The Changing Economy

The Changing Economy

With the continued growth within the U.S. economy, it seems only fair to review what is causing these changes, and how it has and will continue to affect us. When the economy grows the fed usually takes steps to slow its growth thru the use of fiscal and monetary policy. The fed has been slowly raising interest rates over the past year or so. This of course has not totally slowed the housing bubble everyone fears but you will notice thinks are slowing down substantially. Cities as New York have seen property values on housing peak and even fallen as demand has slowed.

The question is what has been the driving force for this bubble? One is the poor performance of the stock market. Two is the low rate of return for bonds and bank certificates of deposit. Three is the low value of the dollar in contrast to other world currencies. Four, is the low rate of long-term interest rates that made purchasing homes cheaper than renting. All these causes have led to the increased demand for purchase of real assets as real estate, gold, silver etc. . . . Usually the trade balances from which currency speculators price exchange rates would affect the economy, interest rates, and affect us directly. However, much has changed in the economy over the past few years.

The world market is now a single global exchange. Developing countries has found that it is in their best interest to support the large consumer based economies through purchase of their debt at moderate rates and increase their investment into these economies. The government debt ratio is rising so in reality the cost of money should rise. Nevertheless, many growing economies as China and India are finding that by subsidizing the economies as the U.S. with their newfound profits they are actually putting more bucks in their pockets. In addition, they realize their investment will continue to keep their local economy humming along. A true recession in consumer countries as the U.S. will only send the producing countries as China and India into a stall, limit growth, and send their economies into a recession.

In addition, the growth of large worldwide investment funds and hedge funds has expanded the availability of new dollars for investment into the United States capital markets. This will lead to a new up tick in stock prices, which has already begun, as well as greater availability of venture capital for smaller entrepreneurial companies. After the last dot com crash, the venture market had dried up.

Therefore, the basic premise from which we evaluate our economic future is now changing. Many economists will have to learn to factor these new realities into their market predictions. No wonder they have missed the mark in their projections for the economy and stock market.