consumers have an incentive to delay purchases and consumption until prices fall further, which in turn reduces overall economic activity. Since this idles the productive capacity, investment also falls, leading to further reductions in aggregate demand. This is the deflationary spiral. * A GDP based on the prices that prevailed when the output was produced is called unadjusted GDP, or nominal GDP. * A GDP that has been deflated to reflect changes in the price level...
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...China in the Debt-Deflation Trap HONG KONG – In the wake of a global stock-market sell-off triggered by economic turmoil in China, the US Federal Reserve has just decided to postpone raising interest rates. Indeed, China is facing the huge challenge of dealing with the risk of a global debt-deflation trap. In 1933, Irving Fisher was the first to identify the dangers of over-indebtedness and deflation, demonstrating their contribution to the Great Depression in the United States. Forty years later, Charles Kindleberger applied the theory in a global context, emphasizing the problems that arise in a world lacking coordinated and consistent monetary, fiscal, and regulatory policies, as well as an international lender of last resort. In 2011, Richard Koo used Japan’s experience to highlight the risks of a prolonged balance-sheet recession, when over-stretched debtors deleverage in order to rebuild their balance sheets. The debt-deflation cycle begins with an imbalance or displacement, which fuels excessive exuberance, over-borrowing, and speculative trading, and ends in bust, with procyclical liquidation of excess capacity and debt causing price deflation, unemployment, and economic stagnation. The result can be a deep depression. In 2000, the imbalance was America’s large current-account deficit: the world’s largest economy was borrowing heavily on international capital markets, rather than lending, as one might expect. According to then-Fed Chairman Ben Bernanke, the problem was...
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...The Economic Malaise Case Study 1. In the 1980s Japan was viewed as one of the world’s most dynamic economies. Today it is viewed as one of its most stagnant. Why has the Japanese economy stagnated? The Japanese has stagnated due to Japanese banks. The banks over lent, made it easy to borrow and in turn created bad debt, it make it difficult to replace the money borrowed and cause a deficit causing the deflation in the country. “The Nikkei average plunged from nearly 39,000 points in December 1989 to about 14,300 points in August 1992, thereby losing about 60% of its value. As a result, investors lost the equivalent of (U.S.) $2 trillion and property values plummeted by about $10 trillion. Property values in certain parts of the country declined by 70% and plunged Japan into a deep recession for 10-years.” (Alston, 2013) To summarize the stock market collapsed, property prices dropped, banks curtailed the easy lending practices the created the economic boom, consumer spending halted- recession created, deflation, and the Japanese government was unsuccessful 2. What lessons does the history of Japan over the past 20 years hold for other nations? What can countries do to avoid the kind of deflationary spiral that has gripped Japan? Other nations can learn from what happened with Japan. Strict lending practices should have been in place to begin with, this would help decrease the amount of bad debt. The Government need to watch its spending. Japan is stuck because...
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.... In the 1980s Japan was viewed as one of the world’s most dynamic economies. Today it is viewed as one of its most stagnant. Why has the Japanese economy stagnated? The Japanese has stagnated due to Japanese banks. The banks over lent, made it easy to borrow and in turn created bad debt, it make it difficult to replace the money borrowed and cause a deficit causing the deflation in the country. “The Nikkei average plunged from nearly 39,000 points in December 1989 to about 14,300 points in August 1992, thereby losing about 60% of its value. As a result, investors lost the equivalent of (U.S.) $2 trillion and property values plummeted by about $10 trillion. Property values in certain parts of the country declined by 70% and plunged Japan into a deep recession for 10-years.” (Alston, 2013) To summarize the stock market collapsed, property prices dropped, banks curtailed the easy lending practices the created the economic boom, consumer spending halted- recession created, deflation, and the Japanese government was unsuccessful 2. What lessons does the history of Japan over the past 20 years hold for other nations? What can countries do to avoid the kind of deflationary spiral that has gripped Japan? Other nations can learn from what happened with Japan. Strict lending practices should have been in place to begin with, this would help decrease the amount of bad debt. The Government need to watch its spending. Japan is stuck because its debt is so high, it is extremely...
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...1. In the 1980s Japan was viewed as one of the world’s most dynamic economies. Today it is viewed as one of its most stagnant. Why has the Japanese economy stagnated? The Japanese has stagnated due to Japanese banks. The banks over lent, made it easy to borrow and in turn created bad debt, it make it difficult to replace the money borrowed and cause a deficit causing the deflation in the country. “The Nikkei average plunged from nearly 39,000 points in December 1989 to about 14,300 points in August 1992, thereby losing about 60% of its value. As a result, investors lost the equivalent of (U.S.) $2 trillion and property values plummeted by about $10 trillion. Property values in certain parts of the country declined by 70% and plunged Japan into a deep recession for 10-years.” (Alston, 2013) To summarize the stock market collapsed, property prices dropped, banks curtailed the easy lending practices the created the economic boom, consumer spending halted- recession created, deflation, and the Japanese government was unsuccessful 2. What lessons does the history of Japan over the past 20 years hold for other nations? What can countries do to avoid the kind of deflationary spiral that has gripped Japan? Other nations can learn from what happened with Japan. Strict lending practices should have been in place to begin with, this would help decrease the amount of bad debt. The Government need to watch its spending. Japan is stuck because its debt is so high, it is extremely...
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...What Can The US Learn from Japanese Bubble 1. Easy monetary policy works, but there are risks in the exit. The Federal Reserve’s quantitative easing measures over the past few years have allowed the U.S. economy breathing room to get back on its feet after the worst downturn since the Great Depression. But there are risks that still lurk. If policymakers increase taxes too soon, or if they read the recovery prematurely, they could put the still-tentative U.S. economic recovery in real danger, Goto said. “It’s difficult to measure whether this economic recovery has legs or not,” she said. “In hindsight, the BOJ had misread a lot of the performance of the Japanese economy, and had toyed with the idea of ending that gush of money. What Abenomics has been able to do is to turn back on the spigot,” she said, referring to the current Japanese Prime Minister Shinzo Abe’s plan to breathe life back into Japan. “Japan should have been doing that a lot earlier, so that a comeback could have been easier,” Goto added. “We can learn from that." 2. You can’t divorce financial markets from ‘Main Street’s challenges. Consider what has happened in Japan in recent months. After two decades of subpar performance, the stock market there staged a sharp rally last year, tacking on gains of about 50 percent in roughly 13 months. Japanese stocks took off because of an aggressive round of new easing that was the first part of Abenomics. But what came next was an increase in the consumption tax...
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...improvement in the job market; indeed, the unemployment rate, at 7.8 percent, is well above what we judge to be its long-run normal level. With large and persistent margins of resource slack, U.S. inflation has generally been subdued despite periodic fluctuations in commodity prices. Consumer price inflation is running somewhat below the Federal Reserve's 2 percent longer-run objective, and survey- and market-based measures of longer-term inflation expectations have remained well anchored. The global economic outlook also presents many challenges, as you know. Fiscal and financial strains have pushed Europe back into recession. Japan's economy is recovering from last year's tragic earthquake and tsunami, and it continues to struggle with deflation and persistent weak demand....
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...Additionally, having knowledge of the connection between companies, families, and government in the economical cycle is essential. The vocabulary of economics is complicated, full of vocabulary and ideas which can appear as foreign as language of distant tradition. For that reason, an overview of some fundamental economical principles and vocabulary is essential. To begin with, is gross domestic product, that is “the value of all finished services and goods produced inside a country’s borders in a particular time period” (“GDP“, p. 1). Together with gross domestic product is a similar expression used known as real gross domestic product. Real gross domestic product is just the worth of gross domestic product revised for inflation as well as deflation. The reason behind this adjusting is to permit the gross domestic product of 2 different years to become comparable. Joblessness rate is a phrase or figure which is extremely popular with the public and for good reason. The joblessness rate calculates the quantity of people who are presently jobless who are thought to be in the work force. The inflation rate is one more figure worthy of observing, inflation is the natural increase...
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...University of Phoenix Fundamentals of Macroeconomics paper ECO/372 September 10, 2012 First Part The gross domestic product is a measure of country’s value: Goods produced + Service rendered + Government Spending + (Exports)-(imports) = GROSS DOMESTIC PRODUCT Real Gross Domestic Product equals to the measure of the output of the Gross domestic Product that is acclimated for inflation or deflation. The Nominal Gross Domestic Product differs specially on the aspect that the change in price is not accounted. The unemployment rates is the quantity of people that are able to work due to their age, studies or other conditions but are currently unemployed. Inflation rate is the variation that can be positive or negative of goods or service. Most of the time when the inflation is negative it’s also call deflation but sometimes it’s common to see a negative inflation. Interest rate is the annual % divided by the quantity owed each month on borrowed capital. Second Part On the second part of the paper some things that are explained in the first part will make a complete sense when they become related with real life examples. I will show the link between the following economic activities: Purchasing of groceries Massive layoff of employees Decrease in taxes The economy of a nation is a large number of factors linked each other and strictly related that easily become an ecosystem just as in the...
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...American history from 1877: How the Great Depression compare to The Current Economic Recession affecting the US American history from 1877: How the Great Depression compare to The Current Economic Recession affecting the US. Introduction In 1929s, a global depression hit countries with market economies. Despite the fact that the Great Depression was moderately gentle in some nations, it had very severe effects on others, especially the America. In the United States, the great depression went down in history as one of the worst economic crisis, which left a deep-seated situation, leading to joblessness, starvation and homelessness for over a decade in the US. The Great Depression in America also led a great global depression, as typically each industrialized economy including Germany, Italy, Japan, Britain, France, and others, was completely destructed. Various economists and the media have often linked the current economic crisis that heightened in 2008 to the great depression which occurred decades ago. Looking at the implications of the great depression and what is happening today, clearly there are several direct similarities between the two economic crises. Through a brief analysis of the two economic scenarios, this paper hence aims to show how they are related. What are the similarities with the current financial crisis? Some of the similarities between today’s economic situation and the Great Depression of 1920s include: High rates of unemployment- Economic forces...
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...IT Doesn’t Matter Many years ago, in order to send a letter or communicate with someone from place A which is far away to place B was very difficult. It could take him/her long time to do. Also, trading from country A to country B had a lot of obstacles about geographic boundaries. However, when computers, Internet, and computer applications (technology information - IT) were appeared, they have pushed society up to a high level. Geographic distance is not a difficulty. People can easily communicate via email, chat or call. Today, almost of work is automatic, and it totally depends on computers. This leads to development in IT. Nevertheless, in Harvard Business Review article, Carr (2003) wrote that “IT Doesn’t Matter”. This causes confusion and debates. The first point is that IT is as a commodity. A single company can own proprietary technologies and use them to build competitive advantage because it is hard to replicate. On the contrary, infrastructural technologies are the property which “when shared” in industries rather than “when used in isolation”. A technology that is broadly shared to use cannot create competition. Thus, in his opinion, due to minimize costs, reduce vulnerabilities and restrict risk, Carr (2003) admitted that “IT has all the hallmarks of an infrastructural technology” rather than a proprietary technology. IT can be easily commoditized. First, he said IT is “a transport mechanism”, especially in data. By comparing IT with other commoditized...
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...JB HI-FI was firstly formed in 1980’s in Melbourne, which majored in HI-FI equipment only. However, factors of economic environment and society trend change the business history of the firm. In 1990’s, with the declined popularity of vinyl record, JB HI-FI started the new aspect of exclusively CDs, who is the first one to do so in Australia. Commercial competition became more severe in 2000’s, when demand for visual and family entertaining products increased and decrease of CDs sales amount due to the use of Internet spread out, JB Hi-fi expends its business into electronic appliances, diversifying into televisions, computers, gaming equipment, camera, and other related fields to satisfy customers’ needs. Nowadays, JB HI-FI is not only the retail chain store only for the specialized visual goods, but also cooperate with many brands and manufactories to lower the cost and becomes the leading place in discounted electronic retail brand. 1 GDP in Australia/GDP growth rate GDP is regarded as the most significant indicator to evaluate the economic situation of a country. From the 1980s to 2000’s the economic of Australia, GDP keep steadily increased, JB HI-FI was expand its business. The global financial crisis started in 2007 and reached the dramatic drop point in 2009. During that hard time, JB HI-FI was also experienced the challenging time ever. However, the financial crisis gave JB HI-FI a chance to diversify to the new market. Such gaming product increasingly had a higher demand...
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...Richard Bedford Bennett was Canadian Prime Minister from August 7, 1930 to October 23, 1935, serving Canada in the worst time of the great depression. With a third of Canadian out of job, Bennett proclaimed “ I will find work for all who are willing to work, or perish in the attempt.” I support him due to the fact that with all his power he tried to stop the depression. Bennett did everything in his power to try to put a stop in the recession. He gave out $20 million to the provinces in emergency funds for relief payment. He also put tariffs on imports to boost Canadian manufacturing. But it did little effect on the economic crisis. After creating the Relief Act, Bennett didn’t do much more to help Canadians out of the Depression. As the number of unemployed increase and the economic worsen, Bennett thrive without any new ideas and people start resist him. They even named him after The second reason why I support him is because Bennett was a kindly and generous man, who gave out his personal money to plenty of people who were suffering during the darkest days of Recession. People will write sarrowful letter to him asking for money. He gave dollar after dollar from his own pocket and people still hated him as thought he was the reason for the depression. The people only care about themselves, they didn’t look around them to see the thousand of people sleeping outside starving, they wanted jobs for themselves. R. B. Bennett is just a man; they are asking to mush of him...
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...Complexities of the U.S. Financial System Professor Crawford Finance 100 10/28/2014 Complexities in the US Financial System The Federal Reserve System is the most powerful component of the US Economy. The Federal Reserve is made up of four components. There is a seven member Board of Governors that direct monetary policy. A 12 member Federal Open Market Committee (FMOC) that sets the target for the federal funds rate which also guides the Federal Interest Rate. 12 regional banks that supervise commercial banks in their respective regions, these regional banks also implement monetary policy for the commercial banks to follow. The FED also has a designated Economist who provide information and reports to congress. The Federal Reserve’s primary function is to control inflation without triggering a recession. The FED’s work together with the Treasury Department to avoid or counter any global financial crisis. The FED has been diligent in the past 20 years and more effective in the past decade to assist in the rebound of the economy crashing in the mid 2000’s. “The financial crisis of 2008 led to the worst recession since the Great Depression of 1929. This was despite aggressive efforts by the Federal Reserve and Treasury Department to prevent the U.S. banking system from collapsing. As a result of the recession, housing prices fell 31.8% (What Was the 2008 Financial Crisis? Causes, Costs and Whether It Could Happen Again, by Kimberly Amendeo) more than...
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