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Is the US Headed for Another Economic Crisis? Specific Topics 1) 2) 3) 4) 5) 6) Is the Banking Sector Stable? Are State and Local Governments Solvent? How Serious is the Federal Debt Problem? Will the Real Estate Market Recover? What About Consumer Spending? What Should we Expect Over the Next 12 Months 1) Is the Banking Sector Stable? 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 FDIC Bank Closures 1990 to 2011 400 300 200 100 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 FDIC Problem Banks 1990 to 2011 1000 800 600 400 200 0 Total Assets for all FDIC Insured Banks: Approximately $14 Trillion Total Assets for the 865 Banks on the FDIC Problem List: Approximately $400 Billion (Less Than 3% of the $14 Trillion) Overall Grade for the US Banking Sector Overall Grade for the US Banking Sector C US Banks are Flush with Cash 2) Are State and Local Governments Solvent? State and Local Government Revenue and Expenses Overall Grade for the Financial Condition of the Typical State or Local Government Overall Grade for the Financial Condition of the Typical State or Local Government B- 3) How Serious is the Federal Debt Problem? Total Federal Debt How Big of a Threat is the Federal Debt Problem for the General Health of the US Economy? Analogy to Debt Capacity for a Family There is a “Tipping Point” Beyond Which Lenders are Unwilling to Extend Credit The Level of Interest Expense and the Ability to Service the Debt are of Greater Concern Than the Level of Debt per se. Additional Factor in the Case of US Treasury Debt The International Transactions Demand for US Dollars and US Treasury Debt What the Implication of International Demand for the Tipping Point? International Demand Clearly Adds to the Capacity for US Debt Relative to the Level of Debt Capacity for Other Nations. However, the Full Extent of the Increase In Debt Capacity Had Yet to Be Tested In Addition, it is too Early to Assess the Potential Effect of a Nasty Political Debate Over US Debt US Debt Held by Foreigners Overall Grade for the Financial Condition of the Federal Government Overall Grade for the Financial Condition of the Federal Government D 4) Will the Real Estate Market Recover? Housing Starts Overall Grade for the Residential Real Estate Market Overall Grade for the Residential Real Estate Market E 5) What About Consumer Spending? Consumer Spending Overall Grade for the Consumer Sector Overall Grade for the Consumer Sector A- 6) What Should we Expect Over the Next 12 Months? How Strong is (was) the Economic Recovery? Real GDP from 2002 to 2011 Real GDP From 1950 to 2011 Inventory to Sales Ratio New Factory Orders Average Weekly Overtime If the Economy was Recovering Then Why Has The Unemployment Rate Remained So High? Unemployment Rate Unemployment 101 Unemployment 101 Okun’s Law Unemployment 101 Okun’s Law Effects of Recession Severity on Critical Economic Linkages Unemployment 101 Okun’s Law Effects of Recession Severity on Critical Economic Linkages Growth in Labor Productivity Unemployment 101 Okun’s Law Effects of Recession Severity on Critical Economic Linkages Growth in Labor Productivity Growth in Work Force Unemployment 101 Okun’s Law Effects of Recession Severity on Critical Economic Linkages Growth in Labor Productivity Growth in Work Force Mechanics of the Unemployment Measure An Additional Observation The Absolute Decrease in Real GDP and the Absolute Increase in Real GDP Might not be the Best Way to Measure the Beginning and End of an Economic Recession. Most Economists Agree that a Better Measure is the Increase or Decrease in Real GDP Relative to the Long Term Trend in Productive Capacity Real GDP from 2002 to 2011 The Recession of 1990-91 The Recession of 2001 What Has Been Driving This Economic Recovery? Is the Recovery Due to Monetary Stimulus? Interest Rate on a Conventional 30 Year Mortgage What About Fiscal Stimulus Programs? What About Fiscal Stimulus Programs? TARP Program in Late 2008: $700 Billion for Investments in Financial Institutions What About Fiscal Stimulus Programs? TARP Program in Late 2008: $700 Billion for Investments in Financial Institutions ARRA Programs in Late 2009: $300 Billion in Tax Cuts and $500 Billion in Additional Spending Private Sector Employment Is There Another Factor Contributing to Economic Recovery? Trade-Weighted Value of the US Dollar Trade-Weighted Value of the US Dollar – A Longer View Yuan Per Dollar Canadian Dollar vs US Dollar What Effect Does a Decline in the Value of the US Dollar Have on the US Economy? The Dual Pricing Effect Foreign goods and services become more expensive for US consumers US goods and services become less expensive for non US consumers By Virtue of a Substantially Lower Value of the US Dollar, You Can Even Expect to See a Decline in the Rate of International Outsourcing for Parts and Services Economic Forecast for the Next 12 Months Economic Forecast for the Next 12 Months Despite Continuing Issues for Many Parts of the US Economy, I Expect to See Modest Growth in Real GDP at an Annual Rate of 1% or 2%. Economic Forecast for the Next 12 Months Despite Continuing Issues for Many Parts of the US Economy, I Expect to See Modest Growth in Real GDP at an Annual Rate of 1% or 2%. I also Think There is a Roughly Equal Chance of Either Modest Decline or Enhanced Growth in Real GDP During any Given Quarter And Most Important of All And Most Important of All If Any of These Predictions Turn Out to Be Incorrect, Please Remember That my Name is: And Most Important of All If Any of These Predictions Turn Out to Be Incorrect, Please Remember That my Name is: Ben Bernanke