Global Financial Crisis: Implications on USA - Example

Global Financial Crisis-Implications on USA Name: Course: Tutor: Institution: Date: 1.0 Introduction The world economy experienced its lowest season and period in the 2008 period upon the hitting of the global financial crisis (GFC). In this case, the GFC had numerous implications on the global governments operations as well as on the performance of multinational organisations that either run bankrupt, due o high loans and declining share and profit margins or were salvaged by government efforts through increased funding advancement (Grosh, Bussolo and Freije, 2014, p.180). This was the characteristic of the American Federal government that salvaged many of the banking industry organisations through loans and accredits advancements to insulate the industry and market at large form further collapse and negative implications. Nevertheless, the implications of the GFC despite the efforts initiated by the USA government and individual industries regulations, including low interest rates as compared to the pre 2008 period. As such, this evaluation develops a critical evaluation on the reasons as to why interest rates have remained low since the GFC and the main reasons holding the interest rates low. Moreover, the essay evaluation offers a review on expected interest changes into the future, arguing on whether the rates will rise or remain low into the foreseeable future. 2.0 Global Financial Crisis-Implications on USA The essay topic and issue of discussion will focus on the implications of the global financial crisis on the use market interest rates both in the past, present and into the foreseeable future. The essay thus evaluates on the causes for the low interest rates as well as offering a justification for expectations of future interest rates rise. 3.0 Low Interest Rates 3.1 Federal Regulations One of the fundamental reasons as to why the interest rates have remained substantially low in USA is due to the federal government regulations. On its part, the federal government, through the reserve bank, is legally mandated and entitled to the role of ensuring a steady and stable economy. As such, the establishment of this status is based on the control and regulations on key economic aspects such as interest rates through a regulation of money supply and demand in the market. The USA government initiated a series of policies that have led to the experienced low interest rates in the market. On one hand, upon the end of the GFC, the government, through the reserve bank regulated short term interest rates to almost a zero value in a measure to control and insulate the market form further inflation in the market. This was achieved through a program in which the Federal Reserve target rate for the commercial banks was reduced to almost zero, a value in which it has been stayed since 2008. As such, through the establishment of an interest rates policy, the reserve bank managed to reduce the market interest rates in the short run as illustrated below, On the other hand, Pride, Hughes and Kapoor (2012, p.541) stated that in the long run period, the reserve bank developed strategies and approaches to mitigate high interest rates. In this regard, the bank purchased back the entire issued government bond and treasuries form the economy. In this regard, the approach had double market interest rates implications. On one hand, it insulated the bond and treasury bills in the market form accruing additional interests in the long run. This was run in long-term projects initiated by the Federal Bank named the Federal Bank Quantitative easing between 2008, 2010 and 2012 famously referred to as Q1, Q2 and Q3 respectively. The purchasing relatively increased the market money supply base, allowing for increased supply reducing the need for consumers in the market to seek bank loans and credits (Rochon, 2011, p.23). In this regard, the target for purchasing back the assets from the market was at its highest in 2013 at 3. 03% prior to declining to 2.27% in late October 2014. Consequently, this has a direct impact on reducing the overall interest rates in the USA market over the last six years since the GFC. 3.2 Underemployment The global market development and economic growth rates are based on the nature and state of their respective labour markets. In this case, labour serves a critical economic growth rate as one among the four key factors of production. In this case, factors such as labour force availability, skills and employment rates implicate on the overall growth rates in the market. In this case, Dowling and Rana (2010, p.111) argued that employment rates have been a concern aspect to the USA financial market in its endeavour to develop and regulate the interest rate. The process of regulating and controlling interest rates in the market is in two folds namely the nominal and the rate inflation. On one hand, the nominal interest rates are the values set by the Reserve bank, while the inflation rates are the economic inflation rates. In this regard, consumers acquire the real interest rates form a difference between the nominal and inflation rates, consequently establishing the real interest rates. In this case, the interest rates have a direct implication on the standards and cost of living in an economy. On one hand, a low real interest rate implies the affordability of the cost of living as well as commercial bank loans. In this case, the approach has been adopted by the Federal Reserve Bank as a measure to ensure that the low employment rates in the nation are overcome through reducing the costs of living. As statistics indicate, the level of employment in the market reduced with the fall and closure and collapse of many organisations in the market. Therefore, the Federal Government initiated the interest rates approach as an avenue through which to make the cost of living affordable as well as accommodate the unemployed individuals in the market in the economy re-stabilization process as has been evidenced by the growing USA market economic rates. Further, low employment rates in the USA market have been a key contributor rather than a receiver to the low interest rates values in the market. In this case, increased employment implies increased disposable income, increased spending and thus increased inflation rates in an economy, leading to the consequent rise of real interest rates. However, on the contrary, low employment rates, low disposable income values and reduced market spending lead to a low inflation rates, as evidenced by the average USA 2% inflation rate, and consequently a reduced real interest rate value. As such, based on this analysis, it I apparent that low employment rates and the slow economic development in the USA market has played a key role in the retention of low interest rates by default due to the critical role and contribution of the labour force as a factor of production. 4.0 Interest Rates Increase into the Future Based on the changing market landscape with respect to the USA market performance, it is expected that the interest values will increase into the future in the market. This development is based on the changing economic factors which are expected to project and increase into the foreseeable future. In this respect, this section discusses the various reasons and justifications as to why the current low interest rates in the USA market will change and increase into the future. 4.1 Decreasing Unemployment Rates One of the changing landscapes in the USA market is the changing levels of unemployment. In this regard, as already discussed, the GFC led to increased unemployment rates in the post 2008 period. As such, the government regulated interest rates to ensure reduced costs of living and affordability of commercial bank loans. However, as Coy (2014) noted, in the last 5 years the trend has been changing. In this regard, the unemployment rates have gradually subsidized with increasing economic growth rates. For instance, the unemployment rates survey as of 2014 September established that the rates had fallen to 5.9%, indicating a gradually decreasing unemployment rates in the USA market. Moreover, the survey argued that the overall payroll value increased by 250,000 jobs on a monthly basis implying an increasing employment base for the population. Therefore, despite the stagnant and visibly static wages and salary rates, the overall unemployment level has reduced. The chart below illustrates the decreasing unemployment rates in the USA market. As such, this evaluation concludes that although the wages and salaries rates in the USA market have remained constant over the years, this does not imply that the rate will remain constant into the future. As such, it will be prudent for the government to raise the interest rates as a means to increasing profit margins in the market. 4.2 Growing Dollar Value and Inflation The American society and financial market operates through the use of the dollar as the main exchange currency acceptable in the market. Moreover, other global nations have resulted to the use of the dollars as a means of international trade currency due to its perceived authentication and overall market stability. Therefore, its structure change in the market has a direct implication on the USA interest rates regulations and policies. Jones (2014) argued that in the wake of the years immediately after the 2008 GFC, the dollar value had gradually decreased by the value due to the failure of the financial market. As such, in order to stimulate development as well as infrastructural development in the economy, the government established a cap regulation on the interest rates. In this regard, the Federal Government ensures that the needed infrastructures required in the reconstruction of the American economy were affordable to all to stimulate development. However, with increasing economic development as well as international trade development the situation has changed. In this regard, the American based organisations not only compete against domestic competitors, but also international peers. Moreover, the rising dollar value in the market has increased the overall American goods value and prices across the globe. Therefore, in order to offer the respective America organizations a fair market opportunity, the Federal Reserve Bank is likely to increase the overall nominal interest rates as an approach to increasing the respective organisations profit margins in the global market. In addition, the market changes are experiencing an increasing and expected inflation rates increment. In this regard, increasing inflation rate at static nominal interest rates would in turn increase the real interest rates values, thus increasing the overall cost of living in the market. Therefore, as a mitigation approach to counter inflation rates implications, the Federal Reserve Bank will into the future increase the overall nominal interest rates. Such an increase will serve and enhance the retention of current affordable living standards in the economy. Therefore, this review establishes that due to the need for retaining the overall American based multinational organizations as well as domestic organisations against foreign competition, the market will e forced by industry developments to change and increase the overall nominal interest rates values. 4.3 Market Liberalization Although the introduction of Federal Government control after the 2008 GFC was a welcome initiative by the entire American population as a virtue to ensure that the crisis recurrence was avoided, it has over the years acquired increased resistance for the public. In this regard, increased concerns have been raised on the negative industry and economic infrastructure implications. In this case, arguments such as one developed by Campbell (2013) have emerged arguing on the need to relent on the strict market regulations. Thus, if the USA government is to succumb to these requests, it will reduce its market influence and interest rates setting to instances and situations in which the setting up of interest rates will only be executed in emergency needs while allowing for the interplay of demand and supply forces to set up an ideal equilibrium interest rate value. 5.0 Conclusion In summary, this essay offers a strategic review of the implications of the GFC to the American society. In this case, the essay develops a strategic review approach in which each of the strategic economic implications on the economy are outlines. One of the listed implications was reduced interest rates in which the essay establishes that high unemployment rates and strict financial Federal regulations serve as the key reasons for the development and establishment of low interest rates in the market. However, the essay strategic evaluation establishes that the interest rate value are likely to increase into the future with decreasing unemployment rates as well as inflation and need for infrastructural development. References Campbell, D., November 14, 2013, Banks Want Higher Interest Rates [Online] Available at < http://www.businessweek.com/articles/2013-11-14/2014-outlook-banks-want-higher-interest-rates> [Accessed December 9, 2014]. Coy, P., 2014, Will 5.9 Percent Unemployment Give the Hawks Reason to Raise Interest Rates? [Online] Available at < http://www.businessweek.com/articles/2014-10-03/will-5-dot-9-percent-unemployment-give-the-hawks-reason-to-raise-interest-rates> [Accessed December 9, 2014]. Dowling, J. M., & Rana, P. B., 2010, Asia and the Global Economic Crisis: Challenges in a Financially Integrated World, Palgrave Macmillan, Basingstoke. Grosh, M. E., Bussolo, M., & Freije, S., 2014, Understanding the poverty impact of the global financial crisis in Latin America and the Caribbean, World Bank, Washington DC. Jones, C, December 7 2014, Bank for International Settlements sounds alarm over dollar, [Online] Available at < http://www.ft.com/intl/cms/s/0/d1702e12-7df6-11e4-b7c3-00144feabdc0.html> [Accessed December 9, 2014]. Pride, W. M., Hughes, R. J., & Kapoor, J. R., 2012, Business, South-Western Cengage Learning, Mason, OH. Rochon, L.-P., 2011, Monetary policy and central banking, Elgar, Cheltenham Read More