1. What is the “current macroeconomic situation” (e.g. worrying about inflation and/or recession) in the U.S.?
Financial crisis has spread and increasingly engulfed the US economy. For example, prices for key commodities have been rising sharply, housing prices have fallen and financial turmoil for businesses is resulting in many of them closing.
The first situation is that oil prices have risen in recent years to levels never seen before. Other basic commodities that have featured large increase in price are natural gas, steel, corn; wheat and rice. Why have these prices risen so sharply? The first fact to consider is that the consumption of these items has increased significantly during theses hard times. Rising prices coupled with rising quantities of an outward shift in demand, it appears that rising demand is a driving force behind increase in prices of basic commodities. With these commodities consumers can feed family with more items like rice, wheat, bread, etc:
The second is the large decline in housing prices. There were numerous of reasons for this decline. For example, Mortgage brokers, banks and other lenders provided the funds so that unqualified applicants could buy homes. Brokers don’t lend their own money but serve as middlemen, collecting commissions but sometimes without much regard to whether borrowers can make payments. Many banks aren’t lending as much money now, and it’s uncertain when that will change. Also, lenders aren’t using risky mortgages as much, and they’re paying closer attention to the application process. Banks are watching carefully for payment problems on loans. Many individuals have put homeownership on hold while they grapple with credit-score damage from delinquent payments and foreclosures. In the future, more people will have to buy homes the old-fashioned way — by scrapping together a down payment. Many blame the central bank under Alan Greenspan for keeping interest rates too low and for boosting the nation’s money supply too much. This created an easy-credit environment that encouraged less-qualified home buyers. It also created a period of such low yields that many investors sought better returns in securities backed by subprime mortgages. Critics also say the central bank encouraged investors to take too much risk because of its implied help in arranging bailouts — the “moral hazard” idea. Once the crisis broke, the Fed acted aggressively and in various ways to contain it. The central bank cut interest rates to perk up the economy and provided easier credit to banks, Wall Street firms and even mortgage giants Fannie Mae and Freddie Mac to prevent a cascade of failures. The Fed now is moving more slowly, trying not to stoke inflationary pressure.
Lastly, many businesses have closed. The recession took its toll forcing many family and small businesses to close, ending legacies and leaving behind a wake of sad customers and loyal employees. About 4.3 million businesses with 19 or fewer employees closed during the fourth quarter of 2007 through the fourth quarter of 2008, according to the Bureau of Labor Statistics. These businesses often steeped in tradition and not as flexible to change, tend not to have formal plans in place to respond to crisis and could not compete with the larger retailers. Due to the economic hardships banks have stopped lending small businesses loans as well. It seems there are lots of stores that are closing due to the “recession” and the fact that people are not shopping is making it harder for businesses to profit.