In light of the recent Eric Cantor vs. David Brat upset, memories of our national debt crisis are resurfacing. Cantor was 1 of 28 Republicans who voted to raise the debt ceiling, which is a likely catalyst for his surprising defeat. Since it seems that our fight with our national debt is unending, today's post will be discussing this infamous debt.
Our debt currently amounts to $17.075 trillion, and while this number is definitely a large sum, it is not exactly the same as the average American in debt to, for instance, his or her credit card company. The United States was born, sadly, in debt. Costs from the Revolutionary War were high, and the US was forced to borrow money. However, it was not until the 1930s that the United States, under the direction of President Roosevelt, began to over spend in order to solve financial troubles not caused by a war. Both World War II and the Cold War skyrocketed the US debt, and our debt is still increasing to this very day. So, it seems as though the United States has always been in debt, and will probably always be in debt. What exactly does this mean for us?
Contrary to popular belief, the national debt does indeed affect the average American citizen. For example, as the debt increases, the likelihood of our government defaulting on its debt also increases (this is the situation that predicated the government shutdown in October). This means that the Treasury will have to increase the yield on treasury securities, which will reduce the amount of tax revenue available to spend on social programs. Therefore, the average American citizen may face a lower standard of living. As the yield on treasury securities increases, the cost of a mortgage loan also increases. The Federal Reserve responds by increasing interest rates, which pushes down the prices of homes since prospective buyers can no longer afford such large mortgages. This means that the net worth of American homeowners will be reduced. Finally, the risk of defaulting on our debt is most detrimental to the international standing of the United States. Our country will lose pull as a political and economic hegemon.
Clearly, the debt is pretty significant. So why is solving the debt problem not the top priority on every politician's agenda? This is where the difference between the United States's debt and the average American's debt comes into play. The United States does not have to pay back its debt, we just have to ensure that our debt grows more slowly than our tax base. Furthermore, a citizen in debt is usually in debt to someone else. The United States is largely in debt to... ourselves! 28.4% of our debt is owed to another arm of the American government, whereas China (our largest overseas creditor) only holds 7.6% of our debt. The United States is easily able to spend enough money to service our debt.
I have, hopefully, cleared up some misconceptions concerning our national debt. The potential harms are undeniable, as well as the reasons why politicians are not worried about the harms. Your opinion, however, on how our national debt should be dealt with is rightly up to you and likely aligns with your political beliefs.
Wednesday, June 11, 2014
Wednesday, April 2, 2014
Book Review: Young Money
A couple of weeks ago, I finished reading a fantastic book by Kevin Roose, a writer for the New York Times. Young Money: Inside the Hidden World of Wall Street's Post-Crash Recruits is an absolutely phenomenal book- especially for someone who is interested in going into finance in the future.
Young Money follows the lives of young, new college graduates who have entered the world of Wall Street. Roose convinces eight new hires to give him the skinny on their new jobs- an unheard of insight into the happenings on the Street. The participants work at Sachs, Citigroup, Morgan Stanley, Bank of America Merrill Lynch, and JPMorgan Chase; their college educations range from semi-selective schools to the Ivy League.
The participants become involved in a program called "Training the Street" where they begin their two year stint as an employee of their respective bank. You may expect the training program to teach them how to trade, judge the market, relate current events to fluctuating prices; instead, the trainees are taught how to make complex Excel sheets. For two years, the participants are expected to make Excel sheets, which can be used in a presentation for a client (the clients rarely ever look at the Excel sheets, and they usually end up in the trash). This process is grueling, and the trainees consistently work 110 hours each week. I will refrain from divulging too much, but one could only imagine the effects such work would take on an individual... As the two year job comes to a close, the participants have to decide whether or not they want to make a career at his or her bank, or move on to another job.
Young Money provides a seemingly realistic view on life on Wall Street. Since this book focuses on post-crash hires, readers can compare the new Wall Street to the view of Wall Street made popular today by Jordan Belfort. However, it is still a fun read, often hilarious at times (Especially the section covering the fraternity induction ceremony of Wall Street's most powerful names). Without a doubt, I would recommend this book to anyone who is interested in working on Wall Street!
Young Money follows the lives of young, new college graduates who have entered the world of Wall Street. Roose convinces eight new hires to give him the skinny on their new jobs- an unheard of insight into the happenings on the Street. The participants work at Sachs, Citigroup, Morgan Stanley, Bank of America Merrill Lynch, and JPMorgan Chase; their college educations range from semi-selective schools to the Ivy League.
The participants become involved in a program called "Training the Street" where they begin their two year stint as an employee of their respective bank. You may expect the training program to teach them how to trade, judge the market, relate current events to fluctuating prices; instead, the trainees are taught how to make complex Excel sheets. For two years, the participants are expected to make Excel sheets, which can be used in a presentation for a client (the clients rarely ever look at the Excel sheets, and they usually end up in the trash). This process is grueling, and the trainees consistently work 110 hours each week. I will refrain from divulging too much, but one could only imagine the effects such work would take on an individual... As the two year job comes to a close, the participants have to decide whether or not they want to make a career at his or her bank, or move on to another job.
Young Money provides a seemingly realistic view on life on Wall Street. Since this book focuses on post-crash hires, readers can compare the new Wall Street to the view of Wall Street made popular today by Jordan Belfort. However, it is still a fun read, often hilarious at times (Especially the section covering the fraternity induction ceremony of Wall Street's most powerful names). Without a doubt, I would recommend this book to anyone who is interested in working on Wall Street!
Friday, March 14, 2014
Bonds are NOT Stocks!
I recently asked my friend what he thought about bonds. He responded by saying, "I don't know what they are. Do you mean, like, a stock?" This prompted today's post- the true meaning of a bond. A bond is used when an investor loans money to an institution. The institution can then use that invested money for a certain period of time. The bond also states the interest (also known as a coupon) that needs to be paid on the returned money. Here is a more simple explanation:
If I want to purchase an iPad, but I do not have enough money, I can sell my "debt" to my friends. Let's say the bonds are worth $10 with a certain coupon attached to them. I will garner enough money from my friends to buy the iPad, but I will have to pay back the revenue generated from the interest rate. This is how my friends would make money off of the bonds.
There are many different types of bonds. US Treasuries are considered the most secure and stable because of the full faith in the credit of the United States government.
Treasury bills have extremely short maturities of 13 weeks, 26 weeks, or one year. These are bought at a discount to face value ($10,000) and the investor receives the full $10,000 maturity.
Treasury notes mature in 2 to 10 years. Depending upon the maturity, the investment is either $1,000 or $5,000.
Treasury bonds mature in 10 years and are distributed in denominations of $1000.
Zero-coupon bonds are sold at a very high discount and mature anywhere within 6 months to 30 years. Profits from interest rates are not received until the bond matures, but the investor still has to pay taxes on the interest rate profits that would be received normally.
Corporate bonds are much more risky than Treasury-backed securities because they depend on the profitability of the company, which is volatile and likely to change. Higher quality corporations are known as "investment-grade" bonds; they are less risky investments. Corporations with low credit are known as "high-yield" or "junk" bonds- these are very risks, but also very profitable.
Municipal bonds rarely interfere with taxes. While holding municipal bonds, the investor does not have to pay taxes on the money from interest rates to the federal government. Usually, if the muni is bought from a state or local government, taxes do not have to be paid to these governments either.
Somebody can make money from investing in bonds by examining a bond's yield. The current, or running, yield can be determined by dividing the annual interest payment by the current cost of the bond in a market. The yield to maturity is a more accurate measure of profits from bonds. It takes into account not only the cost of the bond in the current market, but also the remaining coupons until maturity.
These are the basics on bonds. No, they are not stocks!
If I want to purchase an iPad, but I do not have enough money, I can sell my "debt" to my friends. Let's say the bonds are worth $10 with a certain coupon attached to them. I will garner enough money from my friends to buy the iPad, but I will have to pay back the revenue generated from the interest rate. This is how my friends would make money off of the bonds.
There are many different types of bonds. US Treasuries are considered the most secure and stable because of the full faith in the credit of the United States government.
Treasury bills have extremely short maturities of 13 weeks, 26 weeks, or one year. These are bought at a discount to face value ($10,000) and the investor receives the full $10,000 maturity.
Treasury notes mature in 2 to 10 years. Depending upon the maturity, the investment is either $1,000 or $5,000.
Treasury bonds mature in 10 years and are distributed in denominations of $1000.
Zero-coupon bonds are sold at a very high discount and mature anywhere within 6 months to 30 years. Profits from interest rates are not received until the bond matures, but the investor still has to pay taxes on the interest rate profits that would be received normally.
Corporate bonds are much more risky than Treasury-backed securities because they depend on the profitability of the company, which is volatile and likely to change. Higher quality corporations are known as "investment-grade" bonds; they are less risky investments. Corporations with low credit are known as "high-yield" or "junk" bonds- these are very risks, but also very profitable.
Municipal bonds rarely interfere with taxes. While holding municipal bonds, the investor does not have to pay taxes on the money from interest rates to the federal government. Usually, if the muni is bought from a state or local government, taxes do not have to be paid to these governments either.
Somebody can make money from investing in bonds by examining a bond's yield. The current, or running, yield can be determined by dividing the annual interest payment by the current cost of the bond in a market. The yield to maturity is a more accurate measure of profits from bonds. It takes into account not only the cost of the bond in the current market, but also the remaining coupons until maturity.
These are the basics on bonds. No, they are not stocks!
Wednesday, March 12, 2014
Fiscal Policy vs. Monetary Policy
Fiscal and monetary policy are often used interchangeably; however, there are slight differences between the two. Both fiscal and monetary policy can influence the economy, but they are implemented by different actors. Monetary policy is implemented and altered by a central bank, whereas fiscal policy is implemented and altered by the government.
The goal of monetary policy is to create maximum employment, which Janet Yellen has identified as one of her main goals as head of the Fed. Monetary policy also works for instituting long-term moderate interest rates and stable prices. The Federal Reserve uses three different methods of monetary policy. These are 1) open market operations, 2) the discount rate, and 3) reserve requirements. Open market operations deal with the Fed buying and selling financial instruments, such as securities or enterprises. When the Fed wants to increase the bank reserves, it buys securities and puts the deposit in the banks the Fed deals with. When the Fed wants to decrease reserves, it sells those securities and takes out the deposit from the banks. The discount rate is the interest rate banks use for short-term loans. Reserve requirements are the amounts of deposits banks have to retain in reserves or with the Fed.
Monetary policy usually focuses on influencing the growth rate within a country. Stimulative monetary policy should increase a country's growth rate. Restrictive monetary policy slows down an economy to counterbalance inflationary factors. In order to change monetary policy, the central bank can look towards interest rates or the amount of money in bank reserves. The central bank in the United States is the Federal Reserve. Once again, the chairwoman being the one and only Janet Yellen! (pictured below)
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| Janet Yellen (chairwoman of the Federal Reserve) |
Fiscal policy is how a government adjusts taxes and spending levels in order to make an effect on the economy. Adam Smith introduced the idea of laissez-faire economics, in which the government plays a "hands-off" role in dealing with the economy. However, after the Great Depression, the government began to play an increased role in our nation's economic status. John Maynard Keynes engendered the idea of fiscal policy, which now follows Keynesian economics. Keynesian economics explains that governments can play an active role by altering spending levels and tax rates. Like anything else in life, a balance is necessary. A common fiscal policy idea is decreasing taxes, which in turns puts more spending money into the economy. By also increasing government spending, new businesses can arise, which can reduce unemployment levels.
Shout out to Zachariah Chou for the request! #makingdollarsandsense
Shout out to Zachariah Chou for the request! #makingdollarsandsense
Thursday, March 6, 2014
Three of the Three Letter Acronyms
Often, when reading a report on any country's economy, three letter acronyms are supposed to mean something. However, if you do not know what the acronyms stand for, or even what they mean in totality, then the report is opaque- to say the least. Therefore, today I will demystify THREE of the infamous THREE letter acronyms, as requested by Joshua Elkin!
GDP- GDP is one of the most common acronyms used to analyze a country's financial standing. GDP stands for Gross Domestic Product. GDP can be measured in three ways, which all lead to the same result. It is measured by taking into account the market value of all goods produced within a certain country within a certain period of time (usually a year); it is equal to the accumulation of all profits after various stages of production, adding taxes but subtracting subsidies; and it is also equal to the sum of income generated from production. The United States' GDP is currently around $16.24 trillion. This type of GDP is the most common, and known as nominal GDP; however, there is also constant or real GDP, which adjusts for price changes.
GNP- GNP is also very common; GNP stands for Gross National Product. Gross National Product adds net income, but subtracts total payment outflow to foreign assets. GNP is measured by considering the price of all production and services within a country, as well as production and services controlled by the country but on foreign lands. The difference between GDP and GNP is where the money being counted comes from. GDP takes into account any profits made inside the country's borders- regardless of the nationality of the worker. GNP takes into account profits made from any resident of the country, regardless of where he or she lives.
PPP- PPP, or purchasing power parity, is used to determine the worth of a specific currency. It is based on the concept of the law of one price, or how much everything in the world would cost if we used one currency. This is useful in establishing an appropriate currency exchange rate between two countries. Usually, the actual exchange rates do end up following the PPP exchange rates, so it helps to know possible future exchange rates. A really interesting example of how some people consider the differences in currencies is the Big Mac Index. The Big Mac Index compares the price around the world of- you guessed it- Big Macs! Personally, I find this to be hilarious. You are examining currencies based on the price of a cheeseburger!!! Unfortunately, the Big Mac Index is faulty when a country has to lower the price of the cheeseburger in order to increase competitiveness. Oh well, it is still pretty awesome. Anyways, back to PPP as a whole, PPP is difficult to measure because of the popularity of certain goods. For example, the United States consumes an excess of bread (thanks, carbohydrate lovers) whereas China consumes more rice. This is not just a stereotype; it is factually correct. Therefore, PPP would have to take into consideration these differences in demand. PPP relates to GDP because GDP is usually measured with the global currency- the dollar. If the PPP of the Japanese yen is reduced by 1/4th compared to the dollar, then the GDP of Japan will also be reduced by 1/4th. This does not make Japan any worse off- it still has the same amount of money- it is just measured differently.
All in all, GDP, GNP, and PPP are common terms. Thanks for the request, Josh Elkin! Any other requests are welcomed in the comments section! #makingdollarsandsense
Friday, February 28, 2014
Macroeconomics vs. Microeconomics
My very good friend Joao Rojas requested a post that explained the difference between macroeconomics and microeconomics. Joao Rojas, this post is dedicated to you!!!
Microeconomics is crucial to comprehend before understanding macroeconomics. Microeconomics focuses on the smaller parts that make up the entire economy. Specifically, it looks at individuals and small companies and how they relate to supply and demand. Microeconomics is important because it shows businesses the right price for certain items, based upon supply and demand models. Microeconomics also studies the conditions for perfect competition, and the makeup of market failure. Now for some examples:
I am selling pecans from my backyard. There was a prosperous pecan season this year, so my competition also has a lot of good, solid pecans. Not many people really want to make pecan pie this season, so we have a ton of pecans with not many people interested in buying them. Therefore, the price of pecans will go down.
I had a great pecan season this year. Luckily, my competitors' pecans are small and few in number. EVERYBODY wants to make pecan pie. There is a high demand for pecans, and a small number of them. Since I have the best pecans, I can raise the price. Success!!
Those are very simple examples of supply and demand in microeconomics. It usually also considers the consumer demand theory, theory of production, cost of production, and labor economics. If the workers caring for my pecans are paid an exorbitant amount of money, then the price I sell my pecans at will be affected. Now on to macroeconomics.
Macroeconomics deals with the structure and behavior of the overall economy. Often times, macroeconomics is influenced by microeconomics. The unemployment rate will affect the number of workers a business will hire, and vice versa. Macroeconomics studies the unemployment rates, GDP, GNP, investments, savings, inflation/deflation, and international finance. Macroeconomics is the big picture.
One must understand both macroeconomics and microeconomics in conjunction because they often go hand in hand. Varying levels of inflation and deflation will force businesses to adjust their prices. Unemployment rates will affect the hiring of employees for companies. Joao Rojas, I hope you now understand the basics between microeconomics and macroeconomics. For everyone else, if there is a specific topic you would like me to touch upon, feel free to suggest it in a comment!
Microeconomics is crucial to comprehend before understanding macroeconomics. Microeconomics focuses on the smaller parts that make up the entire economy. Specifically, it looks at individuals and small companies and how they relate to supply and demand. Microeconomics is important because it shows businesses the right price for certain items, based upon supply and demand models. Microeconomics also studies the conditions for perfect competition, and the makeup of market failure. Now for some examples:
I am selling pecans from my backyard. There was a prosperous pecan season this year, so my competition also has a lot of good, solid pecans. Not many people really want to make pecan pie this season, so we have a ton of pecans with not many people interested in buying them. Therefore, the price of pecans will go down.
I had a great pecan season this year. Luckily, my competitors' pecans are small and few in number. EVERYBODY wants to make pecan pie. There is a high demand for pecans, and a small number of them. Since I have the best pecans, I can raise the price. Success!!
Those are very simple examples of supply and demand in microeconomics. It usually also considers the consumer demand theory, theory of production, cost of production, and labor economics. If the workers caring for my pecans are paid an exorbitant amount of money, then the price I sell my pecans at will be affected. Now on to macroeconomics.
Macroeconomics deals with the structure and behavior of the overall economy. Often times, macroeconomics is influenced by microeconomics. The unemployment rate will affect the number of workers a business will hire, and vice versa. Macroeconomics studies the unemployment rates, GDP, GNP, investments, savings, inflation/deflation, and international finance. Macroeconomics is the big picture.
One must understand both macroeconomics and microeconomics in conjunction because they often go hand in hand. Varying levels of inflation and deflation will force businesses to adjust their prices. Unemployment rates will affect the hiring of employees for companies. Joao Rojas, I hope you now understand the basics between microeconomics and macroeconomics. For everyone else, if there is a specific topic you would like me to touch upon, feel free to suggest it in a comment!
Monday, February 24, 2014
Modern Forms of Capital
When I first began reading news dealing with finance, I was consistently stumped by the concept of capital. Then, I read an amazing book. It was probably one of the best informational books I have ever read, and I strongly recommend it to anyone with the same confusions. The Mystery of Economic Growth by Elhanan Helpman has entire chapters dedicated specifically to the meaning of capital and its impact on an economy. I wouldn't exactly call it a beach read, but the time spent wrapping your head around the content is definitely worth it. Anyways, in this post, I'll briefly describe the different forms of capital that haunted me for so long.
Financial capital, in simple terms, refers to money that is saved up or given by lenders. Usually this money then goes towards starting a business or any other type of enterprise. Businesses include financial capital in their finance reports and use capital almost synonymously with assets. It can be measured in nominal monetary units (Historical Cost Accounting), in which a company only maintains its capital if it has the same amount of capital at the end of the period as it did at the beginning. In theory, this makes sense. If you have six pieces of candy at the beginning of the month, and six pieces of candy at the end of the month, you successfully maintained your capital. Congratulations! However, in actuality, Historical Cost Accounting does not take into account inflation or deflation, so it is not as accurate if those factors play in. Financial capital can also be measured in terms of constant purchasing power. With constant purchasing power, capital maintenance can be accurately accounted for in times of low inflation and deflation or hyperinflation. We continue to use Historical Cost Accounting because it is the standard form of accounting. Okay, so financial capital, to me, was always the most complicated form of capital. The rest are much easier to comprehend.
Natural capital deals with ecological benefits, such as water that supports a village.
Social capital involves relationships between humans that promote economic benefits. For example, if I have a lemonade stand, I will need to buy sugar. You have a business that sells sugar, so I will need to come to you and buy sugar, thus we have a mutual agreement to depend on each other for profits. We both benefit economically from this relationship.
Instructional capital is the knowledge gained from a teacher. Never in my entire life would I have understood the concept of logarithms on my own. They still mystify me. However, my math teacher can transfer her knowledge of logarithms to me, and I can then use the knowledge to benefit society (If I am lucky, I will find a way to benefit society WITHOUT logarithms). This is instructional capital.
Human capital often includes social capital and instructional capital. Human capital is the pure value of a human. Your dog cannot invent the light bulb, create a vaccine for polio, or write the Great American Novel. Humans can do all of these things; therefore, human capital is valuable.
Physical capital refers to manufactured items that are used in production. An example would be the machines used to make the fabulous L.L. Bean boots.
These are the different forms of modern capital. In The Mystery of Economic Growth, Helpman explained that a country needs all of these different forms of capital in order to grow economically. Each form of capital contributes a necessary addition to society. Yay for modern capital!
Financial capital, in simple terms, refers to money that is saved up or given by lenders. Usually this money then goes towards starting a business or any other type of enterprise. Businesses include financial capital in their finance reports and use capital almost synonymously with assets. It can be measured in nominal monetary units (Historical Cost Accounting), in which a company only maintains its capital if it has the same amount of capital at the end of the period as it did at the beginning. In theory, this makes sense. If you have six pieces of candy at the beginning of the month, and six pieces of candy at the end of the month, you successfully maintained your capital. Congratulations! However, in actuality, Historical Cost Accounting does not take into account inflation or deflation, so it is not as accurate if those factors play in. Financial capital can also be measured in terms of constant purchasing power. With constant purchasing power, capital maintenance can be accurately accounted for in times of low inflation and deflation or hyperinflation. We continue to use Historical Cost Accounting because it is the standard form of accounting. Okay, so financial capital, to me, was always the most complicated form of capital. The rest are much easier to comprehend.
Natural capital deals with ecological benefits, such as water that supports a village.
Social capital involves relationships between humans that promote economic benefits. For example, if I have a lemonade stand, I will need to buy sugar. You have a business that sells sugar, so I will need to come to you and buy sugar, thus we have a mutual agreement to depend on each other for profits. We both benefit economically from this relationship.
Instructional capital is the knowledge gained from a teacher. Never in my entire life would I have understood the concept of logarithms on my own. They still mystify me. However, my math teacher can transfer her knowledge of logarithms to me, and I can then use the knowledge to benefit society (If I am lucky, I will find a way to benefit society WITHOUT logarithms). This is instructional capital.
Human capital often includes social capital and instructional capital. Human capital is the pure value of a human. Your dog cannot invent the light bulb, create a vaccine for polio, or write the Great American Novel. Humans can do all of these things; therefore, human capital is valuable.
Physical capital refers to manufactured items that are used in production. An example would be the machines used to make the fabulous L.L. Bean boots.
These are the different forms of modern capital. In The Mystery of Economic Growth, Helpman explained that a country needs all of these different forms of capital in order to grow economically. Each form of capital contributes a necessary addition to society. Yay for modern capital!
Wednesday, February 19, 2014
The TRUTH About Quantitative Easing
I compete in Speech & Debate, and a girl once gave a speech in the final round of a very prestigious tournament about the almighty Janet Yellen. Naturally, when I stood up to question my competitor, I brought up quantitative easing (QE). She denied that it causes inflation- over and over again. Needless to say, this made me very angry. Even worse, the judges were not aware of the practice of quantitative easing either, so the girl was not penalized for her obvious mistake. Therefore, I am making it a priority to FULLY explain quantitative easing.
Why exactly is quantitative easing so pertinent right now? Well, our economy is obviously not in the best shape. Big surprise there. Our country recently confirmed Janet Yellen as the head of the Federal Reserve. She is pretty much my favorite woman in politics- behind Angela Merkel, of course. Yellen is more than qualified for the job; she was the president of the Federal Reserve Bank of San Francisco and became the vice chairman for the Federal Reserve in 2010. Maybe I will compose a full analysis of Janet Yellen in the future... Back to the concept of quantitative easing, quantitative easing and Janet Yellen cross paths in the stimulus package she is supporting. Henceforth, quantitative easing will be used to "stimulate" our economy in the upcoming years. So you should probably know what it is.
The definition of quantitative easing is "an unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply. It increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity. Quantitative easing is considered when short-term interest rates are close to zero, and does not involve the printing of new banknotes." Pretty confusing. In simpler, less robotic terms, quantitative easing allows the government to buy assets from banks or private companies. The idea is that the banks will then lend the extra money generated from QE to those who need it. This puts more money into the economy as it allows for the movement of capital between large banks and the Americans who are using the money to buy houses, start businesses, or accomplish any other sort of lifelong dream. QE also works to lower interest rates. In the next round of quantitative easing, the Fed is discussing the purchase of mortgage-backed securities. This would make it easier for someone to borrow money and buy a house. But, like anything else, quantitative easing is not perfect.
There is always the possibility that the extra money available to the banks/private companies will not be used for further investment or lending at all, but instead kept for maintenance or internal investment. This totally defeats the entire purpose of quantitative easing, as no money will be cycled throughout the economy. Furthermore, QE can lead to an increase in inflation. In some circumstances, having more inflation is beneficial- particularly if you are Japan. In the United States, however, we do not want a drastic rise in inflation. This would occur if the interest rates are kept too low for too long, which could happen due to QE. People would continuously take advantage of the opportunity and buy with the lower interest rates. This would introduce excessive spending that causes prices to rise quickly. At the moment, the United States does not need to worry about this. We should keep it in mind, though.
This is the end of my brief explanation of quantitative easing. Now, if you ever happen to judge a speech and debate tournament, you will have a general idea of what is going on. Please remember this for such an occasion; I beg of you. #makingdollarsandsense
Why exactly is quantitative easing so pertinent right now? Well, our economy is obviously not in the best shape. Big surprise there. Our country recently confirmed Janet Yellen as the head of the Federal Reserve. She is pretty much my favorite woman in politics- behind Angela Merkel, of course. Yellen is more than qualified for the job; she was the president of the Federal Reserve Bank of San Francisco and became the vice chairman for the Federal Reserve in 2010. Maybe I will compose a full analysis of Janet Yellen in the future... Back to the concept of quantitative easing, quantitative easing and Janet Yellen cross paths in the stimulus package she is supporting. Henceforth, quantitative easing will be used to "stimulate" our economy in the upcoming years. So you should probably know what it is.
The definition of quantitative easing is "an unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply. It increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity. Quantitative easing is considered when short-term interest rates are close to zero, and does not involve the printing of new banknotes." Pretty confusing. In simpler, less robotic terms, quantitative easing allows the government to buy assets from banks or private companies. The idea is that the banks will then lend the extra money generated from QE to those who need it. This puts more money into the economy as it allows for the movement of capital between large banks and the Americans who are using the money to buy houses, start businesses, or accomplish any other sort of lifelong dream. QE also works to lower interest rates. In the next round of quantitative easing, the Fed is discussing the purchase of mortgage-backed securities. This would make it easier for someone to borrow money and buy a house. But, like anything else, quantitative easing is not perfect.
There is always the possibility that the extra money available to the banks/private companies will not be used for further investment or lending at all, but instead kept for maintenance or internal investment. This totally defeats the entire purpose of quantitative easing, as no money will be cycled throughout the economy. Furthermore, QE can lead to an increase in inflation. In some circumstances, having more inflation is beneficial- particularly if you are Japan. In the United States, however, we do not want a drastic rise in inflation. This would occur if the interest rates are kept too low for too long, which could happen due to QE. People would continuously take advantage of the opportunity and buy with the lower interest rates. This would introduce excessive spending that causes prices to rise quickly. At the moment, the United States does not need to worry about this. We should keep it in mind, though.
This is the end of my brief explanation of quantitative easing. Now, if you ever happen to judge a speech and debate tournament, you will have a general idea of what is going on. Please remember this for such an occasion; I beg of you. #makingdollarsandsense
Why A High Schooler Cares About Economics
Sure, making money is probably fun. I would not know myself- I am too busy with school, extra curricular activities, and the tiresome job of being a teenager. However, I would assume that making money is a nice thing to do. In order to dispel any misconstrued notions: talking about how to make money is not the purpose of this blog. I am creating this blog with the purpose of educating today's youth (maybe even today's adults) on various economic principles, concepts, and interesting facts. I will also be blogging about the financial books that I find to be particularly helpful/fascinating. It is very likely that there will be posts about current economic giants and up-and-comings as well. What gives me the right to post about finance? To be quite frank, I am not a professional financial analyst or economics guru. I do have a passion for the material, though, which has encouraged me to learn all that I can on the subject. Of course, all of my posts will be supported with more reputable sources, so no need to worry. Anyways, I cannot wait to begin and subscribe for the utmost exciting discussions on economics! #makingdollarsandsense
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