Things to Look Forward To

At the moment, the United States economy stands in a very peculiar position.  Despite the fact that the stock market is at its highest level in history and there does appear to be some relief from unemployment, there are multiple signs that the economy is about to experience turbulence yet again.  In fact, there is the potential for very significant economic troubles.

The problem with the economy lies in part with the ludicrously low interest rates.  In general, low interest rates are an investor’s dream as they allow the investor to borrow money without having to pay back significantly more real value than what was borrowed.  This has many positive implications for the economy because increased investment increases long term economic growth.  In addition, low interest rates make it easy for the government to borrow money.  If done responsibly, this too can stimulate the economy.

Unfortunately, low interest rates also have some drawbacks including hampering savings.  This is because fewer people want to store money in such things as securities and time deposits when there is less pay-off.   At the moment, this phenomenon is becoming a very serious problem.  Formerly profitable securities currently result in a loss of real value because interest rates are not keeping pace with inflation.  As people are dissuaded from saving, the amount of money that is able to be loaned to investors decreases.  This, of course, causes an increase in interest rates under normal circumstances.  However, this has not happened recently because of actions taken by the Federal Reserve to keep interest rates low.

In the past, it was possible for interest rates to remain low and for the government to hold a large debt seemingly endlessly because many agencies and people were willing to purchase government securities despite low interest rates.  A major reason for this was the stability of bonds since they could not fail in any foreseeable future.  However, with the reduction of the credit rating and the continuing loss of faith in the government, fewer and fewer agencies are willing to allow the government to borrow their money.  As a result, it is evident that the supply of funds will soon contract with the inevitable result of driving up interest rates.

Unfortunately, at this point increasing interest rates would not be a good thing.  In part, this because the government holds a debt that is growing quickly beyond $16 trillion and any increase in interest rate will greatly increase the quantity of money that will have to be paid back.  In addition, as mentioned before, low interest rates usually increase economic growth.  However, despite the low interest rates, the economy is still not growing.  As a result, increasing interest will further decrease all forms of investment, decreased investment will contract businesses, and contracted businesses will cause an even greater decline in economic growth as well as a rapid decrease in the stock market.  This will cause a more powerful decrease in faith in the economy, slowing down further an already stagnant system.

Inflation will, of course, play an important role in the economic downturn.  In order to keep interest rates low, the Federal Reserve has purchased large amounts of bonds, which has increased the money supply.  If the economy is expanding, this is not a bad occurrence because the increase in money supply is met with an increase in output.  However, since the economy is not growing, the increase in money supply is simply devaluing the dollar.  This has foreign implications as well, since inflation causes depreciation.

Not to mention, there is also the problem of rising oil prices about which little has been done.  It seems conservatives lobbying for corporate oil profits have been as effective at blockading green energy as liberals have been at lobbying about the dangers of every reusable energy technology.  Left without an effective measure to wean our economy off of the dreaded petroleum and the certain-hood that political tension and scarcity will soon raise oil prices by a few dollars per gallon everywhere, it seems that the manufacturing industry stands no chance.

There is no way for sure to say whether these problems will ever actually occur.  However, if they do occur, recovery will be extremely slow and the impact on individuals could be devastating.