Analysis of Today's Economy
Today on 3/10/08 the DOW fell 1.29%, to 11,740. Oil Prices hit a record high above $108 a barrel. A majority of American think we are in or heading for a recession. The dollar continues to weaken, and credit has dried up around the world. It is truly a wonderful day to start this blog! Information on today can be found my looking at the links to your right or checking out this article.
I thought I might take a moment to give my own personal historical account on how we came into this mess. I will try to be as brief as possible...
It all began when the dot-com bubble burst in 2001. On January 4, 2001 the prime interest rate was 9%. As the bubble burst and the economy went into a downward spiral, the FED acted as expected by cutting interest rates. This expanded the money supply and this theoretically a shot in the arm to a struggling economy. However, with the events of 9/11 and the wars in the middle east, the economy continued its downward spiral. So, the FED cut rates more and more until finally in June of 2003 the interest rate bottomed out at 4%. This was a low unheard of in recent history, and its effects in a globalized economy were difficult to predict.
This is where the sub-prime mortgage loans came into play. With interest rates this low, and with housing prices going through the roof, everybody decided it was time to buy a home! They got adjustable rate mortgages (ARM's) because they were cheaper as long as interest rates remained low. The real estate market bubbled in response to these cuts because people got the idea that you couldn't lose money on real estate. This is the first tell-tale sign of a bubble and you will certainly lose if you get caught up in this madness.
Long story short...
The economy began to "recover" and the FED allowed the rates to rise. All those profit seekers with ARM's decided to cash out and the market was flooded. Housing prices dropped, interest rates increased, and people began to default. All those people who thought they couldn't lose began to lose big time! The FED rushed into help by cutting interest rates again. But oh here's where the other variables come into play!
1. Gas prices had been rising due to growing economies in places such as China and uncertainty in the middle east.
2. Our long growing trade deficit was finally putting stress on the dollar to depreciate, as the laws of financial gravity state it must in order to bring the balance back into equilibrium.
Thus, by cutting interest rates, the FED hurt the dollar more because it had become more sensitive. The depreciation caused by increasing the money supply with interest rate cuts drove the dollar down further, making gas even more expensive. High gas prices impose higher transactions costs on everything, the demon of inflation is unavoidable!
We and the FED appear to be stuck between a rock and a hard place? What shall we do, I might have to save that for the next post!
I thought I might take a moment to give my own personal historical account on how we came into this mess. I will try to be as brief as possible...
It all began when the dot-com bubble burst in 2001. On January 4, 2001 the prime interest rate was 9%. As the bubble burst and the economy went into a downward spiral, the FED acted as expected by cutting interest rates. This expanded the money supply and this theoretically a shot in the arm to a struggling economy. However, with the events of 9/11 and the wars in the middle east, the economy continued its downward spiral. So, the FED cut rates more and more until finally in June of 2003 the interest rate bottomed out at 4%. This was a low unheard of in recent history, and its effects in a globalized economy were difficult to predict.
This is where the sub-prime mortgage loans came into play. With interest rates this low, and with housing prices going through the roof, everybody decided it was time to buy a home! They got adjustable rate mortgages (ARM's) because they were cheaper as long as interest rates remained low. The real estate market bubbled in response to these cuts because people got the idea that you couldn't lose money on real estate. This is the first tell-tale sign of a bubble and you will certainly lose if you get caught up in this madness.
Long story short...
The economy began to "recover" and the FED allowed the rates to rise. All those profit seekers with ARM's decided to cash out and the market was flooded. Housing prices dropped, interest rates increased, and people began to default. All those people who thought they couldn't lose began to lose big time! The FED rushed into help by cutting interest rates again. But oh here's where the other variables come into play!
1. Gas prices had been rising due to growing economies in places such as China and uncertainty in the middle east.
2. Our long growing trade deficit was finally putting stress on the dollar to depreciate, as the laws of financial gravity state it must in order to bring the balance back into equilibrium.
Thus, by cutting interest rates, the FED hurt the dollar more because it had become more sensitive. The depreciation caused by increasing the money supply with interest rate cuts drove the dollar down further, making gas even more expensive. High gas prices impose higher transactions costs on everything, the demon of inflation is unavoidable!
We and the FED appear to be stuck between a rock and a hard place? What shall we do, I might have to save that for the next post!
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