Where the US economy will be a year from now Essay

The US economy was growing steadily for the past years. Currently, however, the US is facing challenges pertaining to the economy. Some troubles began to manifest as early as 2006 when a sharp decline in the housing starts was first observed. The subprime mortgage crisis occurred. Stock market crashed and investors fleed. The economic slump continued and the dreaded recession occurred. US officially announced it was in recession in December 2008. Deflationary House Prices in the US Once the economic crisis sets in, households at the lower income bracket felt the pinch the most.

People with no savings have no fall back option. They are paying money for home mortgages but money becomes scarce. Consequently since they are unable to pay the mortgage and their houses get foreclosed. Another effect of the deflationary house prices in the US is that foreclosed homes now created a growing list of unsold houses either old or new inventories. This situation is more pronounced in certain markets such as urban Florida, California, Nevada, Atlanta and others. The lack of buyers for these houses cause the prices to stabilize or in most cases, they go down.

Once residential markets experience this problem, potential homebuyers will not commit to buying a house. This is because they want to hold on to their money until the home prices go down to its lowest level. Thereby giving their money a lot of leverage. What can be bought in hundreds of thousands dollars before could be bought in a much lower amount now. With the homebuyers holding on to their money for as long as possible and the house inventory growing by the minute due to foreclosures, a dilemma ensues.

This is the biggest reason why homebuilding industry is the one most affected by the economic crisis America is facing today. 2010 Economic Outlook Federal Reserve Chairman Ben Bernanke announced some good news on May 5, 2009 that the three year economic slump the US has been experiencing is showing tell-tale signs of recovery. He projected that the recession could end late 2009, if US will not experience relapse on credit problems. Bernanke spoke before Congress saying economic indicators are hinting to a possible recovery towards the end of the year. But the climb out of the proverbial tunnel will be nothing but easy.

Bernanke projected that unemployment cases will go even higher even after the recession is over. Unemployment is actually believe to reach its peak in 2010. Also, growth will be slow. The said forecast is based on the effects of the continuous repair of the economic system. The government has taken some steps to stall the effects of the crisis like injecting economic stimulus and lowering interest rates and the results are now showing. If a relapse occur in the financial situation could drag the economic recovery efforts down. U. S. stock markets have shown a lot of promise recently.

The Standard & Poor’s 500 index grows to 35 percent since March which indicates that consumer spending has steadied and the decline in the housing starts have slowly stopped. Bernanke’s forecast that US will peg an economic growth at 2 percent in 2010 and 4 percent in 2011. Excess economic slack or the increase in amount of idle plant and equipment would keep inflation low. Also, the US Central Bank will maintain minimal interest rates for an extended period. Economists believe that the United States will recover from the recession faster than Europe, due to the Federal Reserve’s quick action on the situation.

The International Monetary Fund announced in April 2009 that Europe’s recession might continue in 2010. Deflation and Inflation The deep economic recession felt all over the United States has led to an all-time low in consumer confidence. It has also affected negatively the banking system. These factors have increased the risk of deflation. To counter the deflation risks, policy makers and the Federal Reserve have to adopt measures that are not commonly practiced in order to ward off deflation by increasing the amount of money being circulated. Policy makers had to expand fiscal spending.

And the nominal interest rates are currently pegged at almost 0% since December 2008 to ease up credit and its availability. This has saved the country from being on the brink of deflation. But the same solution could create problems later as the huge increase in base-money has caused a number of people to believe that Fed’s actions could lead to inflation later. Inflation is not a problem as of the moment because households have decreased spending to a minimum and the money are hidden in bank vaults. Excess economic slack or the increase in amount of idle plant and equipment would also keep inflation at bay.

The unused factories and growing unemployment do not permit businesses to increase prices of products and wages of employees. Once economic recovery begins and economic slack levels off, increase in money supply would eventually give way to increase in prices of commodities and wages. To prevent this from happening, the Fed must withdraw the money it has infused to the financial system while in a recession. If the Feds cannot implement this quickly, rampant inflation would ensue. Hyperinflation Hyperinflation occurs when the prices will go up as the currency falls.

This is the next challenge that US might face. This dilemma however could contribute to some advantages to the businessmen. Selling US dollar and Japanese yen – the two currencies that will devalue after recession – would be highly profitable. Before hyperinflation could go full blast selling dollars and yen would bring a lot of money to traders. Once dollar value goes down. The value of the dollar sold would probably be twice its value during hyperinflation. Effect of the Dollar’s Valuation Dollar and Euro currencies are recently on a see-saw battle for supremacy.

US dollar declined against the Euro in the past years until recently. The current global economic slump has caused the Euro to devaluate against the US dollar. Should the tide turn in favor of the Euro again, a decline in the US dollar could actually bring some advantages: – lower dollar could mean more opportunities for export since the goods being sold from the US are relatively cheaper now compared to the Euros. – the discounted US dollar will lead to a foreign investment boom that would eventually slow down investments being poured in the European countries. – Decrease external trade deficit

Disadvantages of a declining dollar rate vs Euro – going or visiting to Europe would mean paying higher amount for goods and services – American importers would pay more for imported goods – Rising inflation – American credit becomes less attractive to foreign investors – Interest rates will go up to be able to finance budget deficit Countries to Invest In The Euro is not the only currency that is rising against the US dollar: the Australian Dollar, and the Canadian Dollar both hold some promise. The Euro is a good alternative currency to the US dollars for investors.

Also, there is a possibility that difference in interest rates in the US and Europe may increase and since returns usually increases along with interest rates, the Euro will then be more profitable to investors. If the devaluation of dollar occurs, countries that hold large amounts of US dollars may shift to using the Euro currrency in their reserves. Some countries have already shifted to Euro reserves such as Russia, Switzerland, the United Arab Emirates and Venezuela. Iran even wants to use Euro in quoting its Oil Exchange. If this scenario develops what might become of the US economy?

One likely scenario is that foreign investors who bought a huge chunk of shares of stocks might sell their shares particularly the S&P 500 stocks. The results could not be certain though because the effects of financial instruments could not be easily determined. Currency levels depend to a large extent on the demand for the country’s currency which is the result of economic activities and interest rate differential. Most likely, US will experience inflation making imports more expensive. On the bright side, this would also decrease external trade deficits which is good for US economy.

Foreign investors however will be hesitant to borrow from American banks or financial companies. The Federal Reserve might need to increase interest rates to be able to fund budget deficits which would affect the economy adversely. For those who want to invest in the market for currencies or the foreign exchange market or currency trading there are a number of options available. These include: forex futures, currency ETFs, export-benefiting equities as well as precious metals related instruments (such as mining stocks). It is good to invest in precious metals. Investing in the BRICs (Brazil, Russia, India, and China) would also be advisable.

BRIC or BRICs is an acronym for the current notably fast growing developing economies – Brazil, Russia, India, and China. Goldman Sachs in 2001 declared that the combined economic development in these places could overshadow the economies of the richest countries in the world. There has been ongoing speculations as evidenced by proofs that the BRICs countries are planning to form an alliance to create greater power. Investing in these places therefore would provide a better alternative to US investments since these countries development are greater compared to other countries.

Invest wisely by focusing on Indian and Chinese companies that do not rely on American market to be able to buffer fluctuations in the US economy. According to economist Stanley Roach, China will recover faster than the rest of the world. This is because the structure of China’s economy is very open. Export and import shares in this country accounts for a very high percentage of the world’s total. The recession certainly affected its export markets negatively. Also, the Chinese government reacted aggressively to the situation and instituted some reforms immediately.

According to Roach, China’s economy will recover more swiftly if the country becomes more assertive in its implementing plans to encourage local private consumption at the same time they should find ways to decrease its heavy reliance on exports. Another country that holds a lot of promise would be Canada. Before the recession, Canada’s economy reached parity with the US dollar on September 20, 2007. Western Canada particularly is gaining a lot of strides in the economic department. But Eastern Canada hardly lagged behind. Employment rates was at its 30-year-low.

Ontario is backed up by its knowledge-based businesses and Toronto’s investment sector was doing well. Western Canada’s economic boom was brought about by the world commodity markets particularly China. The “mega-boom” conditions in Alberta and Saskatchewan were due greatly to its oil reserves in the Oil Sands of Alberta. The reported oil find in Alberta’s sands deposits is believed to be able to cater to the world’s demand for a century or so. The excitement for the ‘black gold’ discovery brought about by the pouring in of billions of dollars in infrastructure has spurred Alberta and Saskatchewan industries.

The provinces’ economic success has trickled down on its neighbors British Columbia and Manitoba as these two cities have experienced “mini-booms” of their own. This is one particular reason why Canada particularly Alberta and Saskatchewan would always be attractive to investors. Oil commodity is very valuable and would not be greatly affected by recession. The currency movements in the U. S. and Canada have opposite implications when it comes to the effects of general price inflation in both countries. In the U. S. , import prices are climbing because the dollar value is falling. In Canada, it is the opposite.

Furthermore, in Canada, the impact of any future rise in commodity prices (which are usually specified in U. S. dollars) will be blunted. With a stronger dollar, however, Canadians need to lower down the prices of goods and services in order to compete with other countries selling same export commodities. Also, Canada needs to address an important inconsistency with the Chinese Yuan. The Yuan, since it floated in mid-2005 has been appreciating versus the U. S. dollar. But it has spiralled down versus the Canadian dollar. The irony therefore is that Chinese goods are getting cheaper in Canada and costlier in the US.

Foreign Exchange Market or Currency Market Foreign exchange market or the currency market is all about trading currencies. Even in these difficult times in the economy, there is always one currency or two that is growing. The stock market is in a slump right now. It is the currency market that has remained liquid which means it is possible to make money even under tough times. The US dollar, as a matter of fact, had gone up as the S;P 500 went down. Investors in the currency market have earned a lot of money in the past months. Currency market is one safe investment that most investors.

Why does US dollar rise even if US is in recession? This is because during economic recession, investors put thier money where they consider is safer. The stock market is simply too volatile and uncertain at this point. So investors turn to look for the more stable options such as the moderate currency market by investing in US Treasuries. US treasury securities are debt financing instruments issued by the US Department of the Treasury. These include four types: treasury bills, treasury notes, treasury bonds and treasury inflation protected securities (TIPS).

All of these are very liquid and can be traded in a secondary market or the aftermarket. This is the reason why when the stock market crashed and panic sets in, investors sought the more liquid and safer US treasuries. The surge in demand for US Treasuries buoyed the value of the dollar. Forex markets or FX markets is also another good way to invest money. FX is where one can trade currencies. FX serves to ease trade and investment among international currencies such as US Dollar, UK Pounds, Japanese Yen and other currencies. In this money market, currencies are traded against each other.

Forex is the biggest financial market today with more than $3 trillion daily turnover. Speculators market one currency for another in order to gain a profit. Financial traders are drawn to this market because it is available 24 hours daily, five days a week. Forex market can be found in four cities: New York, London, Sydney and Tokyo. Investment in foreign exchange can be done in several ways: 1). buying curency shares ETFs. The method is similar to buying stock. 2). Open a bank accont with local bank that accepts foreign currencies. 3). Buy foreign currency from online brokers and 4).

Use online forex trading platform such as eToro, iForex and others. In tough times, it is always good to diversify the investment portfolio. The adage “don’t put all your eggs in one basket” proves to be true now more than ever. Since the stock market suffers great losses now, it would be good to offset it with investments that would surely create gains which the US Treasury provides. Since the currency market represented by the US Treasury securities are not associated with the stock market, investing in the currency market would serve as hedge investments and a good way to diversify investment portfolio.