Economic Issue Prevailing in the United States Essay

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economic issue prevailing in the United States is that of rapid fiscal and monetary stimulus and its inflation implications. Currently, due in part to prevailing market conditions, governments have embarked on a path to massive fiscal ease. Governments, including the United States, Japan, Europe, and China have all engaged in massive stimulus operations. These operations are designed to help build consumer confidence while also enhancing the overall appeal of risky asset classes. For instance, the United States has kept interest rates near 0% for the past two years with an expectation of low interest rates until 2015. This low interest rate environment makes alternative assets such as stock, bonds, and real estate more attractive on a relative basis. High dividend paying stocks for instance, offer a yield of roughly 3% which is nearly double that of the 10-year treasury. These massive stimulus efforts however, have yet to enhance economic activity as previously anticipated. As such, the massive asset purchases created by the government may result in rapid inflation as more currency is circulating in their respective economies. As governments continue to print money, the relative value of this money will continue to decline, ultimately harming the consumers it was intended to help. Furthermore, this low interest rate environment is harming those who depend on their savings to generate income. With interest rates at record lows, and savings accounts generating very little income, inflation will erode the purchasing power of these savings.

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As such, it is my contention that the government should reframe from massive amounts of stimulus as the threat to consumers is very large in regards to inflation (Robert, 1988).

Inflation also pertains to currency risk relative to foreign competitors. Higher inflation in one country will increase the value of a foreign competitor's currency on a relative basis. China for instance intentionally keeps their currency low in order to increase its value relative to the dollar. This makes American imports more expensive and Chinese exports very inexpensive. With impending inflation, American goods are becoming cheaper on a currency basis. This makes exports more competitive while imports are more expensive. However, in regards to consumers, the purchasing power of their dollars are decreasing as rapid inflation erodes the amount of goods they can consumer (Tobin, 1969). American consumers must now contend with low interest rates that discourage inflation. Inflation increases the costs of commodity like products such as food, energy and metals. As such prices are increasing as purchasing power is decreasing, thus creating more economic uncertainty. Businesses must now cut costs, increase prices, or a combination of the two in order to effectively combat inflation. Cost cuts will most likely include layoffs thus….....

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