Download Economies - JMSC Courses

Four Economies
• Economic: Broad view of economic system’s
output.
• Commercial: Goods and services sold and bought
domestically
• Financial: Banks and other lenders, financial
markets—provides money for commercial
ventures
• International: Commercial, financial transactions
across border
(c) 2001 by Russell G. Todd
Key Economic Developments
• 1913: Federal Reserve created
• 1930s: Fiscal vs. monetary policy
• Post-WWII: Bretton Woods, creation of IMF,
World Bank, GATT
• 1972-74: U.S. leaves gold standard; forex market
created
• 1980s: Volcker Fed
• 1986-94: Uruguay round creates WTO
• 1989-91: Collapse of socialist states
• Late ’90s: Creation of Euro; Greenspan ascends
(c) 2001 by Russell G. Todd
The Economic Cycle
• Supply and demand drive economic cycles.
• Sellers and buyers borrow money beyond that which they earn.
• Sellers and buyers tend to over-do things. Sellers invest too
much in business; buyers purchase too much stuff on credit.
• During economic contractions, production and income fall
until credit stabilizes.
• Expansion is possible when both sellers and buyers are relying
on earned income, not credit.
• National economic cycles don't necessarily correlate with each
other.
• National monetary authorities seek to "smooth" cycles by
restraining growth during expansions and relaxing restraints
during contractions.
• The use of fiscal policy by national governments is heavily
(c) 2001 by Russell G. Todd
influenced by politics.
Earnings & Inflation
• Real earnings=earnings minus inflation
• Inflation has varying impacts on wageearners, financial markets, borrowers and
lenders
• Fed’s focus: preventing inflation by
controlling rates
(c) 2001 by Russell G. Todd
How the Fed Controls Rates
• Fed lowers rates by purchasing securities
• Bank reserves grow, lending rises, money
supply rises, demand rises
• Fed raises rates by selling securities
• Bank reserves shrink, lending shrinks,
money supply shrinks, demand falls
(c) 2001 by Russell G. Todd
Productivity & Prices
Supply Demand Price
Comment
100
100
1.00 supply and demand balance
105
100
0.95 productivity up, prices down
95
100
1.05 productivity down, prices up
100
100
95
105
0.95 demand down, prices down
1.05 demand up, prices up
110
105
95
105
110
105
0.95 productivity stronger than demand, prices down
1.05 demand stronger than productivity, prices up
1.11 productivity down, demand up, prices up
(c) 2001 by Russell G. Todd
Examples of Economic Indicators
•
•
•
•
•
Consumer price index: inflation
GDP: Economic output
Durable goods orders: capital investment
Auto & home sales: biggest sectors
Leading economic indicator: future
economic output
(c) 2001 by Russell G. Todd
Friday June 1 8:58 AM ET
Jobless Rate Falls in May
By Caren Bohan
WASHINGTON (Reuters) - The U.S. job market held up better than expected in May, as the unemployment
rate fell for the first time in 8 months, a report from the Labor Department (news - web sites) showed on
Friday.
The jobless rate eased to 4.4 percent from 4.5 percent in April -- defying economists' predictions that
unemployment would tick higher. The last time the jobless rate fell was in September 2000.
But although the percentage of people out of work declined, trends in nonfarm payrolls remained weak. The
number of workers on U.S. payrolls outside the farm sector fell by 19,000 -- a modest drop that was close to
the 17,000 contraction expected by economists in a Reuters survey.
The report included heavy revisions to prior months' data and some methodology changes. On balance, the
job picture in recent months looked stronger after the changes.
Prices of U.S. Treasuries eased after the report as traders scaled back expectations of the extent of additional
rate cuts by the Federal Reserve (news - web sites). The dollar rose.
``Good news on all fronts. The payrolls number was not as bad as expected, the unemployment number was
also better than expected. Another positive was that the April number was revised upward, in the sense that
there were fewer job losses than originally anticipated,'' said Alex Beuzelin, foreign exchange analyst at
Ruesch International in Washington.
``This report is going to support the idea that the worst of the downturn is over. It further supports the
market's guarded optimism that the economy is on the way back up.''
The Fed has hacked 2.5 percentage points off overnight interest rates since the beginning of this year, acting
on five separate occasions in one of the most aggressive rate-reduction sprees in history to reinvigorate a
flagging economy.
Labor said April payrolls fell by 182,000 -- a revision from the previously reported decline of 223,000.
March payrolls grew by 59,000, in contrast to the originally reported 53,000 decrease.
Workers' hourly wages grew in May by 0.3 percent to $14.26 from a revised $14.22 in April. Year-to-date,
growth in hourly earnings is running at 4.3 percent.