As an economics major I would like to comment on something that has been troubling my discipline. When there is a bubble in the financial market and the economy is doing well even the most successful business people and smartest economist will say that it is different this time. They think would think that we are in a state of permanent prosperity. Yet time and time again they are proven dead wrong as the stock market crashes then the economy as we saw in the 2008 recession. Its a cycle between euphoria, depression then euphoria again. No one learns a thing. Even our president at the time said we there was no chance of crash during the housing bubble of the early 2000s.
This cycle between steady growth, prosperity, recession, and recovery is known as the business cycle. The business cycle generally happens because while the economy is growing prices go up at at a faster pace or inflation is rising. Simultaneously, the wages of the middle class and low wage workers do not keep up with the increases in prices as a result they spend less. This leads to a slow down in the economy. Although, the Federal Reserve would typically raise the interest rate to tighten the supply of money in order to reign in inflation. This does not stop the problem and it leads to the interest rate of rate adjustable rate mortgages rising. It increases foreclosures as some families cannot afford it anymore while others simply spend less.
A recovery happens because the economy hits rock bottom, business start hiring again, and people start spending more. At this point the Federal Reserve may have stepped in by lowering interest rates by printing money to buy treasury bonds or by lowering the discount rate. The discount rate is the minimum interest rate set by the Federal Reserve for lending to other banks. The Federal Reserve is an institution that was created in 1913 to print money with the dual mandate of controlling inflation by printing money and/or lowering interest rates to raise it or raising interest rates to lower it. The federal reserve is owned by the large banks in this country. The bill to authorize the creation of the Federal Reserve was pushed through right before Christmas. If the Federal Reserve lowers the interest rate this causes a bubble in the stock market as bonds are less attractive. This causes a dilemma in policy decision making. Bonds have a return that is based on the interest rate. When an investor buys a bond they receive interest up until the bond matures then they receive the face value or the amount the investor paid for the bond.
There is a misconception that the Federal Reserve is supposed to help the economy. While the purpose of a stable currency and interest rate is to facilitate sound economic activity. These factors do not directly affect economic growth intrinsically as productive activity in the real economy does. This means that the Federal Reserve lowering interest rates does not lower the obligation of the government to act in the case of a recession. I am not a socialist or a liberal. I am a libertarian. If there is a recession the government could improve the economy by investing in infrastructure.
Prosperity is when there is record consumer spending and business investment. This happens when inflation is high and interest rates are typically high. People spend their money rather than save it when this happens.
Currently, people in the workforce view their income as being relatively permanent until they retire. People need to save during years in which they have plenty and know that there will be another recession in which they could get laid off. This would be like Joseph interpreting the Pharaoh of Egypt dream in the Christian Bible. The dream was that seven cows, fat and sleek came out of the Nile river and began to feed on the grass then seven thin and bony cows came out of the river. They came and stood by the other cows on the riverbank, and the thin cows eat up the fat cows. The king woke up. He fell asleep again and had another dream. Seven heads of grain, full and ripe, were growing on one stalk. Then seven other heads of grain sprouted, thin and scorched by desert wind, and the thin heads of grain eat up the full ones. The king woke up and realized that he had been dreaming. In the morning, he was worried, so he sent for all the wise men and magicians of Egypt. He told them his dreams, but no one could explain them to him. The wine steward told him that Joseph could interpret dreams, and Joseph was in prison at the time. The king sent for Joseph, and he told Joseph his dream. Joseph told him that both dreams mean the same thing, and God told him what he is going to do. The seven fat cows represent seven years of plenty and the thin cows represent seven years of famine. He recommended that the Pharaoh chose someone with wisdom and insight and put him in charge of the country. Also, he said to appoint other officials and take a fifth of the crops during the seven years of plenty. The food would be stored under guard in the cities, so that Egypt does not starve during the famine. The king made Joseph governor of Egypt. To summarize, Joseph successfully carried out his plan and Egypt did not starve during the famine.
This passage illustrates the importance of planning and saving for times of little. Also, it shows that wisdom and insight can go a long ways.
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