Business advice

How does the government mess with the economy?
December 28, 2008, 7:47 am
Filed under: Blogroll, Business Advice | Tags: , ,

We have all heard that our credit problems are because of the government. I don’t think so. Prior to the depression, the government’s attitude towards the economy (aggregate market), was to leave it alone. We all know the results.

Now we have a government that uses fiscal policy (public spending) to adjust the economy. If you have never heard of this, simply Google the term and you will get a brief definition. Previous to the government spending aspect, the only way governments could get money if they needed it was either taxation or seizure of private property.

Fiscal policy/government spending is a tool used by the Federal government. You know the government allocates a good portion of money every year to government contracts. If all this was left to the private sector, things would be worse than they are. Now, I am not saying that I endorse the way the government awards contracts. I’m just saying that they do.

They also have the right to either lower or raise taxes and institute new ones if they are able to get such a law through Congress.

The other side of this coin is monetary policy. Monetary policy refers to how the Federal Reserve’s use of interest rates and the money supply to guide economic growth.

The overall theory goes like this: once interest rates go down; there will be more activity in the aggregate. If interest rates are down it is a green light for borrowers to go ahead and apply for more loans. It also makes it easier for the lenders to get customers to sign on the bottom line. It is an encouraging sign for the stock market. If there is more borrowing, there will be more corporate expanding and an increase in products sold (GNP). When such announcements come out, they, the stock market, respond by having a day where there is more buying than selling.

The Fed has other tools by which to expand the money supply. An expanded money supply encourages growth. (In case you are wondering the definition of the money supply is so complex, it takes an economist to try and explain it. There is also controversy over which figure the Fed uses to make its decisions. Enough already.)

When the Fed feels there isn’t enough money in the money supply, they can lower the banks reserve ratio. All banks have a reserve ratio. The rest of the money they take in, they put out in loans to earn money. You really didn’t think they kept all that money right there all the time I hope. When they are allowed to loan out more, then there is more money in circulation.

Then there is the business of government securities. You have all heard of T-bills and other treasury bonds. The Fed has the right to buy and sell them. If they want more money in circulation, they issue a buy order. Customers with bonds they had been holding go to the nearest Federal Reserve Bank and sell their bonds. They are issued a check, which they are going to go and deposit in their bank. This money prior to this deposit never existed. There is, as we know, nothing to back it other than the full faith of the United States government. The bank, on receiving the seller’s deposit, only keeps its reserve requirement portion of the deposit. The rest is circulated to others who apply for loans. They then take the loan check and deposit in their personal bank. The same thing is repeated until that original check for the sale is exhausted. Now, that money is in circulation, less whatever the reserve ratio was for the individual banks.

As bad as things are in the current economy, if the government didn’t have the tools of monetary and fiscal policy, we would be a lot worse off and have fewer options. When things are bad, we always tend to blame the government. They are doing all they can to keep the wildfire that’s sniffing out our financial system from causing a complete collapse. As I said, the only thing that keeps the monetary system going period is that we have confidence in the United States government. Once that confidence is gone, everything will collapse and we will be looking at a situation that makes the depression of the 30s like child’s play.

The only thing we can do now is take care of our own personal finances and write to the legislators if we don’t like what they are doing at their end. Their adjusting the system is not what caused the mess we are in. We had a bunch of greedy corporate bigwigs who thought they could do what they want and we had a whole financial system that came very close to mirroring Enron.

If the government didn’t have the tools it did when those banks collapsed, we would be looking at a situation close to the end of the movie, “Rollover” in 1982. The whole economic system collapsed and there were worldwide riots.

The title of this article was me being factious. We better be glad that the government ‘can mess’ with the economy. This doesn’t mean that we shouldn’t be watching their actions. There is more on the horizon. We need to be dutiful watchers.

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It’s not the economy stupid
April 4, 2008, 1:05 am
Filed under: Business Advice | Tags: , , ,

…it’s each and every one of us

We hear that all the changes and problems are to be blamed on this universal omnipresent entity better known as the economy.

Individuals and small business owners live in denial, telling themselves none that effects them. Nothing could be farther from the truth.

We, each and every individual in this country, compose what it is known as the aggregate market (the whole) in America. Every thing we do or don’t do eventually has effect on what is going on in the ‘economy.’ We are the economy. We buy, sell, market, produce, hire, fire employees, invest and plan for the future. These are all the components of the private side of the economy. There, of course, is the government that puts its messy fingers in the pie from time to time. These actions are called fiscal and monetary policy. Fiscal policy is controlled by elected officials and monetary policy by the Federal Reserve.

Neither make decisions to get the economy to expand or contract on a whim. Their choices are made to try and keep the economy on track The government can increase budgets for aerospace and the military knowing that it will mean more hiring and expansion for the future if they see a slow down in potential jobs. This is called fiscal policy. (According a citation I read, it is an effort by the government to stimulate the economy by spending money.) When they spend more money, they create a situation where more people go to work so the projects they launched have manpower. This started in FDR’s time when he wanted the roads cleaned up and damns built and a way to give those out of work a job. Projects were built and more people came home at night with a paycheck.

All of the above along with the Fed’s actions, monetary policy, are the government’s ways of trying to keep the economy on track. What’s happening now is both governmental arms reaching out to intervene in the mortgage mess, a fluke. This only happens occasionally during times of pending crisis.

Now, let’s get back to the individuals that make up this aggregate market. In the late 70s and early 80s the credit card companies pushed customers to expand credit lines and sent out pre-approved cards by the bushel. The idea behind the push was that inflation rates were eating up the power of the dollars in your pocket. So, the theory went by putting off purchases, you are only going to end up paying more. So, buy today or you will live to regret it. To make it even more enticing, in those days, credit card interest was an income tax deduction.

America has never been able to pull themselves off credit card binging. When they couldn’t get rid of that debt, they turned to home equity loans for help, which just happened to pop up on the scene at the same time. What it did was put homes in jeopardy in the long run to deal with the short term purchasing. It wasn’t a good idea then and it is even worse now.

Early in the millennium came the push to put a different market niche of folks into homes. Encouraging home buying is a good thing on the surface; but not if, as a family you can’t afford to stay in the home. Also, all sense of down payments and a correctly proportioned income to mortgage payment went out the window. The folks pushing the contracts were making big bucks and didn’t want to stop. Well, the economy is now saying stop.

The result is people are claiming the turmoil is fueled by the government and the media. No, it is fueled by individuals that make up the economy/aggregate market. Take responsibility for your financial decisions. Change anything that isn’t good planning. Teach anyone who is willing to listen. Look out for money making opportunities during this time. Bargains are always going to pop up when demand threatens to decrease. Change your economic life one step at a time and open up your life to better times down the road.

For more examples of my work:

Laura Bell