US economy 1
The U.S. Economy
1. The Basics
• A mixed economy
• Services
• Sources
2. The Problems
• The national deficit
• The budget deficit/surplus
• The trade deficit
3. The Institutions
• The FED
• "Wall Street"
• Labor and Business
US Economy 2
1. The Basics
• A free market: "Laissez-faire"
Adam Smith, 1776
"Invisible hands"
• Supply and Demand
• Regulated markets
John Maynard Keynes
The 1930s
• "Supply-side" economics
• Money supply
Milton Friedman: the monetarists
The role of the central bank
• Services
social benefits
unemployment insurance
infrastructure
defence
• Sources
taxes on income (progressive)
"indirect taxes" (regressive
"flat taxes"
US Economy 3
2. The Problems
The National Deficit: 5 trillion (5
thousand billion)
SECURITIES: Debt obligations
Treasury bills (one year or less: $10,000)
Bonds (10 years: $1,000)
Notes (1-10 years: $1,000 to $1m)
Budget Deficits (Current-account)
Yearly costs exceed yearly revenues
$106 billion in 1993 largest in world
Percentage of GDP (Gross Domestic Product)
changes picture
US: 1.7% of GDP
Turkey: 5.2% of GDP (5.9 billion deficit)
Norway: biggest turnaround since 1987:
4.8% deficit to 3.1% surplus)
Germany: 1987: 4.1% surplus, 1993: 1.1% deficit
Gramm-Rudman-Hollings Act
1985
Short-term and Long-term
Lobbies
The Trade Deficit
Imports exceed Exports Raise interest rates
What is being exported? Protective tariffs
Domestic Consumption
Devaluation (Currency Depreciation)
US Economy 4
3. The Institutions
The FED (FRS-- Federal Reserve
System):
12 Regional banks, 24 Branch Offices, 36
"Reserve Banks (private)
5000 member banks
(14000 banks in the US)
The Head of the FED: Alan Greenspan--
1987 (4 years): Chairman
7 Governors: 14 year terms
Appointed by the President
Monetary Policy
Interest rates: a tool to influence the
economy-- "long-term"
Takes time-- about 12 months before it has an impact
The "Discount Rate": Federal Funds Rate
for banks/from the FED
Paul Volker: 1980 -- 13%
Greenspan: 1987 -- 6%
Prime Rate: Best rate for banks'
customers
US Economy 5
Money Supply: buying and selling
securities-- "short-term"
Federal Reserve Bank of New York--
sells securities: money supply decreased
buys securities: money supply increased
Reserve Requirements: percentage of
accounts that regional banks cannot lend
to customers
Consumer Protection: Guarantees
on deposits
Federal Deposit Insurance Corporation
(1933): Banks
Federal Savings and Loan Insurance
Corporation (1934): "Savings and Loan
Associations"
The Crash of '87
The Savings and Loan Crisis
Real Estate
Federal Bankruptcy Act:
"Chapter 11": Court-supervised Reorganization
"Chapter 7": liquidation
$500 billion bail-out: tax-payers
US Economy 6
Wall Street
The Stock Markets
•The New York Stock Exchange(NYSE)
60% of shares traded on national exchanges in
the US
1366 "seats"-- bought by "traders" representing
550 companies
1600 companies listed-- the "giants"
Blue Chips-- high quality, high price, low yield
•The American Stock Exchange(AMEX)
Second largest
Small to medium size companies
Oil and gas
Most foreign shares of any US exchange
•"OVER-THE-COUNTERS"(NASDAQ)
Telephone and computer transactions
•Options--The right to buy securities and shares
(Chicago the first with listed options)
Agreed-upon sum is forfeited if right is not
exercised when option expires
•Futures--An agreement to buy a specific
commodity at a stipulated time and price
US Economy 7
Indexes and Averages
Indicators
Prices, volumes, interest rates, trends
Indexes
Consumer Price Index
Base year 1967
Inflation -- 100 to over 300 now
Is inflation natural?
Standard & Poor's Composit Index
Base period 1941-43
market value of 500 stocks
80% of NYSE stocks
The Dow Jones Industrial Average
No base period
"Points" not dollars
price average of 30 Blue Chip stocks
AMEX, NYSE Composite, Wilshire 5000
Barron's Group, NASDAQ-OTC
BONDS
Ratings: A to C
The greater the risk, the greater the potential
for profit... and loss