Attempts by the Obama Administration to Jump-Start the Economy - Example

Student’s Name: Lecturer’s Name: Course: Date: Attempts by the Obama administration to “jump-start” the economy The Obama administration has proposed a universal pre-school education despite the administration own studies showing that such a program would not produce any form of educational gains. In addition, the President has consistently launched scathing attacks on for- profit higher education firms majority of which do an exemplary job of imparting young people with the necessary skills for them to be competitive in the job market. Such government support to both basic and tertiary education is meant to provide the market with the right people who can spearhead national economic growth. President Obama has in the recent past been asking the congress to approve more money to help create opportunities in Solar and wind energy. Additionally, some of these funds are expected to be channeled to investment in natural gas which has experienced a boom in the recent past. More so, the Obama administration continues to put more emphasis on infrastructural development. Notably, Infrastructure was one of the specific slogan through which the president was re-elected and he has shown a close interest in improving the infrastructural network in the third quarter of the year 2013. This among others includes expansion of Atlantic ports. The president continues to put more emphasis on high speed rails despite being a half century old technology. Five leading economists with their assessment of long-term growth of the national economy Leading economists emanating from both sides of the political spectrum such as Ben Bernanke, Martin Feldstein and Lawrence Summers are convinced that lack of elaborate policies to spur economic growth could lead to return of recession state. Similarly, Goldman Sachs and Merrill Lynch suggest that the US may still be in recession state. They attribute their argument to the fact that the US unemployment rates continue to increase and more firms closing down. The direction of inflation using the U.S. Consumer Price Index The nature of inflation rates and three major factors influencing the direction of the inflation rate The consumer Index is the benchmark for an inflation guide as it uses a combination of goods to compare the base price from period to the other. The US consumer price index shot substantially from 3.44% in November from 0.2 % in September. On analysis, the changes in CPI inflation rate could be explained by variation in oil prices. The increase in inflation rates could be explained by more than 94% by the absolute change in price of crude oil. Increase in food prices, which could have been triggered by a shortfall in the monsoon, is another driver of inflation rates. However, the chances of reducing the commodity prices remain limited as the weather conditions still remains uncertain. The commodity prices are expected to be influenced by the turnaround of the global economy as it continues recovering from the effects of the global crisis. Higher commodity prices from abroad have had a cascading effect on the local commodity prices resulting in high inflation rates. Another factor that has significantly contributed to high inflation rates is higher disposable incomes and liquidity. The government spending on the stimulus packages as it tried to resuscitate firms on the verge of closure due to the devastating effects of global economic crisis and injection of more dollars to the economy from foreign investors has led to a surge in economy’s liquidity. With such increase in money circulation, the Obama administration tax cuts, however, continue to put more money in the hands of consumers. Movement of the U.S. federal funds rate, the 3-month Treasury bill rate, the 10-year Treasury bond rate, the 3-month LIBOR rate, the prime rate, and the 30-year fixed mortgage rate The U.S. federal funds rate The Federal Funds Rate has remained constant from September to the first week of December at 0.25% The 3-month Treasury bill rate Week September October November December Week 1 0.01 0.02 0.05 0.06 Week 2 0.02 0.03 0.08 Week 3 0.02 0.03 0.07 Week 4 0.02 0.05 0.07 The 10-year Treasury bond rate Week September October November December Week 1 2.64 2.65 2.65 2.79 Week 2 2.64 2.75 2.71 Week 3 2.64 2.63 2.79 Week 4 2.64 2.57 2.75 The 3-month LIBOR Rate The 3 month LIBOR (London Interbank Offered Rate) rate has been constant at 0.24% from September 2013. This rate represents the rate at which banks are willing to lend money amongst them in the wholesale money market, in London. As a standard financial index, it is also used in the US capital markets especially in the Wall Street Journal. This rate is used to set the interest rates for different variable rate loans. According to Pedro, the lender normally adds a certain percentage as margin which varies with change in the LIBOR rate. Traditionally, this rate was only applied to corporate financial transaction, but presently it is also used in consumer loans. The Prime Rate The prime rate has been constant from September 2013 at 3.25%. This is the rate at which American banks will lend money to their most favored customers. This rate changes following changes in lending rates for Federal Reserve Board. The prime rate is reliant on the 30 largest banks in the US and usually changes when three quarters of them adjusts their lending rate. This is the same time at which the Wall Street Journal changes their rate. The 30-year fixed mortgage rate. The 30-year fixed mortgage rate has been on the rise from September- 3.54%, October- 4.80%, November- 4.49%, and December- 4.60%. Movement of the U.S. dollar, the Euro, the Yuan, and the U.K. Pound The US Dollar: The US dollar remains stable against the major world currencies as observed from the slight daily movements between September and early December 2013. The Euro: The Euro is mainly used in the Euro zone and also exchange with other major currencies like the US dollars due to frequent trade transactions between the US and European countries. Nevertheless, the daily exchange rates remained stable within the last four months. The Yuan: From September, the Yuan maintained a stable daily movement rate of about 6.12 against the US dollar. The Yuan is seen to appreciate in October daily movements starting with 6.10 in the early day of the month of October closing at 6.09. This rate is seen to remain state across November to December. The UK pound: The UK pound also remained stable against the US dollar from September to December. In September, one sterling pound exchanges an approximate rate of 1.5964 to the US dollar. In October, the Sterling pound grows slightly stronger as observed through appreciation to an exchange rate of about 1.6220. In November, the exchange rate depreciates slightly while slight appreciation is recorded in early December. Three factors have caused the dollar to increase or decrease in relationship other currencies Inflation: The inflation rates in the US are relatively lower compared to China, UK and the Euro zone. As such the US, exports become more competitive, and the demand for the US dollar rises as many traders seek to buy the US goods. In this respect, the lower inflation rate makes the US dollar to slightly appreciate against the other currencies. Interest rates: US interest rates are more competitive comparable to those of China and the Euro zone. It therefore, becomes attractive to deposit money in US banks since investor earn higher returns. This, in turn, makes the demand for the US dollar to appreciate. Relative strength of other currencies: The other three currencies are from the world economic powerhouses. As such, these currencies are quite strong due to high demand from their trading partners. For instance, China is presently embarking on major projects across the world including infrastructural developments across Africa and investment in mining. This has led to increased demand for Chinese Yuan causing it to appreciate, and therefore, put more pressure on the US dollar. The importance of the central bank in implementing monetary policy Control inflation: Monetary policies are implemented by central banks to control the money in an economy for varying reasons. For instance, to manage the inflation rates, the central banks have to implement macroeconomic policies that would ensure that only sufficient amount of money circulates in an economy to effectively manage inflation. Attain price stability: Monetary policies control liquidity in an economy. An increase in liquidity leads to an increase in prices, and therefore, one of the key objectives of the monetary policy is to maintain stability of commodity prices. Full employment: Full employment refers to a situation where every person who can work has a job. In this case, the central bank can exercise expansionary monetary policies which lead to increase in commodities aggregate demand. With an increase in commodities demand, firms are required to produce more products and as such, require more people to work. Monetary policies are part of discretionary policies that require the intervention of the central bank. This is because it is part of the central banks' role to fix macro economic problems through the application of monetary policies in order to return to full employment state via market adjustments in wages, commodity prices and stable interest rates. Monetary policies can either be expansionary or can contract an economy. When the government wants to expand the economy, it can apply expansionary monetary policies which will inject more money for investments and funding capital projects. On the other hand, the government through central banks can apply monetary policies to mop up the excess money within an economy with a view of controlling inflationary rates. Movement of gold and silver The three major causes of price movements of Gold and Silver Gold and Silver are highly complicated assets to determine their prices. This is because pricing gold or silver on a fundamental basis is extremely difficult since their prices depends on valuation of other assets and on the difference between US data and that of the rest of the world. Analysts trade in gold and silver based on the technical and limited fundamentals. Some gold dealers base their analysis on the explosion of public debt which their opponents argue that gold earns no income and has a cost only to carry. The major drivers of price for gold and silver include price variations for other commodities and the prevailing global demand for these commodities which is known as “indirect pricing”. Trade imbalance and US debt are other major price movement determinants. When the trade balance is in favor of the US and the US public debt eases, the price of these commodities rises while the converse is true. Central banks' activities such as money printing or gold purchases and shall also influences price movement. As precious metals, the central bank purchase gold and silver resulting in shortages, in the market. This, in turn, leads to increase in price. On the other hand, the central bank may print money which it holds for value and as such sell any deposit of precious metals in its custody. This will lead to excess supply of precious metals in an economy with the resulting to reduction in prices. The three major causes of petroleum price movements Demand and supply: Similar to other market commodities, the crude oil prices have recently experienced significant price swings due to shortages. The price of crude oil varies based on the amount of oil drilled, processed, demanded and sold by both OPEC and non-OPEC producers. The OPEC member countries earlier on the agreed quantities of crude oil to produce. However, some members and non-member countries fail to comply leading with either excess or deficient supply that results to destabilized commodity prices. Economic conditions: During periods of vibrant economic conditions, there is excess demand for fuel which at times surpasses the quantity produced. This has an impact of causing an increase in commodity prices. On the other hand, during periods of the economic depression, most businesses are on their downside and not many economic activities happens leading to decline in demand for crude oils. However, if the commodity supply remains constant, the prices will actually go down as suppliers try to appease buyers to buy the product. Exchange rate: Crude oil transacts in international markets based on major currencies. However, when such currencies including US dollar appreciates, the commodity prices spike and on the other hand, when the dollar weakens against other world currencies, the price of petroleum products reduces in price. The unemployment rate in the US national economy According to WSJ statistics, the US national employment rates were as follows: September 2013- 7.3%, October- 7.2%, November- 7.3% and the first week of December have recorded 7.0%. This rate shows a decline from a high of 7.3% in September to a low of 7.0% in the first week of December. Unemployment rates in the US are reported by the Bureau of Labor Statistics, and since 1948 to 2013, it has averaged at 5.83% with a high of 10.80% in 1982 and a low of 2.50% in 1953. The unemployment rate in Michigan The unemployment rate in Michigan stood at 12.3% in September, 12% in October and 11.3% in November. The first week of December had recorded unemployment rate of 11%. According to the reported statistics, the unemployment rate has been on the decline. Unemployment refers to a percentage of people who have been actively searching for jobs and are jobless. Future direction of US unemployment The projected US national unemployment rates are as follows: January 2014- 7.0%, February 2014- 6.9% and March and April 2014- 6.8%. US is a highly developed economy and also regarded as the world super power. Regardless of all that, the country continues to suffer from unemployment which continues to be a big problem for the Obama administration. According to Hughes, the US growing population poses a serious employment in the coming years. This is because jobs do not increase relative to the increase in population. In addition, a majority of American firms are presently facing serious challenges from foreign companies. Some companies have expressed their concern especially from Chinese firms, which produce commodities in China at very low cost hence affording to sell them in the US market at the same low prices. Ideally, this has caused them financial instabilities with the possibility of closure in the near future, and hence, increases in unemployment rates. With the recent popularity of flatter structures of organization structure, the majority of US companies are exercising de-layering leading to endemic erosion of employment. Proponent of the linear structure of organization argues that flatter structures could make organizations smoother, and decision making process quicker as there will be no much red tapes. Improved technology is another factor that poses a great problem to employment. To enhance operational processes, the majority of organizations are presently replacing individuals with automated machines. This has indeed led to massive job cuts rendering many people jobless. With the current high wage rates in the US, most firms are relocating to countries with cheap labor hence reducing the number of establishments in the US. However, as this happens, the population continues to rise putting more pressure on the few available jobs. This is a clear indication that, in the future, there could be serious job shortages in the US economy. Dow Jones Industrial Average and the Standard & Poor’s 500 Index Articles on the market as a leading or lagging indicator of national economic performance Dow Jones Industrial Average (DJIA) is the only widely used and well known indicator of the entire condition of the US stock market. It is comprised of weighted price average of 30 actively traded blue chip securities of all industrial companies. These 30 stocks are selected by WSJ traders. Standard and Poor (S & P) 500 indices are a combination of 500 widely held stocks. The S& P index is weighted on the basis of market value, and its performance is considered a representative of the entire stock market. Ideally, 70% of the US equity is transacted by S & P 500. This index selected its companies on the basis of liquidity, market size and industry sector. Nevertheless, most of the companies in this index comprise of medium to large size companies. According to many experts, the S & P index is the best benchmark to judge the overall US market performance. The modest rise in DJIA and S& P 500 indices between September and November represents a trend recorded in the prior two months. This has contributed to the annualized economic growth rate of 5.1% from the 3.7% recorded six months ago. The recent rise in these indices supports the forecasted rise of the US economy which is poised to grow at a higher rate in the year 2014. Considering that the DJIA is comprised of firms in the industrial sector, whereas the S&P 500 comprises of the most traded stocks, these two indices give a picture of the sector that plays the biggest role in the economic growth. However, a dip in either of the two indices is a clear reflection of lagging indicator of the national economic performance. When the two indices are at their highest level, it implies that the market has little fear and is much more complacent as the stock market follows unrelenting upward trend. Logically, high interest rates represent better earnings, which collectively extend to national economic performance. Another indicator of leading economic performance is experienced in bearish markets where stocks can remain oversold for quite an extended period of time with little tethering in a bullish market. This is depicted by slight changes in two indices as stock prices are not significantly affected by the state of the market. The minimal variation on the two indices tends to indicate investors are more attentive to market accomplishments. As such, they continue trading in stock even in a bullish market hence creating almost similar stock demand. Five books about economics or finance reviewed by The Wall Street Journal staff The Wall Street Journal Guide to Understanding Personal Finance: This book gives simple explanations about complexities faced by individuals on a daily basis in their financial lives. It also includes information needed to make smart business decisions and how to avoid pitfalls on credit, banking and buying homes. The Wall Street Journal Lifetime Guide to Money: Strategies for Managing Your Finances: This book covers information on building stock portfolios, managing debt and taxes, home equity loans among others. More so, it offers current advice on a wide range of relevant financial discussions that are clearly presented in an easy to understand language ad through graphs and charts. The Wall Street Journal, Complete Personal Finance Guidebook: This book is considered by many as the Americas quintessential premier on managing and understanding your money. It emphasizes that money has an impact in every corner of our lives and has an impact on the way we live and as such provides ways in which to cope with future financial challenges. The Wall Street Journal, Guide to Starting Your Financial Life: This book provides a means of managing personal money especially in tough economic times. It emphasizes that the road to financial freedom depends on the smart choices that an individual takes. The Wall Street Journal, Complete Real-Estate Investing Guidebook: This book acts as a guide to building a real estate empire. It indicates that profitable real estate opportunities exist everywhere as long as an individual knows how to search and understand how to enter into prudent deals that have the capacity to transform the property into profits. A major corporation traded on the New York Stock Exchange and comments on its performance Exxon Mobil Corporation is a company dealing with petroleum fuels and based in Boston, US. During the second quarter of the year 2013, Exxon Mobil Corporation reported a strong performance breakthrough in both its investments and operations. This came after the company reported earnings per share of $ 1.55 which was a 55% decline over similar reporting the prior financial year. To that effect, the company management explained that such decline was attributable to 10% increase in exploration and capital expenditures which hit the high of $ 10.2 billion in the second quarter of the current financial year. The oil production capacity was also reported having declined by 1.9% in the third quarter of the present financial year. The reported dividends were $ 0.63 per every diluted basic share which was 11% higher compared to the prior earnings. By November 2013, Exxon Mobile Corporation reported having distributed dividends amounting to $ 6.8 billion to all its shareholders. The daily movements of shares for this energy company appear to be moving on the lower side for this last quarter of the present financial year. On Monday, Exxon Mobil Corporation share closed at $ 91.59 which represented a 0.39% decline from the previous day. During the present financial year, the energy company shares have traded at a low price of $ 91.01 and a high of $ 91.76. Further, the company has recorded a share price high of $ 95.49 per share selling a volume of 12.80 million shares every day and 4.45 billion shares to institutional investors, which represents 50% of the entire share capital. Mutual fund and comments on its performance The PIMCO Total Return Fund is one of the open end fund that was incorporated in the USA with an objective of maximizing total return that is in line with the preservation of capital and effective investment plans. This fund invests a minimum of 65% of its asset base in a portfolio of investment grade of fixed income instruments that have varying maturity dates. According to Wall Street Journal statistics, PIMCO Total Return Fund had a NAV of $ 10.62 in September, $ 10.82 in October, $ 10.90 in November and $ 10.82 in December. With almost similar NAV rates between October and December, PIMCO can be said to have delivered a flat performance within this period. This could be attributed to an attempt to avert losses due to fears expressed by Federal Reserve policy that is viewed as to hurt the bond prices. The fund performance in the last three months averaging to a net of $ 248 billion worth of assets marked the weakest turnout within the current last quarter even though it surpassed 85% of its competitors. PIMCO Exchange Traded Funds (ETF) designed to mimic the established strategy of the flagship mutual fund declined by around 0.35% in November, leading to its first negative performance. This could be attributed to $ 811.2 million withdrawals in November by Double line Capital LP. This outflow reduced the fund’s assets to about $ 33.3 billion. Total index fund and comments on its performance Vanguard Total Stock Market Index Fund is also an open end fund incorporated in the USA. The objective of the fund is to track the performance of the benchmark index whose role is to measure the investment return of the entire stock market. This Fund applies an indexing approach that is designed to keep track of the US Total Market Index. Vanguard had a NAV of $45.78 in September, $44.67 in October, $45.56 in November and $ 45.68 in December. Ideally, this fund was formed to provide additional exposure to US investment grade bonds. In this respect, the fund invests 30% in corporate bonds, and the rest 70% in US government backed bonds of all ranges of maturities. Similar to other funds, one of the risks of this fund is the increase in interest rate, which may adversely affect the price of the bond. Nevertheless, since the fund invests in all segments and varied maturities of fixed income market, many investors consider this fund as their core bond holding. As of November 2013, the asset of Vanguard had reached a high of $ 287.68 billion. Based on the fore mentioned NAV rates, the fund continues to perform better as can be witnessed by its superior performance over S & P 500 and other large cap indexes. This could be attributed to the fund investments in large companies such as ExxonMobil, Apple and Johnson & Johnson. For the present year, the fund is expected to achieve 28.74% in return against 16.77% in the prior year. Foreign company - Nokia Corporation traded in NYSE and comment on its performance Nokia Corporation is a Finnish handset maker. Merrill Lynch has pushed Nokia’s rating in NYSE from neutral to buy rating in November 2013. This upgrade has led to increase in number of company shares that were traded in November and the first week of December. For instance, on Wednesday last, the company share trade recorded a 5.12 % improvement with a share price hitting $ 5.95 per share. During the same day, 81,399,568 shares were traded. Between September and December, Nokia Corporation has recorded a share price high of $ 5.95 and a share price low of $ 2.52. The company’s market capitalization stands at $ 22.088 billion. Wall Street Journal analysts upgraded the company’s shares from “outperform rating” to “sector perform rating”. Similarly, and as mentioned earlier, these shares were also upgraded to buy from sell rating. This rise in share price is attributable to the new status to which the company has been upgraded after releases of new handsets that are of high market demand. In addition, the handset maker has outpaced its market rivals Apple Inc and Samsung. In October, Nokia announced its intentions to unveil a new brand of smart phone with large screen as an attempt to revamp its Lumia smart phone brands that hit the market with great surprise due to its outstanding features. Pressing problems that the U.S. economy might face over the next two years Since the US economy is just from the tantrums of global economic crisis, the policy makers should continue crafting sound economic stimulus packages to spur job creation and economic growth. Casselman and Jon argues that lack of stimulus packages of sufficient magnitude, the US economy is likely to face a decline growth or further recession, which could lead to endemic job cuts, stagnant or declining wages and many other economic challenges. The current US government shut down combines with the technical default is expected to affect the economic activities in the last quarter of the current financial year and the first quarter of the following financial period. The shutdown is expected to last for an extended period of time, and as such, could create systemic challenges in the financial and capital markets. There are chances that the Euro zone might slide back to the financial crisis, and as such, the Euro might find itself under intense pressure against other world currencies. However, since most of the US traders emanates from the Euro zone and a big number of US investor have placed their investment in Euro zone banks, the US dollar may also be at risk due to exposure of the Euro zone financial institutions as it was witnessed in the recent past. Another problem likely to face the US economy in the next period of two years is the Federal Reserve's attempt to purchase long-term bonds, which have the potential of causing unexpected fireworks across the US financial markets. According to market analysts, there are an awful lot of unknowns from emerging markets for mortgages as Federal Reserve seeks to unwind the extraordinary policy arrangement that has been in operation for the last five years. Works Cited Casselman, Ben and Jon, Hilsenrath. “Job Market Needs to Find Higher Gear.” The Wall Street Journal: Politics and Policy. 6 Dec. 2013. Print. Hughes, Siobhan. “Latest Data Complicate Push for Extended Jobless Aid.” The Wall Street Journal: Politics and Policy. 6 Dec. 2013. Print. Pedro, Nicolaci da Costa. “Fed’s Lacker Glum on Growth, Still Opposes Bond Buys.” The Wall Street Journal: Economic insight and analysis. 9 December 2013.Print. Read More