UW-L Global Macroeconomics

Guangze Zheng

4/8/2011

 

News report for: US dollar influenced by the Government shut down

 

 

The Democratic Party and the Republican Party are trying to make the final decision before the midnight of this Friday on April 8th about the budget of the Year 2011 in the US. This budget will increase the up limit of the debt, and continue with the government budget with all the projects which have been started.  Meanwhile, both of these parties will not compromise, so that the US dollar might face new risks shutting down part of the departments. People in the Market said this action may hurt the investors who want to invest money in the United States, and also they will lose the confidence in the US dollars. The International currency strategist in Chicago for BMO capital Market said, it is still fine in the market so far, there should not be a large risk for the US government, but if the government shut down, there must be a negative effect on the US dollars. The minister of the finance in the US Timothy Geithner said, if they do not increase the up limit of the debt, the Government may stop or defer paying the salaries of the officers, and stop paying the Social Security and the Federal Medicare.  This must cause some other bad influence.  Geithner sent a letter asking the government to increase the debt which is 14,294 billion dollars.

 

The dollar continues to drop compared to foreign currency for most of the first quarter.  Like an earlier article predicted, investors no longer see the dollar as a safe haven.  This is mostly caused by the extremely low interest rates.  As we have learned in class, the government lowers the interest rates to encourage people to buy.  As a result, the demand for U.S. currency goes down, and demand for foreign currency goes up.  This is shown in the 5.7% decline of the dollar against the euro.  Helping raise the euro's strength is the expectation of higher interest rates in the near future.  The yen on the other hard is on the downfall even against the dollar.  There was a short rise due to the disasters in Japan, but other than that it has been getting weaker.  Most market strategists predicted the euro to weaken due to Portugal's collapse.  However, investors believe that Europe officials are prepared to deal with any crises that occur.  The euro's strength is also because of the belief that interests rates will rise, but the euro is vulnerable is the belief does not come true.

                Many banks have been trying to level off the changes in world markets against the Yen and did not expect the drastic changes that have been occurring.  Much of the reasoning for the recent depreciation can likely be attributed expected reaction of the Japanese central bank to the horrible earthquakes that have struck the island of Japan. 

                The interest rates in Japan have been made extremely low causing people to invest in other markets where they will earn a higher return.  Exports of Japanese goods are also expected to go down due to the natural disaster that has struck the country.  This expectation and result will likely cause the purchase of Yen to decrease even more.  If the demand for Japanese currency cannot level it would seem to make sense that if this trend continues with interest rates low, then if interest rates were raised the trend may turn around as more people would want to purchase Yen and invest in Japanese current.

The Wall Street Journal

The Fed Should Consider a “Bad Bank”

                Inflation is a general increase in prices, but increases always occur at different rates. Right now, labor costs are not rising but other costs, such as the prices of raw materials, have been and are continuing to increase. Businesses will pass come of these costs to their customers. Health-care costs also are continuing to rise. Federal Reserve Chairman Ben Bernanke tells us that inflation won’t be a problem as long as unemployment remains at an unacceptable level. But considerable research shows that this reasoning is badly flawed.  During the inflation of the 1970s, for example¸ the discredited “Phillips Curve” which suggested that high unemployment and rising prices shouldn’t go together. Persistently underestimated inflation has misled the Fed into pursuing an ever more expansive policy. If the Fed looked, it would find many other countries that experienced high inflation and high unemployment together.

                Prices will likely continue to rise as the world economy grows. Meanwhile, world grain prices have been driven up by the foolish U.S. ethanol program. When ethanol raises corn prices, prices for substitutes like wheat and rice rise also. There is no sign that Congress will repeal the ethanol program. When countries run huge budget deficits with rapid money growth and a depreciating exchange rate, inflation follows. There is no reason to believe we will escape the consequences. The biggest risk is that the Fed will wait too long and be too hesitant to begin tightening. Fed policy discussions always concentrate on near term data and vents over which the Fed has little control They give much less attention to longer term events that the central bank can influence. There is a long lag, from the beginning of anti-inflation policy to success. Much of the time lag reflects market beliefs that the Fed will no persist once unemployment rises. By the time the Fed finally decides inflation is coming, It will be here.

                One idea is for the Fed to create its own version of a “bad bank.” The Fed should promptly put the $180 billion of its long term government debt and more than $ 1 trillion of its mortgage backed securities into a separate entity. The Fed would make a commitment not to sell any of the bad bank’s mortgage backed securities and Treasurys until they mature. As the mortgages mature and are paid off, the bad bank’s assets decline. This proposal removes some of the risks of inflation by removing some of the bank reserves that threaten to fuel it.

By: Nathan Bellile

A change in consumer spending habits coupled with the recent recession has put many malls in a hard situation. Many malls are experiencing many spaces without renters. Vacant spots in malls and strip malls are on a rise because businesses can’t stay open any more. Many shoppers are turning to online shopping, and others are just lowering their consumption all together to save money. The online shopping has increased indicating that people are doing that rather than taking the time to go to the stores.  The article titled “Malls Face Surge in Vacancies” in The Wall Street Journal, says that even common mall tenants like Boarders and Blockbuster are closing. Consumer spending habits can change an economy because if less people go to stores to purchase goods then less people will have jobs. All the stores that are closing have to regrettably lay off workers and stop production. Those people will then have less money and will consume less also. This is a great example of what we talked about in class. A negative shock to a store like Boarders will cause them to find themselves with too many products and not enough consumers. The will slow production to lower their inventories and with lower production, people lose their jobs. Those people have less money to contribute to the economy and that can shock other businesses causing them to go into the same spiraling downturn.  These sorts of thing lead to recessions and are difficult to recover from.  The malls themselves hurt also when stores begin closing because there isn’t as many people renting out their spaces, and they now have to cover the costs and lower their consumption on other products.  If people continue to turn to online purchases then more and more stores will be forced to close and many people will find themselves without jobs.

The article on April 8th described that India has higher savings rate which can lead to increase in higher growth, higher income and higher saving. Also The GDP of India is High compared to develop countries in  the world. But this increase also leads the economist to worry about the future, looking at the history whenever the saving rate increase rapidly there is sudden drop of people who consume to save in the market. the ministry of finance stated that the there was most increase in  the private sector saving, not in the household saving like gold. Thus it would be critical to maintain  the household saving rate high. The article also mentions that the new generation have not faced the recession their parents faced thus youth don't believe in saving for future. In conclusion right now the market is raising for new products.

The European Central Bank became the first monetary authority in a major developed economy to raise interest rates. This is a sign that a long period of easy credit will come to a close. The Federal Reserve is unlikely to do the same until later this year or possibly next year. This is unusual for Europe’s central bank since they usually follow the Fed. Canada and Australia have already boosted rates last year. The UK is expected to raise theirs later this spring or summer. This is a very risky business. The movement of interest rates by the right amount at the right time will determine whether a recovery will gain momentum, and whether there will be an outbreak of unwanted inflation. Fear of inflation is high due to the rising prices of food, oil, and other goods. Banks and borrowers also remain fragile and growth to slow. To fight this, Europe’s central bank raised their interest rate by a quarter percentage point to 1.25%. This will be hard on some European countries such as Portugal, who is the third country to ask for a bailout. Prices in March were found to be 2.6% above year-earlier levels. The Fed in the US is about to stop adding more credit into the economy by purchasing $600 billion in U.S. Treasury bonds.  Don’t expect interest rates to increase though until sometime in 2012. It will be interesting to see if the rise of interest rates will help the European economy. Hopefully all this will help stop the growth of the inflation rate.

Europe’s Rate Rise Signals End of Cheap-Money Era

By Brian Blackstone and David Wessel

 

Adam McMurray

Shopping online has played the biggest role in the increase of mall vacancy rates. Now that many of the U.S. population have smart phones, people can literally shop online from anywhere with them. Online retailing increased to 12% of the total during the holidays. It seems as though the amount of online shopping will only increase. This leaves owners of vacant mall buildings wondering what they will do with their property. Some owners and city officials have turned to making the facilities into offices or housing developments. Some landlords have tried battling against the trend of online shopping by adding more tenants like restaurants, entertainment venues, fashion stores and goods not usually shopped for online.

             Small businesses seem to be struggling regardless of what they try to do. This is due in large part to the weak economy. There is such little capital that the small businesses are unable to expand. Until capital that would be of help to them arrives, small businesses are likely to continue to see high rates of vacancies.

              I do not think that it is all that surprising that during these tough economic times and even for short period after the economy starts to turn around, small businesses and strip malls are struggling. When money is not being put into the economy by the consumers, it is hard for business owners to make ends meet and make a substantial profit from their business. I also think it is very logical that malls are seeing an increase in vacancy rates during a time when online shopping seems to be the most convenient and sometimes the most stress free way to shop. With more and more people catching on to the trend of smart phones and internet capable phones, I would think that vacancies in malls and stores that offer online accessible goods will only continue to climb.

Andy Kressin

Malls Face Surge in Vacancies By Kris Hudson and Miguel Bustillo

4/8/11