Economic stability is a perfect scenario for sustainable growth without inflation, deflation, recession or financial crises. Consumers and businesses best economic times during pronounced business cycles of economic stability. Unfortunately, economic stability is hard to maintain for long periods of time (years). Derailing economic stability internal and external (international) bad economic news, unfortunate world news events, changes in government policies (legislation) that hurt businesses, natural disasters, greed on Wall Street or combination of factors. Preferable consumers and businesses prefer this status quo of economic tranquility, indefinite period of time. 1 Historically government and Central Banks intervention policies absolutely necessary, rescuing an economy out of duress and onto the road of stability.
During times of economic stability consumers and businesses prosper: Savings rate increases, more money is spend, disposable income plentiful, wages likely increase, prices can climb gradually without the surge of inflationary concerns and demand for goods & services remain strong. In the United States measuring economic stability the Index of Consumer Sentiment (June of 2005 record 96.0.), Index of Consumer Expectations (85.0 record in June 2005) and Economic Conditions Index (113.2 in June 2005) expand during times of economic prosperity. 2
Economic stability is achievable by contributing factors. In June 2007, U.S. economic stability remained strong despite higher interest rates on credit purchases, offset by growing number of price discounts. 2 Economists would agree the role of the Central Bank (USA) maintaining price stability, promotes economic growth: “According to the President of the Federal Reserve Bank of New York William J. McDonough: Over the long run, price stability is the one sustainable contribution monetary policy can make to growth. This applies to all countries.” 6 Economic stability fosters a friendly environment for creative innovators and entrepreneurship’s, besides expansion of enterprises. 7 Contributing work of the International Monetary Fund (IMF) of 187 countries, strives to harness economic monetary cooperation and stability around the globe by providing necessary capital. 12 A country’s natural resources such as coal, natural gas, and petroleum provide economic prosperity as world demand increases. A strong economy fosters foreign investing and a strong currency valuation (Imports cost less compared to a currency that gets devalued), compared to less fortunate economic countries. Most important for economic stability: “Peace is a necessary precondition for trade, sustained economic growth, and prosperity.” 11
Facets derail economic stability includes higher taxes (3), over-expanding monetary policies (3), and inflation (higher energy prices 2). Deflation can lead to economic downturns (Prices for goods and services decline as demand falls, since consumers and business will not support paying current prices 4): Subsequently wages or income is less than during robust economic times. When wages and incomes fall paying – off debt obligation, including mortgages and business loans enormously become a concern. During deflation investments in the financial markets lead to a negative financial return, businesses risk decrease in profits as prices decline. The Federal Reserve has harder time combating deflation than inflation, requiring lowering interest rates to spur growth. And government tax cuts and increase in government spending may be necessary to pull an economy out of deflation. 5 Household and business debt devastate economic stability, borrowers unable to pay their creditors or fail to make timely payments, during a recession, depression or unpredictable catastrophic events including earthquakes, natural disasters, and destructive climatic weather conditions.
In the movie ‘Wall Street’ “Greed, for a lack of better is word, is good” 8 In reality, greed especially on Wall Street contributed to derailing historically United States economic prosperity. Greed on Wall Street lead to economic crisis in the United States, 1929 (lead to the Great Depression) and near collapse of the U.S. economy in 2008 (Near financial collapse of the United States economy) by making risky investments. Intervention by new financial and consumer protection regulations, such as signed into law by President Obama and financial assistance by the Federal Reserve, necessary returning economic stability. 10
Financial intervention by Governments and Central Banks around the world sometimes essential, during times of economic turmoil for establishing or returning economic stability for consumers, businesses, and municipalities. Recently the U.S. Federal Reserve pledged to maintain benchmark rate close to zero for an ‘extended period” by purchasing outstanding debt securities, hoping lower interests encourage borrowing, and fostering economic purchases of hard & soft assets. Unfortunately, the Federal Reserve is fighting a battle made harder by many consumers and business tremendously burden with current debt obligation, adding to it only worsens their financial crisis, assuming they have the credit worth to borrow more money. 13
Rescuing the United States economy out of economic distress does require economic growth legislation friendly to businesses & consumers, and central bank’s challenge keeping interest rates low & provide easy liquidity. Achieving economic stability should encompass legislation for pay-off the debt obligations held by Fannie Mae & Freddie Mac – largest holder of debt securities in the in the United States. Alleviating the debt obligations for mortgages directly stimulates the economy, burdening the grip of financial debt held by households in the United States. Business leader entrepreneurs, such as Warren Buffet suggestion for economic recovery (Warren Buffet said: “We need to get money in people’s pockets. The first stimulus plan did not do that very well.” – – http://www.manufacturing.net/News-Buffett-Economic-Recovery-Uncertain-012110.aspx) should be considered by legislatures.
1.) Economic stability – http://en.wikipedia.org/wiki/Economic_stability
2.) Inflation Top Concern of Consumers – http://www.emaxhealth.com/49/6519.html
3.) Does consumer confidence raise economic activity? – http://www.brookesnews.com/051710consumers.html
4.) Deflation – http://en.wikipedia.org/wiki/Deflation
5.) Deflation (economics) – Definition – http://www.wordiq.com/definition/Deflation_(economics)
6.) The dangerous myth of price stability – http://www.brookesnews.com/060901pricestability.html
7.) Secretary Geithner Introduces Financial Stability Plan – http://www.ustreas.gov/press/releases/tg18.htm
8.) Greed, for a lack of a better word, is good – http://www.script-o-rama.com/blog/2004/06/greed-for-lack-of-better-word-is-good.html
9). Wall Street Crash of 1929 – http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929
10.) Obama Signs Financial overhaul Bill Into Law – http://cbs11tv.com/national/obama.financial.overhaul.2.1816929.html
11.) Economic Stability, Economic Cooperation, and Peace – the Role of the IMF – http://www.imf.org/external/np/speeches/2009/102309.htm
12.). About the IMF – http://www.imf.org/external/about.htm
13.) More Debt to Fight the Correction and Other Absurdities – http://www.dailyreckoning.com.au/more-debt-to-fight-the-correction-and-other-absurdities/2010/08/12/