PR-2

Participation Expectations.	Thomas Westover	4/17/2016 12:00 AM
In order to be eligible for the maximum score on this graded activity, the initial response to the discussion questions must be at least 200 words and be suitably supported (citations) with material from our our assigned textbook readings.  Subsequent comments to other students must "add value" to the discussion and should be approximately 100 words each in order to be considered "substantive" and therefore eligible for the maximum score

APA FORMATTING NOT NEEDED : Please keep the two post separate

Discussion Post #:1

The Current State of the Economy and Unemployment

Read the journal article, "Five Big Steps toward Faster Global Growth". Based on the information presented in the article, discuss the following:

· What are the challenges that the US economy will be faced with given a higher debt limit for future economic growth?

· Describe what would happen to GDP, the unemployment rate and the inflation rate if there is a decline in global growth.

Respond to at least two of your classmates’ posts.

Reference: Malpass, D. (2014, January 22). Five big steps toward faster global growth. Forbes. Retrieved from http://www.forbes.com/sites/currentevents/2014/01/22/five-big-steps-toward-faster-global-growth/

in the reading when responding to your classmates

Peer Response #1: CT

The debt limit, or "ceiling," sets the maximum amount of outstanding federal debt the U.S. government can incur by law. “A debt limit was instituted with the Second Liberty Bond Act of 1917, and Congress has raised the cap more than seventy times since 1962” (Masters, 2013). Hitting the ceiling would cripple the government’s ability to finance its operations, like providing national defense or funding entitlements such as Medicare or Social Security. According to the article, “Five Big steps toward global growth”, he believes that the most important growth is raising interest rates. “Even raising it a .5% would allow credit markets to work better” (Malpass, 2014). I feel by Increasing the rate would not only hike future borrowing costs of the federal government, but would also raise capital costs for struggling U.S. businesses and cash-strapped homebuyers.

If overall economic output is declining or merely holding steady, most companies will not be able to increase their profits, which is the primary driver of stock performance. However, too much GDP growth is also dangerous, as it will most likely come with an increase in inflation, which erodes stock market gains by making our money (and future corporate profits) less valuable. The growth of a nation also depends a large part on employment. If rate of inflation is high, unemployment rate is low. According to Maplass the euro zone’s average unemployment rate at 12.1%, with some countries’ rates as high as 25%. Economists call these programs “internal devaluations,” which translates to lower wages and pensions for the private sector (Malpas, 2014).

References

Malpass, D. (2014). Five Big steps toward faster global growth. Forbes.

Masters, J. (2013). U.S. Debt Celing: Costs and Consequences. Cuncil of Foreign relations.

Peer Response #2:CH

     In the article, “Five Big Steps Toward Faster Global Growth”, David Malpass indicated that the current debt limit is only written for the purpose of expanding government spending and debt (2014). This article continues to stipulate certain implementations that would reign in debt and provide future global growth. These activities include: letting interest rates rise, implement a new debt limit, Japan putting a ceiling on the Yen, downsizing governments, and liberalizing trade (Malpass, 2014). Although many of the points indicated in the article are valid, suggesting that raising the current debt ceiling for the purpose of expanding debt is politically fallacious. In order to understand the various aspects of rising debt, one must understand the potential danger for future economic growth and the underlying consequences for GDP, inflation, and unemployment. In the book This Time is Different (2009), authors Carmen Reinhart and Kenneth Rogoff conducted an empirical study of economic data that stretched over 66 countries and 800 years. In regards to rising public debt, their analysis shows that countries experiencing a public debt overhang have an average growth rate of 1.2 percent less than in periods with debt below 90 percent of GDP (Reinhart & Rogoff, 2009). The average public debt overhang lasts 23 years (Reinhart & Rogoff, 2009). This data shows the implications of rising debt limits and the major consequences which includes an extended period of reduced economic growth and stagflation. Stagflation refers to the economy being stagnant and having inflation at the same time (Amacher & Pate, 2012). Rising inflation would devalue currency and minimize the value of public debt, but hurt the middle class and elderly. It would ultimately increase the price of goods and services, meaning that those with limited or fixed incomes would have less purchasing power. In turn, unemployment would rise from prolonged growth reduction, due to less business investment. All of these various aspects work in a cohesive manner, which strengthens the concern of a rising debt limit. Which illustrates David Malpass’s concern that the stabilization activities have led to a distorted global economy, devastating growth rates, and a collapse in real median income (Malpass, 2014). Historically, this analysis proves to be a valid concern and one must balance the dangers of persistently raising debt with stimulating economic growth activities.

Public Debt Overhang- Sustained periods of gross country debt persisting above 90 percent of GDP for five or more years (Reinhart & Rogoff, 2009)

References

Amacher, R., Pate, J., (2012).  Principles of Macroeconomics.  San Diego, California: Bridgepoint Education, Inc.

Malpass, D. (2014, January 22).  Five big steps toward faster global growth . Forbes. Retrieved from http://www.forbes.com/sites/currentevents/2014/01/22/five-big-steps-toward-faster-global-growth/

Reinhart, C., Rogoff, K., (2009). This time is different: Eight centuries of financial folly. Princeton, NJ: Princeton University Press

Discussion Post # 2:

Who Benefits and Who Loses from Inflation?

Inflation is an important policy issue because it causes a redistribution of income and wealth, and discourages saving and investment.  Discuss how inflation affects borrowers and lenders, asset prices, and households on fixed incomes.  

Reference: Chapter 4, section 4.3: Gainers and Losers from Inflation. 

Peer Response #1:GT

When it comes to inflation it may affect many elements of the economy since it ultimately means that there would be an increase in prices; for which then, it may effects one's buying power. Usually when a lender gives borrower money, they would include an interest fee in order for the lender to compensate for lending this money to the borrower for a certain amount of time. The interest is to cover the funds in the event the lender(s) do not get paid back, which benefits the lender. However, when there is inflation from the previous interest, then the amount received for the goods and services may be decreased; therefore, affecting the lender. In essence, "if one can anticipate an inflation, then they would have demanded a higher interest rate to cover the loss of purchasing power; for which, unexpected inflation redistributes income from lenders to borrowers" (Amacher & Pate, 2012). As for asset prices such as my homes, they may see the value of the asset increase; in other words, equity on their land since an inflation may cause a rise in prices and value. For instance, my partner and I just recently purchased a home in August (2015) at $160,000 and so, if an inflation was to happen today (per se) and the value of my house rises to 170K; then, we benefit when an inflation occurs within the assets price since we purchased the home prior to the inflation at a lesser cost, which now we earn equity on the property—a positive effect. On the down side, my partner has not received a merit increases within his employment and so, if this continues during inflation; then his buying power will decrease. Essentially, "as more people shift to real assets [e.g. house] in response to expected inflation, the increase in demand for those assets will drive their prices up even faster than the inflation rate" (Amacher & Pate, 2012). Lastly, it is obvious that people on a fixed income may see an affect when inflation is noted since their buying power declines while the prices of products, goods, and services are going up. As previously discussed, my partner is on a fixed income since his job has not given him a salary increase for over a year. Therefore, when the prices were going up on gas, it took a big toll on us financially since he is a traveling nurse, which means that the gas inflation will affect him significantly. On top of that, his mileage reimbursement rate does not increase when gas price does; so basically, a double whammy when inflation hits the economy with no noted changes into a source of income. Ultimately, it is a gain for the government during inflation because "when the prices rises, households' dollar incomes also rises, even though the purchasing power of those incomes have gone unchanged; consequently, taxpayers find themselves in higher tax brackets, paying a higher percentage of their incomes in taxes" (Amacher & Pate, 2012), which then goes over to the government for spending while the people are spending less in products, goods, and services. These are the reasons as to why inflation may affect the economy in the spectrums of borrowers and lenders, asset prices, and households on fixed incomes. 

Reference

Amacher, R., Pate, J., (2012). Principles of Macroeconomics. San Diego, California: Bridgepoint Education, Inc.

Peer Response #2: AS

Inflation is an important policy issue because it causes a redistribution of income and wealth, and discourages saving and investment.  Discuss how inflation affects borrowers and lenders, asset prices, and households on fixed incomes.   Inflation.  No one wants to hear that dreaded word!  A general rise in prices across America for good and services puts a great deal of strain on the American family.  Often times it is easier to deal with the setbacks of inflation if they are expected vs. unexpected.  Lenders and borrowers can better prepare for the risk involved and plan accordingly.  Other things such a life insurance policies are negatively affected where as those who own land and jewelry see a increase in value, hence demand increases.  Inflation hedges are things people buy in preparation for inflation, to gain a profit once inflation occurs.  The most common of these is gold (Amacher).  The government often comes out ahead during inflation (go figure!) due to tax revenues rising faster than inflation.  Meanwhile, tax payers are thrown into the next tax bracket, making any extra income earned not really "income" they will ever get to see and use.  Those on a fixed income find inflation especially difficult.  They are not able to purchase the goods and services they require due to rising prices and often struggle because of this.  One may beg the question, "why not strive to make inflation zero?"  The short answer to this is inflation often times go hand in hand with rapid economic growth which is important in many ways.  Overall, inflation is good for the economy and the government but often not for average middle and lower class families.      

Two Separate Discussion Post

Must Complete both and use the classroom text as well