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Micro and Macro Economy
Do seasoned equity offerings (SEO) and issuer stock market operation affect micro and macro economy? Seasoned equity offerings (SEO) bear a significant task in the sector of finance irrespective of the view of a bystander. Seasoned equity offerings have been a major section of research in the region of corporate finance because of their importance as the company’s financing occurrence and fairly inconsistent stock market operation of equity issuers. Several studies record stock price increase prior to equity emergence, negative reaction from the shareholders to the public proclamation of the concern and ultimately, and certainly most outstandingly, issuers keep on underperforming their non-issuing equals for up to six years following the concern. Accordingly, SEO proclamation vividly signify an indication to investors equally to other shared occasions, but simultaneously, not every investor amend their assessments to accurate rank as issuers maintain underperformance of diverse standards. Long-established monetary theories on capital formation, like hierarchy and trade-off theory, fail to elucidate completely the empirically studied stock market operation of the issuers. The inability of the traditional theories has led to a sequence of fresh efforts to elucidate the SEO methods.
The Effects on Micro and Macro Economy
Different views have been embraced to validate the market timing assumptions in equity contribution. Research of a sample of companies in the United Kingdom encountering equity versus debt choice established that companies’ choices are heavily controlled by past securities costs and present market situations in addition to targeting control ranks. Equity concerns seldom arise when management finds is company’s equity being underrated. Furthermore, higher equity concern volumes arise during high current stock market operation and are frequently associated with augmenting economic action. Lastly, companies having towering past stock returns are liable of issuing equity and retiring debt, whereas companies having squat past stock market operation are hesitant to issue impartiality.
Investment Associated Demand for Capital
Long-established hierarchical assumption signifies that an adverse assortment problem is likely to be large when companies do not have hopeful investment chances. Moreover, charges of granting equity escalate with rising problems thus making a difference between excellent and dreadful venture projects. Usually, the undesirable selection difficulty is evident when the economy is in a downturn, and in accordance with hierarchy assumption, companies ought to consider utilizing internal capital or granting risk-free liability. Hence, the general rate of requirement for capital can be viewed as a likely determinant on the equity concern choice. The squat unfavorable choice charge periods are probable of arising when economy is thriving and companies have hopeful investment chances.
Equity share in every new concern augments in expansionary trade sequences. Additionally, when the influence of trade sequences variables is perfectly controlled, neither past supply proceeds nor interest rates is seen to be considerably associated with equity provision. In brief, the effect of trade sequence variables essentially leads to the connection involving the proven strong force of stock marketplace inconsistencies on equity provision. Moreover, with the augment of demand for capital, an increase in Initial Public Offerings (IPO) volume is probable of arising and correspondingly, companies have a tendency of going public when investor sentiment is high.
Irregularity of Information
In reaction to the tradeoff theory, asymmetrical information has a critical function in companies’ capital provision choices. Furthermore, asymmetrical information drives companies to adhere to the monetary hierarchy, in accordance to which internally made investment is at all times favored to external investment and liability favored to equity. Nevertheless, empirical proof to back the time-changing asymmetrical information charges as the enlightenment for the existence of equity sequences is rather restricted, yet a number of studies point to its course as a basic SEO causal factor. Companies might take instances of low asymmetrical information like a window of chance to offer equity. In this regard, companies describe window of opportunity to materialize where the irregularity of information is at historical low state in the entire economy. Under a circumstance like that, companies are capable of signaling their worth and objective to investors more accurately.
An example of a signal that is employed is thorough capital expenditure plan where the investors can effortlessly authenticate companies’ demand for capital and generate a difference from a condition where the major motivation to grant equity is simply opportunistic stock over-assessment. On this note, need for capital and information irregularity assumptions partially overlie and it could be impractical to fully differentiate between their consequences. Investors react in a different way to the firm attributes of equity provider in hot and cold marketplaces and affirm it as an indirect proof of information irregularity having a function in equity provision. Explicitly, investors give more consideration to inconsistencies of firm excellence and future prospects like market-to-book fraction in times of cold phases.
A more current area of concern in behavioral corporate finance tackles the effects of investor feeling in the market. Presently, investor feeling is seen to arise in the contemporary stock proceeds, and to a given extent, have analytical control in the potential aggregate stock profits. The mounting body of study seizes either unreasonable investors’ advance or illogical managers’ advance and elucidates some features of the behavioral corporate finance from these views. The development of research concerning the function of investor feeling has advanced with time. The inquiry is no longer if investor feeling is evident, but merely, the way of gauging it and to determine its effects. Studies have affirmed that over-hopefulness amid small investors signifies a great chance of participating in an equity issuance. Being aware of the general rate of investor feeling in the economy, companies can utilize variations in feeling to time the equity issuance for instances of high feeling.
Firm Issuer Qualities
A characteristic issue type company encounters less negative abnormal proceeds around the proclamation when judged against a company with characteristic debt issuer qualities when offering seasoned equity. Qualities closely associated with the increased possibility of an equity concern, or existing as an equity issue type company, are, for instance, low financial elasticity, high stock prices, and small company size just to mention a few. Equity offering companies are frequently inhibited; they employ the Altman’s Z-score to seize the impact of missing financial elasticity. It is considered that seasoned equity offerings match up with insider promotion. Findings from research are in line with market timing anchored assumptions on equity provision in accordance with which the management embraces information that investors lack. Different studies have discussed the management variables that are applicable in the tests of companies’ monetary strategy. They affirm that in an attempt to distinguish between effects of hierarchy and tradeoff theory, a specific set of management variables ought to be encompassed in the scrutiny of the monetary strategy.
Furthermore, big companies have lesser costs of debt and thus, the natural logarithm of sales ought to be encompassed as a management variable. Research affirms that profitable companies frequently have higher agency costs linked to debt, and, therefore, proceeds on possessions ought to be employed as a management variable. In addition, monetary slack, identified as cash and cash correspondents divided by overall resources, signifies lesser requirement for external financing. Companies that are endowed with research and development expenses have greater action costs of liability and ought to favor equity as compared to liability. Studies also affirm that companies with high palpability of resources, determined as property, plants, and paraphernalia divided by overall possessions, are more probable of issuing debt. Lastly, rooted in tradeoff theory of capital formation, companies that have high leverage favor offering equity; this is attributable to their high rate of marginal costs of debt.
With regard to effects of macro and micro causal factors of seasoned equity offerings (SEO) in addition to issuer stock market operation, equity concerns have been found to arise in sequences. This is because the vast majority of SEOs and IPO have a likelihood of occurring during hot periods, followed by instances of low provision volumes. There are different motives for companies to offer equity and, therefore, equity sequences exist. Collective equity share in total capital provision is a powerful analyst of future market proceeds as high equity allocation in every new issue is frequently followed by remarkably low proceeds. Likewise, hot and cold market concerns vary in quantity and issuer attributes.
International Political Economy
Global financial recession comes with a wide range of consequences, which affect policy makers worldwide including scholars of international political economy due to cross-national and sequential variations in how national governments control their financial sectors, for example, state ownership of banks in OECD countries like Greece, Italy, and Portugal, as well as in developing nations. The current economic crisis in these nations is influenced by the relationship between financial regulators and the regulated firms where regulators vary across nations, as well as regulators differing in their ties to the government bureaucrats and chosen leaders. Regulators in some nations are sovereign from political interference, as well as the entities they regulate while others are vulnerable to devotee pressures.
Capital requirements, financial clarity, main company holdings, and supervision, as well as portfolio limitations, are some of the factors influencing international political economy crisis across nations in the context regulations. Diversity of national regulatory structures, cosmopolitan firms and dogmatic arbitrage are also significant factors as the system is prone to financial relapse within any respective country. IPE scholars have done few studies and the existing ones focus on the individual nations at the expense of cross-national approach. Booms and busts have been influenced by laxity in the banking system supervision than conservative banking restrictions. Countries like Canada employ principle based approach during regulation of the banking system, which is less stringent. Empirical analysis has not captured formal procedure in place for banking, as well as their application, that is, independence of the central bank was domestic in nature. In this regard, nations that grant independence to their central banks result in lower borrowing costs on international markets and this has an impact on booms and busts.
Global cooperation started when the crisis prompted greater inclusion of emerging market countries in global financial governance and it involved the G7and G20. G7 formed the consultation opportunity for macroeconomic strategy in addition to promoting attempts at monetary principles and systems in the early 90’s while G20 formed the point of international cooperation. During their 2008/2009 meeting, member states agreed to pursue regulatory and financial reforms in capital availability, liquidity management, and expansion of financial institutions as well as international cooperation on fiscal and monetary policy by agreeing to triple their allocation to the international monetary fund. The nations agreed to dismantle the rich country financial stability and develop a more profound financial stability board, which empowers them by increasing their reputation in the emerging markets globally.
Politics affected the post crisis adjustment as some nations like china were excluded from the bargaining table despite its high economy and had pushed its mandate in supplanting the dollar with another global alternative currency. Imposed quota led to appreciable changes in the International Monetary Fund behavior by preferring to cooperate with the G7 nations as opposed to the G20 nations due to post colonial ties, security, and cross border financial cooperation. Public pressure for inclusion of G7 provided the locus for further discussions for regulation and control but due to their size, diversity, and different political atmospheres, as well different standards of development makes agreements tricky. Defunct system by the earlier G20 nations has altered the distributional nature of negotiated outcomes while, politically speaking, this is perfectly acceptable in some G7 nations like U.S due to their ambivalence towards their worldwide regulatory efforts. The current crisis may be mitigated by inclusion of private arms in financial policy making in order to improve transparency and to standardize the accounting rules to back up the public sector coupled with proper self-regulation.
The Federal Reserve and inflation in the US in the past few years
The Federal Reserve System was adopted in the US when some of the state banks that held federal government deposits failed. The failure of the banks led to the establishment of an Independent Treasury system, which kept its funds in its own vaults and in various sub-treasuries around the country. When the government did not have high expenditures or receipts this system was adequate, but during the Civil War this system had to be changed (The Economist 6).
Inflation is the rise in prices of goods and services, which is accompanied by the rise in living standards. Though inflation often occurs, there is no provision or increase in salaries to counter the increase or rather rise in prices of goods and services. The increase in inflation is one of the major goals of the Federal Reserve. This is because inflation is often believed to strengthen the economy of any particular country. For instance, the Federal Reserve’s aim was to achieve an inflation of 2% in the US. Though this was to be accompanied by increased employment opportunities and rise in discount rates hence consumers would not suffer. The inflation was pushed when the Central Bank in the US decided to increase its interest rates on the domestic banks and other consumers. This was a major setback to the entrepreneurs who had to increase the prices of their goods and services (The Economist 6).
According to “The Economist,” low inflation is always a choice. Besides, in the US, the Federal Reserve has total control over the short-term interest rates that are given to customers by various financial institutions with target of fighting inflation and its expectations. In fact, the Fed has come with a goal of achieving its target of 2% in the long-term. It would be worth noting that in achieving this, the Fed has excluded other sectors such as volatile food and energy. Volatile food and energy are some of the critical sectors that determines the survival and existence of common person. Any slight increase of goods and services from these sectors would mean that there would be suffering of humankind. Since the inception of the Federal Reserve in the US, core inflation has never been one of its targets. Instead, the Fed has used core as a major indicator since past core inflation can act as a better indicator or rather predictor of future headline inflation than past headline inflation. During situations when there are shortfalls with inflation, monetary policy does not have the capability of reaching or rather hitting a particular price level or rate of inflation. That is to say, the origin of monetary impotency is when there is existence of monetary shortfall and employment shortfall. This is the point when a number of financial institutions often allow very little inflation since they have the belief that hiring or employing people is more expensive. This is in contrast to the stand of the Federal Reserve that believes in more inflation and more growth of employment at the same time. The bigger worry is that the Fed has been missing out on inflation and employment issues on purpose. Several people have not understood the reason behind this, but it is believed that the Fed has had negative thoughts and conclusions that the monetary policy that is accommodative would result to high risks of financial stability. The Fed rolled out a new program of open-ended quantitative easing in 2012, which led to a reduction in inflation expectations. The market at that time was behaving as though the Fed had total control over inflation. Inflation should thus be encouraged as long as there is more creation of employment opportunities. This is because low inflation contributes to financial instability. However, it would be funny to come to terms with the Fed’s reasons for supporting low inflation. Maybe the Fed has the belief that when the inflation is too high, then there would be high possibility of financial risks.
Additionally, according to an article in “The Wall Street Journal”, the Federal Reserve, in January 2012, made an announcement that it had a goal of achieving 2% inflation. The Fed also had the aim of making the prices of consumer goods in the US advance at a rate of 1.3 % annually. The Fed’s target was achieved because prices of consumer goods and services have slightly increased in the past two years. However, despite the struggles, the leadership of the Federal Reserve Bank of Minneapolis has been involved in a number of debates. The debates are about whether the Fed should be committed to coming up with a policy that would ensure return prices or promote the increase in inflation rates of consumer goods and services. The major opinion that the leadership of the Fed has come up with in the past few years with the consumers in mind, is price-level targeting. That is to say, instead of targeting a continuous rate of inflation, the Fed together with the central bank of the US, will keep an eye on the steady rise of the price level of various consumer goods and services. The steady rise in the price of consumer goods and services is to some extent better than inflation as the consumers’ employment pay rise is a gradual process and it would go hand in hand with a gradual but steady rise in the prices of goods and services thus not becoming kind of hectic to the consumers (The Wall Street Journal 3).
Furthermore, the Federal Reserve has leaders that mind about the consumers, who are among subjects that make the Fed so relevant. For example, Mr. Kocherlakota is one of the leaders of the Fed and he is majorly in support of low interest rates and easy-money policies. Mr. Kocherlakota is one of the several leaders of the Fed who have been supporting an increase in the employment rates in the US. Their major reason for pushing for employment is that a higher rate of unemployment would lead to a significant drop in the economy of the US. The fall in the economic level would in turn lead to calls for low interest rates to boost growth and hiring of services. Since the Fed leaders began their campaign, there has been a significant drop in the rate of unemployment though they are still doubtful whether that is a good sign of the health of the economy. The establishment of more industries in the US marked the fall in the rates of unemployment. One of the main suppliers of employment opportunities is industrialization. Thus, a number of US citizens were able to get ways and means of survival and income. This was good way to contribute to the economy of the US. Unfortunately, despite the fall in unemployment rates, the Fed’s goal of achieving 2% inflation has not been arrived at yet. The highest the Fed has achieved is 1.2 % in the past few years though they are still struggling to ensure that the 2% level is achieved (The Wall Street Journal 3).
The contributions of the Federal Reserve to the economy of the US are also noted down in an article in “The New York Times.” The article articulates that the Fed has in the past few years intensified its drive to stop rising inflation. The reaction of the Fed followed reports in the daily papers in the US that consumer prices were rising year in year out. The move of the Fed also followed the increase in the prime lending rates which financial institutions such as banks capitalized on as a benchmark for loans to their consumers especially those running small businesses. According to the article in the “New York Times”, since the inception of the Federal Reserve, there has been a steady push for the fall in the lending rate by financial institutions. Besides, there has been a push for the rise in the prices of consumer goods and services. This has been the biggest contribution of the Federal Reserve towards the welfare of the American citizens. It is worth noting that the Federal Reserve had to come into agreements with the American government before pushing for increase in lending rates and discount rates on consumer goods. The agreements were made during the Bush era and he as the president of the US at the time was in support of the efforts of the Federal Reserve. The leaders of the Fed came into face-to-face meetings with the US government officials on the need of ensuring an economy that was friendly to both consumers and producers of goods and services. In the long term, a balance of benefit between the two would enhance the economy of the US. This is why the government officials at that time, welcomed the idea or rather the opinion of the Federal Reserve. Nevertheless, at some point, the push for inflation and increase in discount rates became disadvantageous. The Fed had a number of demands for the government and this caused friction between the two. The government lost its ground and support for the Fed’s ideas. The result of the friction was a significant depreciation in the economy of the US. It is articulated that on the Wall Street, stock prices declined at a great percentage. Besides, there was a significant drop in the bond prices as there was a rise in interest rates in response to the higher Federal funds rate. The dollar that also was believed to strengthen when rates increase also declined. This was a major blow to the economy of the USA (Hershey 3).
According to the “Business Week”, the Federal Reserve in the US has done a lot to ensure that inflation is achieved so as to enhance the economic growth of the US. Besides, the Fed has been struggling to ensure that the lending rates of a number of financial institutions in the US are reduced significantly for the benefit of those who live below a dollar a day. To begin with, the Federal Reserve had a target of ensuring that the inter-bank lending rate in the US was 0.25%. The aim of this was to ensure that the consumers had friendly interest and lending rates. The focus of the Federal Reserve was a dream-come true, because, on April 4, 2014, the Fed funds closed at 0.27% after trading partnerships from 0.06% to 0.27%. This was as par one of the world’s largest inter-dealer brokers. According to the “Business Week”, the Fed considers the present inflation in the US to be low and thus opts for a rise in inflation to secure economic growth of the US. However, the “Business Week” adds that the rise in inflation should be accompanied by creation of more employment opportunities so that the citizens that live below the poverty should not suffer. The Fed reacted or rather supported the rise in inflation since they viewed that in a few years, the economy of the US would be headed down the drain. This would be a big blow to the world at large, especially to the countries that are major trade partners of the US. Thus, according to the “Business Week”, the Federal Reserve decided to come up with policies that would ensure that a rise in inflation is adopted. Secondly, the Fed came into agreements with the US government concerning the rise in inflation, which would be helpful to the government. One of the ways that the Federal Reserve pushed for the rise in inflation is through advising the Central Bank to give loans to the domestic banks and increasing the interest rates. Through this, the Central Bank will collect so much revenue that will help boost the economy (Aneiro 2).
By pushing for a rise in inflation, on one hand, the Federal Reserve did the right thing. This is because, through an increase in interest rates to domestic banks by the Central Bank of the US, the country would be able to get sufficient income that would help keep its economy moving. Besides, by pushing for an increase in the prices of goods, with exclusion of basic food commodities and energy, the US government would be able to garner enough revenue, which would be a boost to the economy. The Fed did the right thing because they had everybody in mind when pushing for a rise in inflation. This is because they also encouraged the government to create more employment opportunities so that the poor members of the society would be able to get a way of survival (Aneiro 2).
On the other hand, the Federal Reserve did not do the right thing by pushing for a rise in inflation. To start with, when the Central Bank increases its interest rates to the domestic financial institutions, the institutions would be discouraged and withdraw from requesting of loans and this would affect the economy of the US significantly. Furthermore, the domestic financial institutions would increase their interest rates to the common person making it hard for entrepreneurs to expand their businesses, which would in turn or in the end help boost the economy. Additionally, inflation rise would mean the prices of the basic commodities would also go up and this would be disadvantageous to the consumers. It would be worth noting that the Federal Reserve was not right in pushing for a rise in inflation since the implementation of the policy across the US would be biased. That is to say, some goods would be exempted from inflation yet they are supposed to be included. Besides, some officials would misappropriate the revenue collected from the rise in inflation instead of using them with the aim of boosting the economy (Aneiro 2).
According to the “Barrons”, the BlackRock in the New York for financial media hosted a conference. The Federal Reserve that was headed by Janet Yellen, with the aim of pushing for a rise in inflation to boost the country’s economy, held this conference after a policy meeting. The Federal Reserve also pushed for a rise in short-term interest rates for consumers and domestic banks by the Central Bank. It would also be important to note that the Federal Reserve has been shifting focus more indicators of employment rather than just the increasing rates of unemployment. The Fed has been manipulating the money policy in the US such that it has lost its power to help or rather aid the labor market. The Fed leaders believe that the increasing rate of unemployment is disastrous to the economy of the US and thus should be gotten rid of. This would thus be accompanied by a rise in inflation, which would enable the government to get more revenue to run its day-to-day operations. The “Barrons” points out that inflation in the US at present is low. This is the reason why the Fed has taken an initiative to push for rise in the inflation rate. The Fed has done this by asking the Federal government together with the state governments to push for an increase in the prices of basic commodity goods and services with the exception of food and energy products. This would be a major boost for both the federal government and the state governments as they would be able to receive more and sufficient funds to run the economy of the US as a whole. Moreover, in order to achieve its goal of pushing for a rise in inflation, the Fed pushed for the manufacturers, wholesalers and the retailers to increase the prices of their commodities so that they would counter the increased taxation on commodities that would be imposed by the government so as to boost the economy. Increased taxation often results to observable or rather evident inflation.
The “Barrons” considers the act of the Fed of pushing for a rise in inflation as the right thing. This is because a rise in inflation is considered to have a number of advantages. To begin with, one of the primary benefits of inflation is to the investors. This is because long-term indexed Treasury bonds often accompany inflation. These bonds give investors a long-term asset with a fixed long-term real yield that is free from inflation risk. Definitely, all investors often wish for less risks of inflation. Therefore, the Fed has also assured the investors of less risks of inflation making their preference of pushing for a rise in inflation the right thing to do. Secondly, the push for the rise in inflation was the right thing to do by the Fed because it greatly benefited the U.S treasury. Like investors, the U.S. Treasury was bound to benefit greatly from the rise in inflation, which was being pushed for by the Federal Reserve. As a matter of fact, the U.S treasury has benefited a great deal from the inflation risk protection that is often provided by indexed bonds. Besides, as a result of the push by the Fed for a rise in inflation, the US Treasury has been benefiting from savings on its interest expense. The U.S. Treasury is currently considered as one of the leading issuers of nominal bonds. In fact, it bears considerable inflation risk in servicing the debt that it has. If all of the Treasury’s outstanding debt were indexed, the real cost of servicing its debt would not vary inversely with inflation. Indexed bonds would also save the Treasury money by eliminating an inflation risk premium that is often part of the yield on nominal bonds. A risk premium is the difference in the yields of two assets due to differences in the riskiness of the assets. Because investors do not like risk, issuers of riskier assets typically have to pay higher yields to compensate investors for taking on the additional risk. Corporate bonds, for example, pay higher yields than Treasury bonds with comparable maturities since corporate bonds have default risk and Treasury bonds do not. In other words, corporate bonds carry a default risk premium (McCormick 3).
On the other hand, the Federal Reserve’s act of holding conferences to discuss about possible inflation rise in the US can be considered as not being the right thing to do. This is because, inflation rise is considered to be accompanied by a number of disadvantages. For instance, inflation in the US in the past few years has led to increased prices of commodities and services and this has been unaffordable to the poor members of the community. Thus, the Fed should not have pushed for inflation rise. The other disadvantage of inflation is that it leads to increased unemployment because the cost of production and maintenance often increases year in year out yet there is no profitability because customers and consumers are driven away by the high prices of goods and services. Additionally, the Federal Reserve should not have pushed for the rise in inflation as it led to unfavorable balance of payments in companies in the US. That is to say, directors and managers of companies often have or rather put up unfavorable payments for their employees due to a rise in inflation. This is often not favorable in all companies across the US. The other disadvantage of rise in inflation is that it could lead to hoarding and theft of goods from one company to another. A rise in the price of commodities would mean that common persons would not be able to afford such goods. Therefore, they would rather turn to hoarding or theft of goods so as to access such goods easily. Thus, supporting inflation was not a good idea for the Fed (McCormick 3).
According to the “Financial Times”, inflation is considered to be the best thing to do. Actually, the “Financial Times” articulates that the Central Bank in the U.S has played a major role in ensuring that inflation has been achieved. The bank, with the policies and regulations of the Federal government of the US, has been increasing the interest rates of the loans that it has been giving to its customers; that is, the domestic banks in the recent years. In return, the banks have also increased their interest rates to their customers thus prompting small businesspersons and entrepreneurs to increase the prices of their commodities and services. “The Financial Times” adds that the Central Bank in the US has also come up with a policy to make yield gap yawn. This has enabled the government of the US, to have raised revenue collection for running its operations. This has also helped boost the economy of the US (Mackenzie 5).
“The Financial Times” considers the rate of inflation to be low. Thus, it pushes for an increase in inflation, though slightly in order to help the government to collect enough funds that would help it run its day-to-day operations. This is why “Thee Financial Times” has also come up with a policy that pushes the Central Bank to increase its interest rates on the domestic financial institutions (Mackenzie 5).
Additionally, according to “The Financial Times”, it was the right thing for the Federal Reserve to push for a rise in inflation. This is because it offered the government with a number of opportunities of revenue collection. This would be very advantageous, as it would help the government in boosting the economy that was almost at the verge of collapse initially. On the other hand, the rise in inflation as supported by “The Financial Times” was not one of the brilliant ideas that came up. This is because inflation would be accompanied by a rise in the prices of goods and services in the market and this would be a great disadvantage to the common man and the poor who live below the poverty line. Thus, apart from pushing for a rise in inflation, the Federal Reserve should have also campaigned or rather pushed for an increase in the rate of employment through creation of more employment opportunities (Mackenzie 5).
Figures showing inflation in the US over the recent years
Aneiro, Michael. “BlackRock: As Fed Distorts Short-Term Rates, Better Value In Long Bonds”. Barron’s. 2014, pp 2. Available online at: http://blogs.barrons.com/incomeinvesting/2014/03/20/blackrock-as-fed-distorts-short-term-rates-better-value-in-long-bonds/
Grand Central: As Unemployment Falls, Fed Doves Pivot to Low Inflation Concern. The Wall Street Journal. 2014, pp 2. Available online at: http://blogs.wsj.com/economics/2014/03/24/grand-central-as-unemployment-falls-fed-doves-pivot-to-low-inflation-concern/?KEYWORDS=Federal+Reserve+and+inflation
Hershey, Robert. “Federal Reserve Raises A key Rate to slow inflation”. The New York Times. 1989, pg 3. Available online at: http://www.nytimes.com/1989/02/25/business/federal-reserve-raises-a-key-rate-to-slow-inflation.html
Mackenzie, Michael. “Central bank policy contrast makes yield gap yawn”. The Financial Times. 2014, pp 5. Available online at: http://www.ft.com/intl/cms/s/8fa36678-be5e-11e3-b44a-00144feabdc0,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F8fa36678-be5e-11e3-b44a-00144feabdc0.html%3Fsiteedition%3Dintl&siteedition=intl&_i_referer=http%3A%2F%2Fsearch.ft.com%2Fsearch%3FqueryText%3Dthe%2BFederal%2BReserve%2Band%2Binflation#axzz2yOdOzxwJ
McCormick, Liz. “Fed Funds Open at 0.08%, Within Target Range, According to ICAP”. BusinessWeek. 2014, pp 3. Available online at: http://www.businessweek.com/news/2014-04-07/fed-funds-open-at-0-dot-08-percent-within-target-range-according-to-icap
R.A. “Monetary policy: Low inflation is a choice” The Economist. 2014, pp 6. Available online at: http://www.economist.com/blogs/freeexchange/2014/03/monetary-policy-3#comments
International Trade Policy
International trade refers to a flexible and valuable commitment between global countries to undertake trading activities conducted in free markets. The International Trade Policy is an agreement between trading nations to co-operate in undertaking economically efficient free trade activities. It is also a contractual agreement to allocate economical, governmental, and environmental resources efficiently in order to improve various trading sectors. The resources mainly include technologies, information and management techniques among trading countries. They are utilized in improving production of goods and services traded in a free international market. The commodities are supplied to nations able to access and afford, further increasing earnings and revenues from international trade. Consequently, global governments conduct international trade to improve economies and living standards (WTO, 2009).
International Trade Policy
The International Trade Policy was established to accomplish the following goals and objectives. Foremost, it was formulated to permit and facilitate expansion of more free trading activities across global nations. This objective was established aligned to the development policy across global countries involved in international trade. Global nations aim at retrieving increasing benefits from expanded free international trading activities to expand economies and record growth and development. Thus, International Trade Policy is conducted regionally as well as bilaterally under multilateral negotiations. The policy is important in creating an international legal system legitimately providing guarantees among international actors participating in international trade (WSM, 2008).
International trade provides an opportunity among undeveloped, developed and developing countries to improve global economies. However, the International Trade Policy is more considerate to undeveloped and developing countries. The considerations are aligned to further improve economies among the countries. The economies are often regarded as struggling due to high levels of poverty, unemployment and poor living standards. Thus, the International Trade Policy aims to ensure all global nations participating in international trade are awarded equal opportunities to conduct beneficial commercial activities in a free market (WTO, 2009).
The International Trade Policy was also formulated to integrate global trading activities in a multilateral trading system facilitating flexibility, competency and creation of value. It is however regarded as a dictatorial trading policy among developing countries. This is because, the policy dictates how they are integrated in global economies efficiently and effectively to facilitate and promote fair and equal trading opportunities. The International Trade Policy aims at ensuring countries are able to grow and expand to high economic levels. However, participants from developing nations do not acknowledge this vision. Instead, they regard the policy as a trading regulation encouraging developed nations to grow and develop economically at the expense of developing countries. Consequently, they regard the policy as an economic measure aimed at forcing developing nations to accept aid from wealthy developed countries. Thus, developing nations do not regard the policy as a regulation aimed promoting international trade to improve free markets and global economies (WSM, 2008).
The International Trade Policy was formulated to end poverty among developing nations. It combines governance and economic policies and reforms to establish and create opportunities for nations participating in international trade. Consequently, it was established to facilitate the participating nations take advantage in achieving globalized economic growth and development. However, International Trade Policy has facilitated the development of unequal and unfair global competition. The terms and conditions consisting the bilateral and multilateral trading arrangements and policies dictate countries either benefiting or loosing from conducting international trade (WSM, 2008).
Policies facilitating and promoting free international trade are formulated and implemented to eradicate trading barriers. Thus, they open up marketing opportunities for participating nations to achieve a comparative advantage. A comparative advantage aligned to International Trade Policy ensures global trading countries efficiently and effectively compete for a market position in the free international trading arena. For example, developing nations ought to intensify on labor and low-skilled trading activities including the light and agricultural industries to achieve a comparative advantage. Conversely, developed nations ought to manufacture technology-intensive goods and services accessible and affordable to both developed and developing nations in a free market. More so, developed nations comprise of highly educated, trained, skilled and experienced employees often found in urban areas. Urban areas encourage investments and innovation in order to increase economic values in the country. Thus, developed nations should manufacture high technology commodities and expertise services such as engineering, banking and accounting and provide them in a free international market (WTO, 2009).
However, there are situations during which barriers are imposed against free international trading activities. The barriers include import quotas, export and import licenses, subsidies, embargo, trading restrictions and currency devaluation. They are imposed in order to increase trading costs and prices of commodities traded in a free international market. Thus, the barriers reduce economic efficiency and competitive advantage. They are important and necessary in situations seeking to regulate unhealthy and unsafe commodities traded in a market. They are also applicable in obstructing free trade of imports and exports violating economic and government policies and regulations (WTO, 2009).
A trade barrier can be imposed to reduce and eliminate the trade of illegal and unhealthy commodities such as illicit drugs. More so, it can be imposed against trading countries perceived to pose danger on security measures adopted among other nations conducting economic activities in an international market. Quotas can be imposed on commodities to reduce the number of nations able to afford to purchase and import them. The prices are set too high blocking nations from accessing and affording the commodities. For example, Europe imposed a one percent tariff on raw cocoa and a thirty percent tariff against processed cocoa from Africa (WTO, 2009).
Imposed trading barriers against free trade affect diverse economies and governments differently. The Word Trade Organization formulated and implemented trading tariffs enforceable and negotiable among trading countries. The tariffs were aligned in developing and expanding global trade through protected bilateral and multilateral commercial agreements. When Europe imposed tariffs on cocoa products from Africa, it ensured the barriers were economically beneficial and wealthy. Thus, Europe collected exorbitant tariffs while Africa accounted for trading losses further destroying the struggling economies (WTO, 2009).
Trading barriers also facilitate wealthy economies to export excess commodities at low prices an activity referred to as dumping. This further increases poverty among domestic producers, as they cannot compete with wealthy economies. Consequently, developing nations lack trading incentives to grow and develop local industries to improve their economies. However, barriers on illegal and illicit products such as drugs and weapons ensure global countries improve national security. More so, they ensure companies manufacturing drugs acquire patents to protect and recoup the products from illegal, unsafe and lethal innovators (WTO, 2009).
trade was established to improve economies among participating nations. It
provides a free market through which high quality commodities accessible and
affordable to participating nations are supplied as imports and exports.
Trading barriers are important in regulating free trade. Besides ensuring safe
and healthy commodities are traded, they also promote and safeguard free and
fair competition. Thus, trading barriers should be imposed to benefit participating
countries in equal and fare measures.
World Savvy Monitor (WSM). (2008). International Trade Policy: Global Poverty and International Development, World Savvy Monitor Report.
World Trade Organization (WTO). (2009). Flexibility in Trade Agreements, Word Trade Organization Report.
International Political Economy
Democracy, internationalization of the market and globalization are some of the concepts that determine the functioning of the international political economy. It is often said that one cannot divorce economics from politics and a close examination of the interplay between these factors in the global economy reveals that there is a degree of truth to the claim. Democracy remains the most practiced form of government just as market liberalization is entrenched in most economies. Despite its promises, democracy at both the government and market levels has failed to solve the problem of inequality in income distribution. This paper discusses why democracy has failed to reduce income inequality.
The late twentieth century has seen massive ideological shift and greater polarization within the political system, for example, in the US house of Congress; the voting patterns of legislators can be measured with reference to pre-determined ‘ideal point.’ Linear graphical presentation of these patterns since late 19th century to the 21st century reveals that conservatives have increasingly voted to the right whereas liberals have voted to the left of the ‘ideal point.’ According to Poole (2005), the increasing levels of polarization and ideological shifts affect income distribution. This is partly because politics between Democrats and Republicans has shifted policy concerns from social welfare to other issues such as race, gender and sexual orientation.
According to McCarty, Poole and Rosenthal (2006), a relationship exists between participation in the voting exercise and income inequality. One observation is that the majorities of the poor are not United States citizens, and second is that among the poor population who are citizens, the voter turnout during polls is reportedly low. This implies that the populations with higher income participate in the election more frequently than their low income counterparts. The low income status of this section of the population is seen as both a cause and effect of their voting patterns. This means that the policies to combat income inequality are designed to favor the high income earners who exhibit increased participation in polls.
Campaign donations and political outcomes also have a bearing on income distribution. Individuals, organized labor and corporations often make electoral funding. Both the democrats and republicans get their funding from wealthy individuals. Surveys conducted over time reveal that the amount of donations a candidate or party receives depends largely on the ideologies and policy positions they promise to champion once elected to office. The rich, who contribute the highest, therefore, have policies on inequality skewed to their favor.
The way in which the political system is instituted determines its reaction to the issue of inequality. According to Persson, Roland and Tabellini (2000), systems that are presidential-congressional in nature often have high levels of inequality and the use of proportional representation is a viable remedy to reduce the levels.
Internationalization of markets due to globalization has also played a role in abetting inequality. Globalization creates interdependence between economies such that an economic shock in one economy spreads to others via ripple effect. According to Piketty and Saez (2003), economic depression has led to increasing inequality. Globalization in the financial sector has also increased inequality because the rich are able to avoid taxes that are a redistributive tool. The consequences of globalization do not promote equal rights for all because the evidence suggests that the rich continue to benefit.
Politics plays an important role in public policy formulation and one way to ensure effective policy to curb inequality is to eliminate the polarizations between the liberals and conservatives. All population must also engage actively in the voting process and finally there must be legislation to regulate the percentage of donations for elections.
Consumption Patterns of Coffee
The news article ‘coffee board sees scope to improve per capita consumption’ was identified from the Business line digital newspaper published on January 21, 2014. The article highlights the consumption patterns of coffee within India and actions being undertaken to improve the consumption. The article reveals that the consumption of coffee has increased despite the rise in price. The articles further show that Indians are increasingly embracing the café culture. Anil Kumar, the president of India Coffee Trust for example, insists that the increased consumption is attributed to the increase in the proliferation of branded café outlets within the country. The outlets have grown by 15 percent (Proquest, 2014). This paper outlines the process of researching the university library to locate this article and explains the advantages of using university library sources for academic work.
In order to search the university library online, one must have a computer and stable internet connection. Within the university website, a link directs one to the students’ portal where you can login and access the university library. One is able to access the website after login in with valid details. In the website, there are options for classroom, library and account. The library portal has a search option where one can access either peer reviewed on non-reviewed scholarly articles. In this portal, you type the keywords for the document you want to search. For example, in this case, I typed ‘consumption patterns of coffee’. The results can be refined by selecting the relevant content type (Proquest, 2014).
In this example, the search was refined under newspaper articles. From the subsequent results, the article ‘coffee board sees scope to improve per capita consumption’ was selected because it was the most recent of the articles. The use of this article is superior to the use of articles from Google and other internet sources because it is easy to get relevant information. The articles within the library are also peer reviewed and increases their reliability for academic use. The information is also classified under various topics such as business, arts among others. Similar documents from earlier publications are also available within the library and this increases the scope of research for the student (University of Buffalo Library, 2014).
The Internet, through various search engines, such as Google provides useful tools of research for students. However, as a free space where anyone can express his or her opinion, some of the information may not be ideal for academic research. The university library, therefore, remains a superior place to find information because it is evaluated according to academic standards (University of Buffalo Library, 2014).
The Law of Demand and Elasticity
According to the law of demand, a rise in the price of a commodity causes a decrease in the quantity consumers are ready to pay for the good and the opposite is true. The demand curve shows the interaction between the cost paid for a commodity and the quantity consumers are willing to acquire at that cost. Movement along a demand curve represents a change in both the cost of purchasing a commodity and the amount of the commodity demanded (Nicholson & Snyder, 2012).
A demand curve shift however happens when the cost paid to acquire a commodity is constant despite a change in demand. In summary, a movement arises when a change in demand is caused by a change in price and a shift occurs when a change in demand is caused by other factors other than the price. Shifts are caused by the lack of substitutes for example if beer becomes the only alcoholic drink available, for the same price there would be an increase in demand (Nicholson & Snyder, 2012).
Elasticity is the ratio of the percentage change in
quantity demanded to the percentage change in price. The availability of substitutes
affects price elasticity of demand in that the more substitutes are available
the more the price elasticity of demand. Tea, for example, is a substitute for
coffee and if the price of coffee increases, people will resort to taking tea,
meaning that the change in price cases has a significant change in demand (Nicholson
& Snyder, 2012).
Nicholson, W., & Snyder, C. (2012). Microeconomic theory: Basic principles and extensions. Mason, Ohio: South-Western/Cengage Learning.
Proquest. (2014, Jan 21). Coffee Board sees scope to improve per capita consumption. Retrieved Mar 20, 2014, from Apollo library: http://search.proquest.com.ezproxy.apollolibrary.com/docview/1490825449
University of Buffalo Libraries (2014, Mar 20). Finding and Evaluating Research Materials. Retrieved Mar 20, 2014, from University at Buffalo:
Who is Afraid of China?
In the current phase of industrial revolution, Chinese technological endeavor has been rated as expanding three times the rate of its predecessors. While China has been ranked as the leading manufacturing nation of the world, it has proven to create a huge trade-related imbalance with the US among other developed economies. This is particularly attributed by the widely adopted culture of innovation, inventiveness and commercial spirit that gives China a head start.
Who is afraid of China?
Although China has proven to be a rapidly emerging technology giant that has continued to pose significant threats to technology manufacturers, Dell may not be among the various companies that are Afraid of the emerging giant. While most Chinese companies are thought to take certain historic shortcuts to perpetuate an earlier realization of their set goals, Dell sticks to a well calculated strategy that will not only perpetuate its current profitability, but which will enhance future success as a world leader in technology-based manufacturing industry. Dell’s strategy for enhancing its level of competitiveness includes saving available resources to ensure that production cost is significantly reduced, and this has proven to be an effective strategy that may not be released by rival companies. The company executives for example maintain a close supervision of the assembly process to ensure that production teams do not waste time and resources that could be used to develop an extra unit.
The company equally evaluates the level of workers’ performance to ensure that only the most productive and efficient employees with a particular set of special talents are retained in the company. Dell has equally adopted a unique strategy that sets it apart from the global trend while on the other hand setting the standard that every technology manufacturer seeking to be successful should adopt. While everybody, including Chinese technology manufacturers relies on outsourcing, Dell has spent over two decades strategizing on how it can effectively exploit its human and capital resources to create a wide range of products. This has enabled the company to figure out how it can create high quality products at a significantly reduced price, which may not be the case with most technology manufacturers including Chinese companies. Dell has further vowed to increase its manufacturing presence in America, which has proven to be more efficient as it brings products closer to the customers.
This indicates that most Chinese technology manufacturers that include the renowned Lenovo Company may not be able to compete with Dell, especially because they cannot meet individualized customers’ demands. This is due to the fact that such companies seek to expand their manufacturing presence outside China, which inhibits their ability to significantly reduce production cost as well as meet certain customers’ demands. Dell does not operate any warehouses, which eliminates possible limitations that may be attributed by constant changes in technology. This means that the company can keep up with the pace of changes in technology as it would be able to purchase raw materials that are bound to be relevant at a certain time to satisfy customers’ demands.
Suppliers may however be afraid of China, particularly because the wake of rapidly changing technology demands that they have to keep with the pace at which Dell is expanding. Dell does not take possession of any production component as it requires “just-in-time” delivery of raw materials. This indicates that suppliers have to maintain readily available raw materials to ensure timely delivery as Dell demands to work with efficient suppliers that can provide materials that are suitable for a given time. On this note, constant shift in technology as perpetuated by Chinese technology manufacturers can attribute to huge losses among Dell’s suppliers as they have to constantly dispose components that may be passed by time as technology changes.
There is adequate evidence that Dell is not afraid of China as it has established an effective strategy that will enable it to remain competitive in technology manufacturing industry. The company’s strategy revolves around limiting the amount of resources wasted, expanding its manufacturing presence in America, depending on its human and capital resources rather than outsources as well as adopting “just-in-time” production strategy rather than operating warehouses. Suppliers may however be afraid of China especially because Dell does not possess any components, which instills the cost of disposing components that are passed by technology on suppliers.
Milestone ~ Final Project
The current administration’s economic policy
Economic policy refers to the actions that the current governments in their respective countries take to influence as well as to control how the economy is presently behaving. This caters for the settlement of operating interest rates as well as the countries budgets that are suggested by the governments. This in return has two roles to play in the field of economics, which is, to ensure economic growth and maintain tax revenues collectible amounts. In addition to this, economic policy stimulates other indicators of the economic boundaries as well, according to the economic periods that influence the manner in which the economy operates in the economic field. Depending on the economic period, the governments in their respective countries tend to alter their economic policies to protect certain interests that could benefit the government as well as the citizens.
Though the country has made attempts to enable it recover from a period of recession immediately at the end of the World War II, it still experiences some challenges in its economic growth. The realized economic growth rate at which its current sectors in the economy have been growing at has been estimated to be almost half of any other rate that has been recognized during the recovery periods. The recession period ended in 2009, and since then, 2.4% has been the estimated growth rate in the economy (Smith, Kellstedt & Goth, 2009). To address the issue, some economic policies have been implemented to ensure that the economy recovers from recession at attains a higher growth rate in all its sectors. The policies that have been suggested to be effective are the Keynesian policies, which are different from the applied policies during the great moderation period.
The bible prophesies that the economy would collapse in the last days. Though not mostly addressed by the media as well as governments, the bible calls for those who have been made too blind by the two parties, the government and the media, to open their eyes wide and see the fulfillment of these prophecies. It states that the last days would be characterized by the the collapse of the world economy, which will consequently attract superpowers and wars. Martial law on the rich elites as well as impoverishment would be seen. In these days, even the wealthy nations, like America, China and Japan are experiencing lapses in their economies, fulfilling what was prophesied (The Bible).
According to Gwartney, Stroup, Sobel
and Macpherson, business cycles have frequent rising and falling of the prices
of the stocks in the market commonly known as inflation and deflation
respectively. Another indicator of the
poor economic situation currently in the country is the high ratio of the debts
of the households to their income in their hands (Gwartney, 2009). Irrespective
of the traumatizing situation, America
has been on top in its economic growth making it a superpower globally, which
is another fulfillment of the prophecy from the bible. The main role of the
Keynesian policies that have been adopted currently is to heighten the impact
of the multiplier regarding fiscal policies. Nevertheless, these efforts do not
improve the situation to a great height. This is evidenced by the fact that the
multiplier of what the government has been spending is always below one
Gwartney, J. D. (2009). Economics: Private and public choice. Australia: South-Western Cengage Learning.
Gwartney, J. D. (2013). Microeconomics: Private and public choice / James D. Gwartney. Mason, Ohio: South-Western Cengage Learning.
Smith, C. E., Kellstedt, L. A., & Goth, J. L. (2009). The Oxford handbook of religion and American politics. Oxford: Oxford University Press
The Bible, NIV Version.
Ukraine’s Economic Problems
Ukraine has lately been in the news for getting into a political crisis. It has been in trouble for a long time economically, says the Economist. In the past one month, the country’s currency, the hryvnia depreciated from exchanging at 8:1 to 10:1 with the American dollar. The economy of Ukraine began to grow on a sluggish note in the 1990s after the fall of the Soviet Union. There was a disturbingly limited access to financial markets, and the government spending was in excess of the available monetary resources. This resulted in hyperinflation. As a measure to curb the situation, Ukraine was forced to change its currency from Karbovanets to hryvnia that is used presently (Why is Ukraine’s economy in such a mess? par 2). Things started to look up for the country at the start of the 21st century thanks to high interest rates that saw capital flow into the nation.
The rate of increase in broad money was 35 % annually for the period between 2001and 2010. A credit growth that averaged 73 percent was observed in the years 2006 and 2007. However, the high inflation that accompanied Ukraine’s growth stifled it export competitiveness. The global economic crisis in 2008 diminished capital flows to Ukraine. It also made the value of the hryvnia to plummet. The central bank of Ukraine drained it reserves from $40billion to the present $12 billion in a bid to protect the currency (Why is Ukraine’s economy in such a mess? par 5). The depreciation of the country’s currency raises the debt burden. The fact that about a half of the public debt is in form of foreign currency makes the situation even worse.
The exports of Ukraine failed to do well, especially after the fall of the price of steel products in the global market. This made the GDP of Ukraine to fall by 15% in 2009. The IMF wanted to lend them $15 billion in 2010, but this loan was withheld after the country was found unwilling to honor the conditions put forth. The government has failed constantly to meet the public deficit targets. About 50 percent of the GDP is accounted for by underground businesses that don’t pay taxes. The country requires around $25 billion to pay foreign creditors and finance its current expenditure for this year. The foreign reserve has only $12 billion (Why is Ukraine’s economy in such a mess? par 8). A default is most likely. Ukraine is not so concerned about working on the economy right now but on managing the political unrest, that has made headlines globally. Ukraine leaders have been described as not willing to have reforms in the country and condoning of corruption. The economic problems of Ukraine therefore seem unlikely to end soon. Below is a graph showing how Ukraine has consistently lagged behind in terms of economic development compared to her peers (source: The Economist).
The sanctions threatened against Ukraine and Russia as a result of the alleged abuse of human rights during the political unrest will only serve to weaken the economy further. Russia’s claim on the Crimea region as a being a part of its territory has made Ukraine the center of controversy between former cold war adversaries (Harding par 6). The importance of political stability for growth and prosperity of the economy of any nation cannot be refuted. The political situation in Ukraine will need to be resolved first before it embarks on restoring its economy. It will be a matter of resolving the bigger problem first before dealing with the headache of a failed economy.
Harding, Luke. “Ukraine crisis: US will not recognize Crimea referendum, says ambassador.” the Guardian, 2014. Web. 11 Mar 2014. <http://www.theguardian.com/world/2014/mar/10/ukraine-crisis-us-crimea-referendum-putin-ambassador>
Unknown. “Why is Ukraine’s economy in such a mess?.” The Economist, 2014.Web. 11 Mar 2014. <http://www.economist.com/blogs/freeexchange/2014/03/ukraine-and-russia>
Fiscal Policy and the American Economy
In the past five years, the American economy has experienced significant change as it emerged from one of the worst financial crises in history. The housing market was one of the areas where it was severely affected with house prices dipping so low that real estate companies could not recoup their investments and banks could not sell the houses they repossessed and were unable to recover their money leading to majority of them shutting down. The government initiated a recovery program that saw some areas develop and the interest rates, inflation and unemployment rates have significantly changed in the past years due to the government policy in place.
The unemployment rate has in the past five years reduced significantly from its peak at sixty percent to less than thirteen percent recorded in the past year (Larsen, 2014). The cause of this has been the lack of individuals focusing on full time employment and instead opting to look for alternatives in self- employment. Full time employment is therefore no longer viewed as an attractive option for most people due to a lack of confidence in the economy’s growth and stability.
The interest rate is at less than one percent, which is extremely low and the trend does not show any signs of changing. This is due to the Federal government’s attempt to reduce the cost of ownership as it purchased mortgage backed bonds that injected cash into the failing house industry. This would make homeowners receive the cash directly as opposed to the severely criticized bailouts that had been attempted in the past in the banking sector. It was also concluded by the government that it was best for interest rates to remain at less than one percent to increase activity at the stock market by making investment in treasury bills and bonds unappealing (Economist, 2013).
The inflation rate has been at five percent in the past five years, which is relatively low. This is due to the lack of purchasing power among the American public, and the continued skepticism over the recovery of the economy (Sivy, 2013). The fiscal policy towards increased social benefits also resulted in the stability of prices which was necessary for the economy to recover.
It is possible for the fiscal policy to be used to stimulate growth by having it spent on items that generate spending, such as welfare benefits that increase spending at the lower levels of the economy and thus compensate for reduced spending by middle and high income earners. The redistribution of income would thus stimulate growth as high income earners being majority producers, would benefit from the increased demand for goods and services.
The fiscal policy can also be a determinant of the unemployment rate as higher benefits lead to less motivation to find employment, which in turn would lead to a reduction in the employment rate. The purpose of seeking employment is simply to earn an income for most people. If the government provides compensation for unemployment that is sufficiently high then less people will be inclined to seek employment due to a guarantee of sustenance. Higher tax rates on the alternative make it unattractive for an individual to seek employment, as they cannot afford to maintain themselves at low income levels. The gross domestic product of the country could thus be increased by a higher tax rate, as there is less incentive to remain unemployed. The fiscal policy can therefore be used as a tool to determine the production levels of the country as it affects the incentives of citizens to work and by increasing or decreasing taxes or benefits one can affect the domestic output (Mceachern, 2012).
The inflation rate is also affected by the fiscal policy selected and a policy that has high tax rates would lead to an increase in the inflation rate, as businesses would increase the cost of goods and services in order to realize the same level of profits that were recorded when tax rates were low. The provision of social benefits would have the opposite effect, as individuals would feel that the government’s subsidies could compensate for the loss of potential profits that come with charging low prices. The fiscal policy also influences the interest rates as a high tax rate would result in the government borrowing less in terms of bonds and securities and this would bring down the interest rate while a policy that encourages expenditure beyond the government’s budget leads to a deficit which it would meet by borrowing and thus raise interests rates (Mankiw, 2012).
The unemployment rate, inflation rate and interest in the USA have remained low in the past five years due to several reasons including the lack of purchasing power of American citizens, a lack of confidence in economic growth and government policy towards lower interest rates in order to spurn activity in the housing market. The unemployment rate however has not been low due to job creation but due to individuals seeking income generating activities in alternate fields as opposed to the traditional platforms of employment. As new policies are made there can be room for growth as the government adjusts its fiscal policy to incentivize citizens to work through higher taxes.
Larsen, R. (2014). America’s beleaguered middle class. Finanical Sense. Retrieved February 28, 2014. from http://www.financialsense.com/contributors/richard-larsen/america-s-beleaguered-middle-class
Mankiw, M. (2012). Essentials of economics. Ohio: Cengage
Mceachern, W. (2012). Economics: A contemporary introduction. Ohio: Cengage.
Sivy, M. (2013). If there’s no inflation, why are prices up so much? Time. Retrieved February 28, 2014 from http://business.time.com/2013/03/12/if-theres-no-inflation-why-are-prices-up-so-much/
The Economist. (2013). A world of cheap money. The Economist. Retrieved February 28, 2014. From http://www.economist.com/news/briefing/21575773-central-banks-have-cushioned-developed-worlds-economy-difficult-period-they-have-yet
A common description of a monopoly is a corporation that has such effective and full control of its market to an extent where it can dictate prices, and suffocate innovation by depriving rivals of any chance of revenue. The offending corporation only has to maintain its character to perform well in its practice regardless of what opposing regulators have to say. For some time since the inception of economic markets, monopolies have been viewed as greedy, and evil. However, the current economic environment stipulates that monopolies have to be reviewed in a different light. This paper aims to examine monopolies, and their characteristics in relation to their initial view and how they are currently taking part in today’s market systems.
A Monopoly market configuration is a market structure that has a solitary seller of an invention that has no equal substitute, the seller has complete control over the market price, there is a restriction on entry of new firms to the market, and price differentiation is practiced. Research has shown that some of these characteristics have been held responsible for the negative press monopolies have received in the past. It follows that early economist and policy architects have always favored perfect competition instead. In their view, ‘Perfect competition’ is regarded as both the most idyllic, and the default market position in Economics 101. This is so since the supposed perfectly competitive markets realize equilibrium when a producer supply meets customer demand, by producing homogeneous goods, and allowing free entry of new firms unlike monopolies.
The most controversial characteristic of monopolies as explained by early economists is that the sellers have complete control over market prices. Many of these policy architects have viewed Monopolies as companies that are always been driven by profit and greed. On the other hand, contemporary economists such as Mr. Peter Thiel suggest that “If you want to create and capture lasting value, look to build a monopoly” (Peter Thiel. 2014). Mr. Thiel views monopolies as not just companies that restrict competition to maintain high profits, but corporations that are so effective at what they do hence no other company can offer an equivalent substitute. This means that these companies have a right to determine market prices since they offer an entirely new category of profusion to the world. Mr. Thiel’s view is supported by current developments in the airline industry, which is currently going through a challenging period in determining ticket prices. In his description, he states that such a problem is largely brought about by perfect competition characteristics of not allowing firms determine market prices.
Another controversial characteristic of a monopoly is the restriction of entry into the market economy. Early economists view every monopoly similarly, to them whether the offending corporation deceitfully eliminates competition, secures an authorization from the state, or works its way to the top all monopolies are evil. Most of the early monopolies such as IBM and Microsoft have been branded as such for restricting competition. For example, the Justice Department went after these companies in the 1970s and in the 1990s without consideration of their dynamic market. Both companies did business in an environment where the government did not protect incumbents, new companies were free to displace old innovators, consequently this saw the decline of IBM and a drop in share value and returns in Microsoft. On the other hand, present economists view perfect competitive market structures as the death of thriving economies. Through his article in the wall street journal, Mr. Thiel explains that issues such as the lack of firms with market power, free entry, and price determination being dependant on demand and supply are all current market problems. In his statement, he suggests that in cases where there is profit to be generated, new firms will invade the market, as a result increasing supply, and thus drive prices down, thereby eliminating the returns that attracted them initially. If too many companies enter the market, they will suffer losses, some of the like IBM will fold, and prices will rise back to the lucrative levels. Under perfect competition structure, no company generates an economic profit in the end (Peter Thiel. 2014).
In both his arguments, Mr. Thiel suggests that though perfect competition was ideal before, it does not hold the same credentials in the long run. In his description, Mr. Thiel uses Google as a creative monopoly. Google is a monopolist, by character, because as of May 2014, the company holds about 68% of the internet search market, its closest rivals, Microsoft, and Yahoo! Hold about 19% and 10%, market share, respectively (Peter Thiel. 2014). Research shows that the online advertising industry that has a value of about 150 billion dollars in the U.S and 495 billion dollars globally yearly. From this perspective, Google is a monopoly since it is the youngest in incorporation from its competitors. The fact that Google is so excellent at what it does makes it a creative monopoly offering customers with a wide range of products that include an easy platform as a search engine and advisement avenue. These kinds of monopolies are being encouraged by Mr. Thiel to protect the profitable markets in the end.
In conclusion, Mr. Thiel description of creative monopolies stands to redefine how monopolies are viewed in the current economic system. The characteristics of restricting entry and determining prices have always been argued as an evil, however, through his article these two qualities are well described and approved. It may be that perfect competition is still in favor by most contemporary economists, but as explained by Mr. Peter Thiel, monopolies are not as bad as they have been viewed.
Peter Thiel, Sept. 12, 2014. Competition Is for Losers. Article retrieved from The Wall Street Journal.
Economics Research Paper on What trends in real GDP have occurred in the time period shown in the BEA release highlights document?
GDP Research Paper
What trends in real GDP have occurred in the time period shown in the BEA release highlights document?
The United States of America experienced an increase of 3.2 percent in the GDP from the third quarter of 2013 to the fourth quarter. However, these were just estimates that were based on provisional results that are subject to changes and revisions. The increase in GDP can be attributed to various reasons. For instance, there was an increase in exports, private inventory investment, nonresidential investments, and personal consumption expenditure among other reasons (BEA). However, imports also increased; imports are normally subtracted from the Gross Domestic Product. The speed at which the GDP was being produced was reduced tremendously in the fourth quarter (Brezina, 22). This can be attributed to the reduced nonresidential investments coupled with reduced local government investments.
What time period shown in the document experienced the most significant growth?
The U.S. economy experienced a boom in the fourth quarter of 2013. More people and businesses were willing to spend more than in previous years. However, the federal government was a major disappointment. Instead of contributing positively to the GDP, the federal government was responsible for negating the GDP. Compared to 2012, 2013 experienced the greatest growth in real GDP. The Bureau of Economic Analysis indicates that the real GDP experienced an increase of 2.7 percent as compared to an increase of 2.1 percent in 2012. These percentages are “measured from the fourth quarter of 2012 to the fourth quarter of 2013” (BEA). Furthermore, there was a decrease in the price index for gross domestic purchases. In 2013, the U.S. had an increase of 1.1 as compared to a 1.5 percent increase in 2012. In a nutshell, 20133 experienced a large increase in GDP as compared to 2012.
Based on the data you have researched, what do you project real GDP will do during the duration of this year? Be specific in your answer.
It is evident that the first quarter of 2014 will not be as fast as the last quarter of 2013. This is not to say that the country will not be making profits from private investments and other forms of revenue generating activities. Sharf suggests that GDP grows gradually over the year. Therefore, the growth in GDP will be gradual. It is anticipated that 2014 will be better than 2013 “on a year-over-year basis.” (Sharf) however, on a “quarter-over-quarter” basis, 2014 will not surpass 2013. The momentum with which the U.S. entered the fourth quarter is expected to continue into 2014. The economy will grow at a steady but sustainable rate.
What will be the primary cause that will cause your prediction in the previous question to occur? Why?
The U.S economy will grow slowly in 2014. This is as a result of the government’s attempt to reduce government expenditure. Since government expenditure is a component of the GDP, it is likely to reduce the GDP (Brezina, 47). Unemployment will also be associated with the slow growth in the GDP for most people will prefer to spend less. Personal consumptions contribute to 70 percent of America’s GDP. It is also forecasted that the Federal Reserve may decide to reduce its quantitative easing program. This will potentially result in expensive loans and mortgages due to increased interest rates (Brezina, 47). Nevertheless, this will only happen if the inflation rate surpasses that projected by the Federal Reserve. Fortunately, the increase in exports to new markets has rally boosted the GDP growth. The recovery of the housing market is also an indication that the GDP will be increased. The rise in home prices has attracted more investors in the housing industry. These are some of the indications that 2014 is likely to experience a great growth as compared to 2013.
Brezina, Corona. Understanding the Gross Domestic Product and the Gross National Product New York, NY: Rosen Pub., 2012
Bureau of Economic Analysis (BEA) National Income and Product Accounts Gross Domestic Product, 4th quarter and annual 2013 (advance estimate. January 2014 Web February 11, 2014 https://www.bea.gov
Sharf, Samantha. U.S. GDP Grew 3.2% In The Fourth Quarter 2013. January 30, 2014 Web February 11, 2014 http://www.forbes.com
Global Economy and Trade
Globalization is an important factor that drives the economic activities in the world today. Globalization has enabled goods and services to easily move from one part of the world to the next through an increasingly complex system. In most cases, the interaction involves various people, companies, as well as governments through activities like trade, investments, and the exchange of technology. Large corporations currently find it easier to set their operations in various countries as dictated by the various economic factors than before (Aggarwal and Evenett 552). It is important to note that adopting the global economy and trade poses numerous impacts to the local persons and business.
The global economy is a complex system that connects people and the various parts of the world through the movement of goods, services, and information technology. Therefore, it eases the movement of goods and services to the various parts of the world, which has increased in the past decades. Consequently, various countries have registered an increase in exports and imports that have boosted their economic balance and trade. At present, multinationals and individual medium companies can easily set their operations in different parts of the world with limited trade barriers (Sturgeon and Gary 3-7). Undoubtedly, the interconnection to form the global economy has led to positive trade results. Globalization started thousands of years ago and evolved to its current state of global economy. During the Middle Ages, Silk Road was used in connecting China, Europe, and Central Asia. However, the increase in trade across borders started in the early 1950s and by 2000s, the amount of foreign investment had significantly increased. After the Second World War, many governments expanded foreign investments and trade by adopting free-market policies that encouraged trade between countries.
According to Aaronson, the expansion of the global economy is a result of various factors (6). For instance, innovations in information technology have made it possible for accessing of information on the best practices for trade. Development in the transport industry is another factor that has contributed to the expansion of the global economy. It has led to a decreased cost of transporting goods and services to the various market destinations. Additionally, the formation of regional blocs has worked towards creating centers of operations with specific laws and regulations. Some regional blocs like the European Union (EU) and the North American Free Trade Association (NAFTA) have played major roles in encouraging export and import activities as regulated by trade laws (Utting-chamorro 590-591).
The global economy depends on available policies and related legislations in place. Before the current trend of globalization, countries had legislations that did not allow free trade with other countries. Today, countries around the world put in place policies that allow for the domestic and international movement and consumption of goods and services. Free-market economic systems have made it possible for the governments encourage their growth potential, as well as attract international organizations to operate in their economies (Utting-chamorro 590-591). In most cases, countries with favorable trade policies attract multinationals who establish operational bases to the benefit of the host countries. Governments also negotiate to allow exports and imports into their countries, providing more opportunities for business. With such arrangements, goods can easily be moved from one country to another to increase consumption.
Technological advancement has been the most important factor in driving globalization. In the global economy, technology provides a tool that producers, investors, and marketers use to identify markets for operation. The market analysis provides information that investors use to map out economical situations for different regional markets (Mohan 6). Proponents of globalization hold the opinion that a global economy is the only solution of making the world a better place because of the employment opportunities and eradication of poverty that it offers, especially in the developing countries. Additionally, the global economy is an indication of the free trade between different countries, which leads to the economic growth. This means that a country benefits from opportunities provided by the trading partner. New jobs are created from the new companies that establish their operations in the new markets (Bowman 12).
A free-market economy encourages competition amongst the companies in the market, leading to the reduction of consumer prices. Competition is an element of the global economy that helps in lowering of prices goods and services. In most cases, this strategy works as customers enjoy lowered prices. However, opponents of global economy note that most countries end up manipulating their currencies to enjoy the differences in price. Another advantage of globalization comes from the fact that poor countries benefit from the foreign technologies and capital brought by the multinationals. In such circumstances, the poor country has an excellent chance for economic growth, as well as gaining democratic virtues. Most of the countries with policies that allow free trade also gain from the expansion of the democracy.
Consumers easily access goods and services from other parts of the world because of the global economy. Such a system is an advantage to local consumers and businesses that enjoy goods with minimal effort, adding value to money and consumption. In addition, the expansion of world economy has led to the emergence of a new global power system whereby politics ensure that decisions are made with respect to their economic significance. With time, all political decisions are made for the benefit of the global population. Moreover, globalization has encouraged the movement of people and information to and from different parts of the world. Cultural interaction has made it possible for coexistence with people who were considered as aliens; people are becoming more tolerant of others because of the shared business and cultural practices (Utting-chamorro 590-591).
At present, people travel faster through the development of better transport networks across different countries. Also, the internet has made it easy passing information from one part of the globe to another. These, among other gains, result from the quest to achieve a global economy in which people and information can travel faster. Developing countries have continued to benefit from sharing of technology with developed countries, spurring growth. When new multinationals establish their operations in developing markets, they train and employ local workers to help fight poverty and improve their standard of life. Globalization expands from the various trade agreements by various blocs. Therefore, those countries that are interested in the global market must agree to sign the agreements. Consequently, many countries have adopted free-market policies to attract investments and enable economic growth.
The major argument against the global economy comes from the fact that some countries are poor while others are rich which makes it hard for all countries to benefit equally. Additionally, with a global market, investors and business owners enjoy all the benefit at the expense of the workers. In most cases, large companies establish their operations in the developing or emerging economies to enjoy benefits such as cheap labor and raw materials. Such companies take advantage of the poor labor laws in these countries to reduce their production cost through, for instance, offering poor pay to the workers. The developed countries also face a challenge when multinationals relocate their manufacturing plants to the low-income countries to take advantage of the low wages. For instance, the U.S. has lost millions of jobs to China as most companies base their operations in the latter country today. Furthermore, most of the workers in the developed countries face pay-cut as the business owners threaten with relocation to other countries if they do not conform to their demands. This means that the global economy would make the middle-class threatened and insecure. Multinationals pose various problems to the individual countries regarding their immense influence. These large organizations may have the ability to manipulate and avoid paying taxes, to the disadvantage of the local economies (Jaffee 101). Additionally, some of these multinationals have also been accused of funding operations that affect the environment and ecology. These are a part of the worker exploitation and poor working conditions in the foreign countries of operation. The growing fear of globalization comes from the increasing influence when it comes to the local political decisions. For this reason, opponents argue that globalization will soon lead to the large corporations ruling the world.
From the arguments above, it is clear that the global economy plays an important role in ensuring economic growth in the world. The benefits are immense, making it an important concept of creating wealth and eradicating poverty. However, arguments against are also valid, which suggests that the adoption of certain measures to safeguard against exploitation and negative influence is necessary. Globalization is an important economic concept that exists for the benefit of everyone. Moreover, to counter the negative indicators, there is a need for a firm’s leadership to confront trading partners who manipulate their currencies. Imports from these countries should have some special tax to discourage unfair practices. Similarly, Trade Agreements are good; however, they do not favor other markets as they work to make developed countries jobless while rewarding others. Countries should also work to enforce trade rules to have a fair group of operation. For instance, the U.S. accuses China of manipulating their currency, subsidizing those companies owned by the state, selling counterfeit products and imposing trade barriers without notice (Jaffee 100). When these factors are enforced, global trade remains to be a game-changer with regard to the economic growth.
Global Fair Trade
Trade is the major driver towards globalization. From the historical times, merchants traveled from China and Europe to Southeast Asia to obtain agricultural products. Over time, migration started with the establishment of the trade routes that made it possible for more merchants to move safely. Therefore, trade is an important part of economic activities as it spurs growth. For instance, there would be no global economy without the trading activities of the products within the market. Trading involves the exchange of goods and services within the economy, with all players benefiting from the process. Trade is the only method that ensures the movement of goods and services to different parts of the world in order to satisfy a certain demand. The current trend in the global economy entails the establishment of the free-trade concept that allows the market forces to control the process. The free-market economy has worked to the disadvantage of the local producers by reducing their ability to achieve economic growth.
According to Buthe, the free-market global economy has failed in the protection of the local exporters (9-11). The social and economic activities in the current system lead to the exploitation of some people while enriching others within the trading chain. Consequently, most of the people at the bottom of the production chain do not have product value. As a result, people in the underdeveloped and developing countries face numerous challenges such as poor housing, lack of electricity, poor healthcare, among other challenges. Globalization leads to the loss of land and inability to keep pace with the growing national debts.
With the continued problem in developing countries, competition has increased in an attempt to attract more foreign investors into the local economies. Consequently, some of these countries lower their minimum wages to appeal to the foreign investors. The locals who remain landless and jobless have no option but to work in such companies without proper remuneration. Most of such products are exported to other parts of the world for trade. It, therefore, follows that while trade is essential, it does not guarantee fairness in terms of the input in the process. Thus, there is a need for fair trade to ensure that all parties benefit in the exchange of goods and services. Currently, the corporate control and global policies in place do not guarantee wages and remuneration that can help the workers meet their basic needs or achieve economic growth. The inequality has existed for a long time to the disadvantage of the workers. Fair trade is possible if certain factors are put in place to bring onboard all the relevant stakeholders. Sustainability is an important factor that makes fair trade necessary. Trade should ensure that the producer earns the right amount for the product to sustain the social and economic activities in place (Tojo 13).
Fair trade is achievable because it seeks to pay farmers and producers extra in order to cater for other social and economic development within the society. Most of the traders who deserve fair trade are small farmers who may not have much money to diversify their operations. Therefore, diversification of the resources could help the farmers improve their income due to price fluctuations. Making trading fair demands that laws and policies are put in place to safeguard the rights of the farmers and small traders who export their products. When laws are in place, such traders have a voice and right to demand fair prices that enable them to make social and economic progress. Small-scale producers and workers need to have a say on matters that affect their welfare. Therefore, they can only achieve fair trade when they are empowered to negotiate, control, and hold accountable some of the institutions with the mandate of representation. As a result, one of the strategies that can be implemented towards achieving fair trade lies in the formation of independent organizations for the small-scale producers with a common goal. Such organizations would help when it comes to the negotiations with employers or starting other investment projects (Aggarwal and Evenett 550).
As noted above, sustainability is an important factor that determines the fairness in trade. Such sustainability should be measured in the livelihood of people. Therefore, fairness relies on the ability of the economic activities in place to withstand economic shocks(Bowman 2). For instance, many of the small-scale producers face numerous challenges concerning the economic fluctuations. Additionally, people should be able to register improving income, better lifestyle, and a healthier environment without depleting economic resources. Small-scale farmers and producers can achieve the above in a trading system that encourages fairness. A fairtrade approach should include creating elaborate supply chain models, customer awareness, and strengthening civil societies. Achieving fair trade requires that small producers come together in organizations that are independent with the ability to provide various forms of support to the farmers. Support should include credit, training, and negotiating power with the buyers. Besides, workers should join strong trade unions in order to have a voice when it comes to negotiating issues that affect their welfare. Workers and other small traders should be aware of the chain of command that exists in the local as well as international levels. Such organizations help the participants have a say in the making of various trade policies and legislations.
Having a clear business chain helps the traders or small farmers achieve prosperity through confidence. Such confidence ensures that all members are respected while the value of the goods and services is achieved (Bowman 12). Adequate investment can only take place where there is confidence. Consumer behaviors also determine the survival of the local workers or producers. The locals within a country must be aware of some of the unfair trade practices in place to influence their choices. Such a move can help the consumers make decisions towards consuming the local products. Such a move can help spur growth, especially in developing countries. Lastly, civil society action still plays an important role in helping push for the fair trade practices at the local, regional, and international levels. Such actions groups excel at mobilizing members at the grassroots to participate in advocating for the favorable trade policies.
It is apparent that trade is an essential activity that influences economic growth. Globalization has been realized in the quest for trade between different countries. The global economy is important because it avails goods and services to the locals. It has also led to the integration and ease of tension between countries. Most importantly, economic growth in developing countries has been possible due to globalization. Nevertheless, there is a need to ensure proper leadership and strict adherence to trade laws and policies to avoid unfair trade policies that affect the local producers or workers. Globalization remains an important part of the world economy. Since various challenges face the present situation, governments should ensure due diligence concerning the formulation and implementation of necessary laws. Though multinationals are blamed for improper trade practices, this paper finds that the measures taken by the local producers and workers remain important in advocating for proper trade practices. Fairness in world economic activities depends on various laws that make it difficult to manipulate people. Globalization remains a viable option in easily accessing various resources across the world. Besides, countries have also realized significant strides towards economic growth and self-sufficiency.
Aaronson, Susan. How China’s Employment Problems Became Trade Problems. Global
Economy Journal Manuscript, 1635.
Vinod, Aggarwal K., and Evenett, Simon. A Fragmenting Global Economy: A Weakened WTO,
Mega FTAs, and Murky Protectionism, Swiss Political Science Review, 19, 2013, 550-
Bowman, Sam. “Markets, poverty, and Fair Trade.” Adam Smith Institute, 11 March 2011.
Buthe, Tim. The politics of market competition: trade and antitrust in a global economy, Oxford
Handbook of the Politics of International Trade, 2014.
Jaffee, Daniel. “Weak Coffee: Certification and Co-Optation in the Fair Trade Movement.”
Social Problems. 59 (1), 2012, 94–116.
Mohan, Sushil. Fair Trade Without the Froth. Institute of Economic Affairs. Monographs,
Hobart Paper No. 170, 2010.
Sturgeon, Timothy and Gary Gereffi. Measuring success in the global economy: international
trade, industrial upgrading, and business function outsourcing in global value chains. Transnational Corporations, Vol. 18, No. 2 (August 2009).
Tojo, Yoshizumi. Trade and competition policy in a global economy: convergence or
Utting-chamorro, Karla. “Does fair trade make a difference? The case of small coffee producers
in Nicaragua,” Development
in Practice. 15, 2012, pp. 584–599.
Aggarwal K. Vinod and Simon Evenett, A Fragmenting Global Economy: A Weakened WTO, Mega FTAs, and Murky Protectionism (Swiss Political Science Review, 19, 2013), pp. 551.
Karla Utting-chamorro. “Does fair trade make a difference? The case of small coffee producers in Nicaragua,” Development in Practice. 15, 2012, pp. 584.
Sushil Mohan, Fair Trade Without the Froth. Institute of Economic Affairs. Monographs (Hobart Paper No. 170, 2010), pp. 12-13.
BOOK REVIEW: ANDREW NIKIFORUK’S TAR SANDS
For decades, Canada has been a leading voice in the call for environmental conservation and protection. It has been on the forefront of pushing for a reduction in the amount of carbon dioxide emission globally. These efforts are aimed tackling the raging problem of global warming and climate change that is threatening the existence of plants, animals and humans alike. The country is a signatory and active participant in several environmental treatises and protocols such as the Paris Accord, Copenhagen Accord and the Kyoto Protocol. However, like many developed economies whose leaders have appended their signatures to these accords and treatises, the most important question has always been their commitment. It is this lack of commitment and propensity for environmental conservation double-speak that Canadian journalist, Andrew Nikiforuk, seeks to critically highlight in his award-winning exposure: Tar Sands: Dirty Oil and the Future of a Continent published in 2009.
In the critical exposure, Nikiforuk seamless weaves wit and passion to break down the true environmental, social, political and economic implications associated with the numerous open-pit mines that dots Fort McMurray, Alberta Canada. The huge machines constantly shifting earth, scarring and scouring land to find the precious bitumen symbolize America’s obsession with oil. The book lays bare America’s inability to wean itself off oil despite its half-hearted efforts and heart-felt efforts to push other nations such as China to wean itself off oil.
The book highlights how Canada has continuously soiled its hand with the bitumen-rich tar sands of Alberta. However, it also implicates the role of the United States in fostering environmental pollution in Canada and the greater American region. The U.S. imports up to 20 percent of its oil from its longtime trading partner and neighbor, Canada. Together with numerous multinational oil corporations who have operations in the Alberta, the country has played a critical role in creating a classical Deadwood of global reputation. Thanks to the dirty oil whose exploitation began in mid 20th century, the region is now a concoction of crime including religious extremism and drug dealing.
One of the most profound strengths of this book is its objective nature. Nikiforuk impassioned plea against the tar sands project is based on his personal connection with area having spent years living in Calgary, Alberta. His exposure draws from two important wells: personal experience and his excellent investigative skills. His criticism of the unregulated exploitation of Alberta’s tar sands for the oil-rich bitumen explores various aspects of the mega-projects in the area. However, the despite the angle he tackles the oil scourge currently blighting Alberta’s once beautiful ecosystem, Nikiforuk does not betray his strong conviction that the project and the oil-lifestyle addition it has induced in the region is unsustainable. He notes that multinationals are currently operating in the region unchecked and with the blessing of petropoliticians with a unidirectional perspective: economic income.
He argues that the tar sand project in his province is a colossal project with mega consequences. While it has enabled Canada to surpass the traditional oil producing and exporting nations when it comes to exporting oil to the U.S., the mega project is a financial sink and a mega greenhouse gases exhaust whose size keeps bludgeoning. The dirty oil project is the largest in the world in all key metrics for quantifying a project. Once compared to the iconic and historic Pyramids of Egypt by the immediate former Canadian prime minister, Stephen Harper, the project is the largest globally in terms of capital requirements. The oil magnates and multinationals have pumped in a staggering $200 billion to fuel the production of oil that fuel the American economy, and greenhouse gases emission and environmental degradation in equal measure. There has never been such a mega construction or energy project in the world.
Nikiforuk holds that Albertan and Canadian are culpable in encouraging the wastage of ecosystem in Alberta and far beyond. Christening them as petropoliticians, he laments the lax government laws instituted by politicians who view the environment as nothing more than just an economic cash cow. Encouraged by the Albertan government, multinationals have gleefully pitched their tents in Albert and are milking the cow dry. Even with the Albertans and ecosystem bleeding, the petropoliticians have continued with their relentless quest to add one more drop of dirty oil into barrels of the multinationals by okaying even dozens of new open-pit mining projects. With each new project approved, the petropoliticians are permitting these multinationals to continue sculpturing and scarring Albertan ecosystem beyond recognition.
However, he notes that the laxity problem is not confined to the Albertan government. The federal and provincial governments are in bed together and cozying up to the United States with blind obedience to the North American Free Trade Agreement (NAFTA). Despite boasting of vast untapped reserves of the much-coveted bitumen, Canada is ill-prepared in the eventuality of a gas shortage. This is because the country seems to be in a hurry to sell off its oil resources to fuel its current needs without considering setting up a strategic fuel reserve program that can come in handy during contingencies. It is a sorry state of policy naivety for a country claiming to be one of the industrialized nations of the world and seeking to command respect and administration globally.
The unsightly glory of the hundreds of pounds of solid and gaseous waste that have been the symbol of Alberta oil industry have thrived due to lack of cohesive environmental and energy policies at both the federal and provincial level. Alberta has gladly followed in the footsteps of the federal and opted to fly blindly when it comes to environmental and energy laws and the bid corporations are none the wiser. The two levels of government have adopted a strategy of short-sightedness, whether intentionally or not, in a game whose outcome only benefits the enterprise. Canada has gladly joined the exclusive club of petrostates and in the process sacrificed the once majestic ecosystem of northern Alberta on the altar of economic greed.
According to Nikiforuk, the only element of the tar sand project that compares to historical landmarks such as the Great Wall of China, which it was compared with, is the height and the length of the wall toxic waste from the open-pits. The impact the project has had on the ecosystems towers above these historical landmarks. In addition to the enormous amounts of toxic waste generated from processing the sludge and mixing it with sand to produce bitumen, several communities have suffered numerous health problems as a result of water pollution. Another egregious aspect of the blossoming industry is the amount of greenhouse gases that find themselves into the atmosphere as a result of the project. In addition to releasing these harmful gases, Nikiforuk points out that huge tracks of forested land are cleared to make way for enormous open pits and heavy machinery. Woe unto animals such as the caribous and birds which call the forests their homes. They are displaced with abandon care as the economic value of bitumen far much outweighs theirs. They have become deathtraps for many birds including ducks due to their toxic nature. Water bodies are drained too. Alarmingly, the water bodies and trees are important carbon dioxide sinks that could have absorbed the carbon dioxide produced in the mines.
The doom and gloom yet informative exposure highlights how such ponds of toxic wastes reeking with chemicals such as carcinogens potentially cause acid rains when their contents evaporate. Disturbingly, evaporation of these wastes is not uncommon as they only freeze under extremely cold temperatures. When they leak into other water bodies, as is commonly the case, water supplies for downstream communities are poisoned. However, such communities rarely complain for their voices have been muffled by dollarized incentives as the cost of their own health.
The waters of Athabasca River are increasingly becoming under threat and will succumb to whims of the enterprise if they continue laying waste to Albertan ecosystem. The threat to the river is twofold: pollution and overuse. The space-visible ponds that run along the river gradually leak their toxic wastes into the river posing a greater danger to its biodiversity. Using statistical data, Andrew Nikiforuk shows that processing of tons of pounds of the sludge to extract market-grade bitumen requires thousands of gallons of fresh water. This water is radily available from the river. However, with heighten mining activities due to increased traffic of oil and gas multinationals into the area, thousands more of the river water will be used per day without necessarily replenishing it.
Fort McMurray has transformed into a crime capital where all manner of criminals thrive. From Muslim extremists to drug peddlers, the transitory workers of the town offer the right environment for crime to thrive as they do not invest the area socially and economically. However, the transient nature of the labor market has not stopped the real estate properties industry in the area to soar. Individuals looking to make a quick kill in the mines can pay high rental charges as their stay is short-lived. Because they give back nothing to the community while raising the living standards in the town, squalor lifestyles have become commonplace. Fort McMurray, which started out as a small outpost with a handful of people, today is home to northern Canada’s largest population of people who lives on the streets. The atmosphere in the town is acrid due to pollution. Air pollution in Fort McMurray currently rivals that of many Chinese cities.
Through the book, Nikiforuk shows his first-rate research skills by not confining himself to criticism. While lamenting Canadian federal government’s complacency, duplicity and apparent pride in the hideous project, he offers hope with a practical recovery program at helping Canada from dealing with decades of oil addiction. The twelve-step recovery program is aimed at ensuring that the country gains sanity by arresting and toning down the effects of a disaster. His practical guide is informed by the social, economic and political effects of the tar sands project in Alberta. As evidenced by corruption and lax environmental and energy policies, Nikiforuk holds that Canada has fallen victim to the corrosive effect of oil on democracy. According to Nikiforuk, the first step to recovery from the dangerous and debilitating oil addition is accepting that the era of low-priced oil has come to a screeching end. Therefore, the country needs to scale down the capacity of the tar sands project with the view of weaning off itself from oil dependency. Canada needs to use the project as a springboard to better and sustainable energy alternatives.
One of the strengths of Andrew Nikiforuk’s exposure is its engaging manner. His presentation is very detailed and uses statistical data and information available to the general public to justify his opinions. He has also mastered the art of drawing comparisons by laying bare two contrasting yet disturbing thoughts. While pointing out the several attempts to assassinate his character and amount of dollars the Canadian spends on personnel employed to convince Americans and Canadians on the green benefits of the tar sands projects, Nikiforuk taps into an emotional well. His appendix of figures on some of the figures the Canadian government does not reveal to the general public during such public relations initiatives is thought provoking. As an indictment against the classic petrostate of Alberta and the petropolitics of Canada, this book comes complete with facts to back up its claims. His portfolio of evidence ranges from journal articles to government documents, newspaper clippings and petitions.
Nikiforuk’s choice and content of chapters is very interesting. The content of each chapter does not betray the poignancy of their titles. There is no second guessing of the criticisms contained in each chapter as the titles give readers an opportunity to create mental pictures of the content. But most interestingly, each chapter paints a specific picture of the negative side effects of the colossal project. For example, the chapter on the ills associated with ponds of toxic wastes is poignantly named as “The Ponds”. In this chapter, Nikiforuk leaves no stone unturned in his indictment. He backs his claims with more than just narratives; he shows data on the sizes and capacities of the huge ponds and their connection to water pollution in Athabasca River and other surrounding wetlands.
While Andrew Nikiforuk focused on Alberta and Canada by extension as dysfunctional petrostates where petropolitics have overrun common sense environmental and energy policing, the mosaic portrait painted throughout the book can apply to any nation. It highlights the fallacies associated with petropolitics where the enterprise calls the shorts. With scintillating evidences, Nikiforuk wades through an emotive and divisive issue while also trying to remain as objective as possible. From rare cancer whose discovery was followed up embarrassing government cover up to cancerous leaking ponds, he lays his research bare for all to marvel at the inadequacies of the federal and Albertan Province governments’ when it comes to critical policy formulation. Tar Sands shows the deep rooted lack of commitment of a government that is keen on signing international treatises on environmental protection and conservation but lacks the spine to put its house in order. But most critically, it shows the dangers of a petrostate at the beck and call of big businesses. Such a state is marked by lack of political accountability and secrecy. The political class is beholden to business communities who rarely care about the local communities. Therefore, they will continue to exploit the local resources unabated at the detriment of the locals and the ecosystem.
In the end, the once serene towns and ecosystems are turned upside down. The free flow of cash and a transient labor markets means that despite the rising cost of living in towns such as Fort McMurray, the locals have very little to be proud off. Once the big businesses move in, it is very easy to find yourself on the streets. Since such environments are mired in corruption and all manner of crimes, residents have very little wriggle room to find justice. Or if you dare ask the tough questions, threats are abound as seen in the case of Andrew Nikiforuk when a smear campaign was hatched to tarnish his name and reputation.
Nikiforuk’s exposure is a wakeup call to all Canadians. It is a call to action to the country’s political class and citizens to begin the process of weaning itself off the murky and addictive oil if the country is to have any hopes of minimizing the outcomes of an oil-dependency disaster. Despite its Canadian perspective, Nikiforuk aims at helping other communities suffering from the insanity of oil addiction and in the process are harming their environments. The facts presented are damning and thought provoking. The statistics used by Nikiforuk to justify his claims are mind-numbing. Paraded in a scintillating manner, these facts and figures form the foundation of any effective exposure.
Alberta Energy. “Alberta Energy: Facts and Statistics”. Alberta Energy. http://www.energy.alberta.ca/oilsands/791.asp#Environment
Nikiforuk, Andrew. Tar Sands: Dirty Oil and the Future of a Continent (2nd ed.). Greystone
Books and David Suzuki Foundation, 2010.
 Andrew Nikiforuk. Tar Sands: Dirty Oil and the Future of a Continent (2nd ed.), Greystone Books and David Suzuki Foundation, 2010.
 Alberta Energy. “Alberta Energy: Facts and Statistics”. Alberta Energy. http://www.energy.alberta.ca/oilsands/791.asp#Environment
 Andrew Nikiforuk. Tar Sands: Dirty Oil and the Future of a Continent (2nd ed.), Greystone Books and David Suzuki Foundation, 2010.
Response to Asset Pricing
What, if anything, should be done about high asset prices?
Rising asset prices
create a bull market. The high prices also create a bubble form of effect
meaning the economy remains very fragile. Bubbles are known to burst at the
slightest of unhealthy shocks. An economy with high asset prices could end up
tumbling upon ‘contact’ with unfriendly market aspects as happened during the
mid-2000s with the tech bubble and the late 1990s with the housing bubble (Mir
n.p). The million dollar question, however, remains “What, if anything,
should be done about high asset prices?” the most plausible answer to this
question would be raising interest rates. High-interest rates would lead to
asset prices falling. This result is achieved through the following two ways.
Firstly, rising interest rates make the opportunity cost of the ‘risk-free’
rate more attractive. This translates to high earnings from both earnings and
dividends yields causing stock prices to decline. Secondly, rising interest
rates alter the cost of the capital structure of firms (Kennon n.p). Per the
Gordon model, interest rates have an inverse relationship with asset prices
because of the affect the present value of the stock prices. Is it a problem to
be addressed by Central Bank, regulators (via additional capital), or should we
just let “intelligent investors” deal with the issue?
argument highlighted above point to raising interest rates as the corrective
measure to the rising stock prices. This can achieve through the government’s
monetary policy and foster behaviour of investments rather than saving among
the masses. The latter is structurally harder since it depends on people’s
preferences and conditions. However, the former is a viable option that can be
utilized. Interest rate manipulation to achieve a desired macroeconomic outcome
is a preserve of the Central Bank. Raising interest rates will work to
discourage savings as the returns on investments will exceed the opportunity
cost of saving (Tabarrok n.p). High-interest rates on
stock also discount future earnings. These stocks end up yielding high gains in
the future while their prices end up reducing.
Mir, Diego. “The bubble without any fizz.” The Economist, The Economist Newspaper, 7 Oct. 2017,
Kennon, Joshua. “Why Do Asset Prices Fall When Interest Rates Increase?” The Balance, 27 Aug.
Tabarrok, Alex . “Asset Prices and Interest Rates.” Marginal REVOLUTION, 27 Aug. 2013,