How do the Americans finance this deficit? What impact does this have on the value of the US dollar? Is this good or bad for the Americans? Explain.

Jim Hussle and Edwar Lezear from Congressional Budget Office reviled during Monday press conference that deficit in 2008 is going to reach record figure of $490 billion. This information causes immediate response in Stock Market. No one expected such a big deficit even White House estimated it to around $389 billion. This issue is going to be the most important task to deal with for a new president of United States, he might follow the “old” steps which were usually taken by previous governments. In 2006 to finance deficit USA voted to rise debt limit to $9 trillion. During 5 years of Bush authority deficit increase to $ 8.2 trillion from $5.6 trillions. In those years the main strategy was rising a debt limit. Other way of financing deficit is increase of interest rates so that government can take money directly from circulation – those money comes from bank. Government gives the promise of giving them plus interest rate. This method is a vitious circle, because in the next year government should have a surplus equal to money they borrowed plus interest they have to pay and if not than government is still in deficit. US used to print more money, which in case of dollar currency is not bringing inflation as it would in other countries. US dollar is a tradable currency, they trade it with oil and military equipment, but recent situation shows a shift to Asian countries, which now are buying US treasury bonds. Those bonds were used to bought by US banks but recently their interest rate is really low so none of the banks is interested in investing in them. Intervention from China, Japan and North Korea gives US opportunity to decrease their defict but in the same time in becoming more dependent from their decisions. If China will spot buying bonds we can assume that after few months government monetary resources will become empty. This situation is very good for China they can manipulate their currency and criticise USA without any negative reaction from them. Foreign direct investments in US market or portfolios are another practice which is already used in USA crisis, most of investors are Arabic countries especially Saudi Arabia. Estimations shows that around 7% of American land is already in Arabic szejk’s hands and it is following the increasing trend.
This situation is not best for US dollar, huge deficit contributed to weak position of US dollar. It fallen against euro and other major currencies. Federal Reserve officer said that this is a warning sign on inflation but any further assumptions would be misleading. Recently main European countries become more secure and confidence into currencies become more unstable. USA can lost power over their economy but it would never happened because all countries that invested in USA are willing to maintain dollar stable. They want to gain money not loose them, so the question is does china have a power over USA holding most of their US dollars or does USA is manipulating market spreading their currency all over the world.
A lot of Americans are already suffering from recent situation, most of them are not used to struggle in basics of their life styles. US population is complaining about increase of oil prices and commodities, but we in European countries never lived “American dream “ life and we are used to be hard workers and constantly try to innovate ways of earning money. Giving simple example of changes that Americans are not used to sacrifice for they well being is use of bicycles. In Europe people who really struggle with oil prices are using bicycles or public transport, but in USA they would refuse bunch of other goods except driving a car. One thing is that most of American roads, sidewalks are not adjusted to that but also people mentality is that they don’t perceiving it as normal way of transports. Public transport is perceived as vehicle for low class income people and bikes are usually seen as sport equipment. Lack of education and lack of unconscious preparation for bad times that might happen caused huge shock for American citizens to whom this situation is going to be very difficult to deal with.

What sort of measures might an Obama administration take to protect the US economy from foreign trade? Do you consider that he would be right to limit free trade in the interests of American workers?

Free Trade Agreement has it pros and cons like any trade union. NAFTA is already protected union, taxes, tariffs, quotas, are limiting its activity in most of trading sectors. Measures, which can be taken by Obama administration in way to protect middle class: for example tax relieves. Most of U.S population blames NAFTA for the decrease in job opportunities; the job outsourcing is their main argument. We might assume that employment problems are not due to free trade union but to U.S. decline in competitiveness, huge potential from Chinese market is starting to overwhelmed American market. More and more people are graduating universities, specialising in engineering and science. In 2004 China’s exports were equal to $180 billion comparing to $ 149 billion of U.S exports. Most of technology goods companies are used to invest in China market, because of Endowment Theory and because of over all gain in final balance shit. We can also see difference in U.S. education investment, most of working class people are either specialised in one career that usually are simple factory skills and those who are short-minded and are not willing to make a change. Obama is particularly concerned about this group of people, because they are also his potential voters. Both McCain and Obama are fighting for almost each of voter because their chances are pretty the same, each of them announcing his campaign in any state has to make small changes in how to approach their audience. Their campaign plans have to be flexible and changeable according to how they are taking too. Free Trade Agreement aims to help U.S economy, increasing new, broader trade opportunities. Open trade increases benefits (NAFTA from $2797 billion to $810 billion). We can see real example of job increase in Europe after United Europe creation. It increased by 600,000 jobs from 1994 – 1998. The idea of free trade is there should be no limits; every future limitation brought by Obama will slow America’s economic growth. Main thing, which Mr. Obama should take under consideration, is the result of closing borders, this will not only cause a layoffs but also the same response from other countries. U.S. wants to trade with every one but only when they are benefiting and setting rules which in today’s world is impossible. In case of Mexico most of America’s citizens see it as coming Mexicans immigrants and “steeling” their jobs but they don’t see how much U.S. is gaining from exporting their products to Mexico worth over $200 billion.
http://www.youtube.com/watch?v=vyq4gzvAeRc

The EU is the biggest free trade block in the world. Its economic success is unquestionable with countries queuing to become members. In response the

The EU is the biggest free trade block in the world. Its economic success is unquestionable with countries queuing to become members. In response the USA promoted a free trade zone – NAFTA. It does not appear to have had the same success. Using the trade theories studied in class, can you explain why the success of the EU and the difficulties of NAFTA?

 

NAFTA is a free trade agreement between United States, Canada and Mexico. NAFTA consist of North America agreement on Environmental Cooperation and North America on Labour Cooperation. First of them obligates it parties to enforce environmental laws. It aims to reduce air pollution and other environmental threats. Labour Cooperation agreement was set up to fight labour problems with all three countries. Trade theory, which in this case NAFTA, is using the prescriptive theory. It means that free trade was set up and interfered by government. General idea of NAFTA was to raise the access to foreign market and to give the opportunity to export and import globally. The union without trade barriers is more prosperous, as the example of European Union followed by US, Canada and Mexico to allay and become more powerful and provide each of member countries opportunities of growth and wealther. Difficulties of implementing NAFTA are mostly assigned to fear after 09.11.01 when most of the people lost their trust and become more precocious. NAFTA introduction like almost any change has to sacrifice some things in order to gain in a long run. In all of the three countries there are minorities of workers who are against the union, usually we wouldn’t care but those people are also voters and over last decade constituents and especially working class had a great impact on Democratic Party in USA. By being scared that those people wouldn’t vote for a party candidate in the next elections, they decided not to go in a favor of the agreement. Another factor, which had a negative impact on NAFTA agreement, was the fact that first time in the history three huge nations with such a radical differences (not only in development but also in culture and behavior) wanted to merge. The rules of NAFTA agreement were very strict especially for Mexico, which has to achieve all the requirements and make a change in domestic laws. In the case of European Union most of the countries are based on the same rules and are similar in most of the terms. Plus there are much more concentrated and connected. One of the examples to show how differently US people think comparing to Mexican people is that most of them are assured that by this union only Mexicans are going to gain in so called “opening of borders”. This would bring huge amount of people to US seeking for better job opportunities.

 My point is that not only Mexicans are going to gain a trade without barriers but also USA, which is already gaining over $200billion from exports to Mexico is going to benefit from it. Most of ordinary USA people are not aware of this. This is also main difficulty toward union, most of USA seems not to get the idea that this agreement is more of the investment and the nature of investments is that it brings profit in time. The theory we can apply to European Union is Country Similarity Theory – if countries are there, there is a better chance to trade and to become prosperous. In the terms of NAFTA, USA, Mexico and Canada can make use of Factor Endowment theory, which in this case can combine it. In example Mexico can give a labour force and USA and Canada can contribute Capital Technical complexities. By this alliance NAFTA can produce products at low prices and export them globally by gaining higher profits than by working alone.

 

http://www.youtube.com/watch?v=vyq4gzvAeRc&NR=1

Consider this information and try and evaluate if globalisation is benefiting the whole world. Which areas are benefiting the most/least?

Consider this information and try and evaluate if globalisation is benefiting the whole world. Which areas are benefiting the most/least?


Globalisation is a long process, which started in the beginning of industrial revolution in 1760, which evolved into Capitalism and than extended to globalisation after 1989. This concept can be described as interdependence between countries. Trade, transport, cultural change increased and developed massively in last years. Countries that had made a huge progress during globalisation are followed by significant consequences such as economical, political, ecological, and cultural factors. Technological progress put all trade markets into different level, by connecting distance communities and making their economical activities easier. The players and in the same way those who benefits the most in this system are rich, multinational companies, corporations, governments of developing and developed countries. Any one who wasn’t scared of the risk and decided to go nationally (globally) in this time became very profitable. Creation of international trade and business, new labour markets, development, human rights, security, health system, education, infrastructure, multicultural societies, awareness of what is going on in other countries, ecological awareness are the positive results of globalisation. Although globalisation is generating more wealth in developing countries the effort putted into reducing the gap between them and world’s poorest countries is not meaningful. Usually globalisation works in interest of rich communities especially North and West areas where they dominate the trade. In case of supporting MEDC’s economy most of the poorest countries are used in providing them with raw materials and cheap labour. For example big investments in less developed countries are not contributing as much as they should to development of those communities. The lack of restrictions in poor countries gives them competitive advantage, for example: setting up plants that don’t have to take under consideration polluting environment, safety policies, or decreasing standards to minimum wages of local workers. Some of anti-globalisation campaigners are even talking about threat to culture’s traditions and distinction of local languages and national diversity. The huge inequality is seen between western countries, i.e. Africa where world leaders under United Nations Millennium Development Goals program try to fight extreme poverty and ensure economical stability. They are aiming to achieve that by 2015 especially targeting to combat HIV/AIDS, malaria and other diseases. Promote gender equality and give power to women as a full participating citizens who contributes workforce to their countries. By this move social progress is going to be achieved by women having less children, being more educated and in the same way spend their incomes in different way than men (health, nutrition in their families, education). This action was seen in so called North and West countries when women fought for their independence. This brought huge improvement in different areas of the economy. By ensuring health policies Millennium Development program not only wants to improve general health but also wants to focus on maternal health and child mortality. One of the main goals is to introduce universal primary education. This is the factor that is going to affect all younger population, educating them with all the necessary knowledge to provide them with opportunities for future. Millennium Goals seems to be perfect and most of people believe in their achieving, but globalisation is the system where there are people who gain a lot and people who can gain just little. This tells us that without those who benefit the least there won’t be those who are winning the fortune. Those are rules which are very hard to play and are unfair but, even the huge gap between the richest and the poorest we should remember about the world middle class which was spotted around 1990’s. After big success of the multinational corporations many people found well paid job or even opened their small businesses that started to live on their own in prosperity.

Why the ECB has taken a different route in dealing with the crisis?

Most of world economies are now leaving in the edge, trying to prevent and come up with the solutions to deal with financial markets crisis. How Europe markets are dealing with crisis? Some say they don't, but maybe lack of action is also a strategy? 

European Central Bank stands up strongly keeping 10th month in the row 4% key rate. ECB is staying focused on euro-zone inflation, the inflation is stable and it is equal to 3,5%  annual as well as economic growth slows down moderately. It gives opportunity to policy makers to hold on the stable rates of a next months. By taking that way ECB wants to calm down markets and keep Euro stable. For Europe the US slow down means Euro rise and ECB believes that euro-zone is able to became strong and secure market. Welcoming investors from all over the world and provide for their businesses te best conditions and environment. President of European Central Bank Jean-Claude Trichet said " we will look carefully at the possibilities of additional measures to calm down markets" and stressed that its priority is to  " prolonged, but temporary commodity-driven inflation spike from seeping into other prices and highlighted unemployment and solid corporate profits". Jean-Claude Trichet in his opening speech at the conference on 'The safety and efficiency of post trading arrangements in Europe on 21st of April "emphasised the importance of the post trading activities in Europe". President of ECB said that Europe is in far more difficult place than US because of the 'cost gap' which US passed 10 years before Europe. Europe doesn't have single market across, within its countries and therefor most of unnecessary costs goes to connections, intermediaries, etc. ECB in my opinion sees this situation as a opportunity to fullfil the Lisbon agenda which claims that " not only must Europe do better, it can do better" the slow down in US monetary system gives EU opportunity to attract foreign and overseas investors to its efficiency and security even in times of crisis.

In general, banks globally tries to approach the crisis from different angels, like Iceland's central bank by putting up key rate by 0,5% to record digit 15,5%. As well as South Africa is keeping bits high, rising by 0,5% key rate to 11,5%.  On the other hand we have UK, next country after US which is falling into slow down, because of their similar economies as well as money-markets. They have to lower down key rates, and inevitably both economies inflation is going up. In case of US we can observe one of the monetary policies (expansionary monetary policy) which contributes to lowering unemployment, recession by decreasing interest rate. In case of Euro-zone we can see the contractionary  policy which is as first tool to approach crisis. This policy results in steps taken by ECB which keeps the key rates stable. Speculators predict that ECB next step can occur in September, this move will consider lowering or rising of key rate, but those facts are unknown. Most probably European Central Bank would rise the key rate to fight with on going inflation, which means that costs of leaving are going to increase. The question is how much? 

What did the US government and Federal Reserve decided to do

The US government in co-operation with Federal Reserve since December had pumped US$310 billions into short term loans to recover from credit crisis. On Tuesday Federal Reserve issued another $50 billion to cashed-strapped banks. This step was aimed to keep on going banking system as well as to keep up consumers confidence in it. Federal Reserve Chairman Ben Bernanke hopes that this is going to encourage banks to still lend money to people and avoid panic attack. Fed also encouraged investment banks to borrow directly from Federal Reserve by employing Depression-era provisions. Previously that was a privilege only for commercial banks. The biggest victim of the credit crisis became Bear Stearns the fifth biggest investment bank. Which was forced to sale it self to JP Morgan Chase & Co. One of the other Federal Reserve steps was lowering interest rate for those people on variable interest rates loans, but that move didn't actually change a lot because house prices are still going down. The money that people invested in housing are not going to come back quickly, by selling properties people won't get any profit and even in some case they are going to loose their money. Simultaneously US government started to lend money on lower interest rate and re-negotiating mortgages with banks. Banks have to lower mortgages because people are not able to pay them back, and as mentioned before Bear Stearns was bought by J.Pm Morgan Chase & Co. with $200 billion debt. US government re-write and add extra regulations on the Wall Street, to have bigger control over the stock market. It aims to prevent speculations on the market and intrus, as well as to exclude not reliable companies to enter it. Regulations are going to me more strict. In the first phase of taking out US from shallow recession government is going to cut taxes of middle and working class because government doesn't want people to stop consuming and spending. It would have huge impact on US economy growth. 

How Has the Crisis Spread

The boom on stock market after the Iraq war caused the chaos every one was buying and selling with higher risk than before, being less worried about the losses. The lowest interest rate since over 40 years which was equal to 1% generated a great demand for real estate. Almost 40% of borrowers in 2005-06  were people who weren't trustworthy, with no credit abilities. When the boom for real investment slowed down the prices of houses simultaneously went down as well. The rise of interest rates caused a lot of problems to Borrowers, paying back every time the higher rate plus principal was bringing great tention. The first interest rate rise accrued in June 2004 of 0,25%, but no one took it seriously. In 2005 there were 8 rises of interes rate, in June 2006 after 17 rises the velue of the interest rate reached 5,25%. In the result people couldn't balance the maintenance of the house plus leaving expenses with their revenues. The owners of houses started to sale them but on lower prices. The market values fell below the the level of mortgage loan outstandings. People couldn't pay back loans any more so the banks had to make huge provisions. In some extreme cases people were burning their houses to get back at least their insurance. In April 2007 one of the biggest subprime bank loaners went bankrupt ( nEw Century Financial). One of the biggest banks - Northern Rock in Uk almost went bankrupt.  Also the subprime loans we repacked by the financial institutions and sold to worldwide investors. They started to be worried because they bought the packages with lorisk rate ( AA and above ). Those investors first started to sale the packages but later were demanding the credit insurance ( Credit Life Insurance, companies insured their credits) the insurance companies had to pay to the house owners and to package holders. They reached the point where the crisis also spread among the insurance sector. The Crisis spread resulted in US$ currency fall and anxiety all over the world. Many of investors were from Europe and now within the countries they trie to block the crisis spread, even by rising interest rates in their own countries and drawing conclusions form USA mistakes. SUmming up lower economic growth in US is going to affect Europe and other continents in all ares of life, export and import between US and Europe slowed down because of the currency rates, and stable prices in Europe. The problem is now not only an economic problem but also got into politics world, with the president elections in the corner.