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Dissertation
Words: 22 021
23/05/2014
Jérémy DELSOL
Supervisor: Enda Murphy
Student Number: 10022061
Title:
“How sustainable is the U.S. economic
recovery?”
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Contents
Declaration …………………………………………………………………………………. 5
Acknowledge ………………………………………………………………………………. 6
Abstract ……………………………………………………………………………………… 7
List of figures ……………………………………………………………………………….. 8
Chapiter 1: INTRODUCTION
……………………………………………………………. 9
1. Crises of the early twenty-first century
……………………………………………………….
9
2. Background of the Issues………………………………………………………………………..
10
3. Research aim ……………………………………………………………………………………….
10
4. Research objectives ………………………………………………………………………………
11
5. Approach to the dissertation
…………………………………………………………………..
11
6. Suitability of the researcher and interest in the subject ……………………………….
11
7. Scope and limitations of the research
……………………………………………………….
12
7.1 Scope ………………………………………………………………………………………………….. 12
7.2 Limitation ……………………………………………………………………………………………. 12
8. Organization of the dissertation ………………………………………………………………
13
Chapiter 2: LITERATURE REVIEW …………………………………………………… 15
1. Keynesian versus Hayek …………………………………………………………………………
15
1.1 History ………………………………………………………………………………………………… 15
1.2 Theories definition ……………………………………………………………………………….. 15
1.3 Recommendations of respective theories ……………………………………………….. 16
1.3.1 Keynes recommendations …………………………………………………………….. 16
1.3.2 Hayek recommendations
………………………………………………………………. 17
2. Debate on U.S economy health ……………………………………………………………….
18
2.1 Following the Keynesian approach …………………………………………………………. 18
2.2 Following the consequences
………………………………………………………………….. 20
2.3 Forecast
………………………………………………………………………………………………. 25
2.4 Following the Free market approach
………………………………………………………. 26
2.4.1 Flashback on the free market reign …………………………………………………. 26
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2.4.2 Current free market opposition ………………………………………………………. 27
2.4.3 Reasons to be cautious
…………………………………………………………………… 30
2.4.4 Japanese example: ………………………………………………………………………… 31
2.5 Following the Facts: ……………………………………………………………………………… 32
Chapiter 3: RESEARCH METHODOLOGY AND RESEARCH METHODS
……… 34
1. Research question
…………………………………………………………………………………
34
2. Research philosophies
……………………………………………………………………………
35
2.1 Research paradigms ……………………………………………………………………………… 36
2.1.1 Positivism
……………………………………………………………………………………… 36
2.1.2 Realism ………………………………………………………………………………………… 36
2.1.3 Pragmatism
…………………………………………………………………………………… 37
2.1.4 Interpretivism ……………………………………………………………………………….. 37
2.2 Research approach
……………………………………………………………………………….. 38
2.3 Research strategies ………………………………………………………………………………. 39
2.3.1 Experiments
………………………………………………………………………………….. 39
2.3.2 Surveys…………………………………………………………………………………………. 39
2.3.3 Action Research …………………………………………………………………………….. 40
2.3.4 Grounded theory …………………………………………………………………………… 40
2.3.5 Ethnography …………………………………………………………………………………. 40
2.3.6 Archival Research ………………………………………………………………………….. 41
2.3.7 Case Studies
………………………………………………………………………………….. 41
3. Research choices
…………………………………………………………………………………..
42
4. Research time horizon …………………………………………………………………………..
43
4.1 Cross- sectional ……………………………………………………………………………………. 43
4.2 Longitudinal…………………………………………………………………………………………. 43
5. Data collection and data analysis …………………………………………………………….
44
5.1 Data collection and data Interpretation ………………………………………………….. 44
5.2 Data Analysis ……………………………………………………………………………………….. 44
5.3 Sampling Method
…………………………………………………………………………………. 45
5.4 Actual Sample and data collection tools
………………………………………………….. 46
5.5 Ethical implications ………………………………………………………………………………. 46
5.6 Limitations to the research ……………………………………………………………………. 47
5.7 Personal biases
…………………………………………………………………………………….. 47
6. Structure of the research method – Framework …………………………………………
48
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Chapiter 4: RESEARCH FINDINGS AND DATA ANALYSIS ……………………… 49
1. Interviewers presentation ………………………………………………………………………
49
2. Findings ………………………………………………………………………………………………
50
Chapiter 5: CONCLUSION AND RECOMMENDATIONS ………………………… 64
1. Effectiveness of the Federal Reserve policy ……………………………………………….
64
2. U.S economy strength ……………………………………………………………………………
64
3. The likely robust recovery ………………………………………………………………………
65
4. Limitations and Suggestions for Further Research
……………………………………….
67
4.1 Limitations
…………………………………………………………………………………………… 67
4.2 Suggestions for Further Research …………………………………………………………… 68
Chapiter 6: SELF-REFLECTION ON OWN LEARNING ……………………………. 69
1. Researcher’s profile ………………………………………………………………………………
69
1.1 Educational backgrounds ………………………………………………………………………. 69
1.2 Professional backgrounds ……………………………………………………………………… 69
2. Relationship with the researcher’s career goal …………………………………………..
70
2.1 Skills required for the career goal
…………………………………………………………… 71
2.2 Rationale for undertaking MBA ……………………………………………………………… 71
3. Review on learning outcomes …………………………………………………………………
72
3.1 Overview of the program & Skills development
……………………………………….. 72
3.2 Overview of the program
………………………………………………………………………. 73
3.2.1 International management …………………………………………………………….. 73
3.2.2 Theory of finance
…………………………………………………………………………… 73
3.2.3 International Business and Trade
…………………………………………………….. 73
3.2.4 International Financial Institution and Markets
…………………………………. 74
3.2.5 English earnings …………………………………………………………………………….. 74
4. Master of Business Administration´s experience and learning ………………………
74
5. Conclusion …………………………………………………………………………………………..
75
APPENDIX ………………………………………………………………………………….. 76
BIBLIOGRAPHY ……………………………………………………………………………. 97
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DECLARATION
This part attests that I, Jeremy DELSOL, student of Dublin Business School, studying a
Masters of Business Administration in Finance, has submitted this dissertation on the
topic “How sustainable is the U.S. economic recovery?” in accordance to the
requirements for the degree of Masters of Business Administration (MBA) at the Dublin
Business School.
Furthermore, I testify that this dissertation is entirely based on my own work, unless
referenced in the text as a specific source and the words have been placed in inverted
commas (“”).
Jeremy DELSOL
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ACKNOWLEDGMENTS
First of all, I would like to thank the Dublin Business School for giving me the opportunity
to accomplish a MBA Degree. I will also always be thankful to my parents who help me
financially and morally to achieve my goals.
I would like to dedicate a special acknowledge to my supervisor who has knew guide me
to the right direction and in the meantime keeping the aim of my research. I have to say
that all I have learned from his class was fully useful and has led me to undertake this
dissertation on this particular subject.
I am also thankful to professionals and contacts that allowed me to obtain interviews.
Finally, I would like express my gratitude to Sylvain BROYER, Jean-Luc PROUTAT, David
WAGNER and David BOTTIN without who I would not have been able to treat that
subject.
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ABSTRACT
The main purpose of this study is to better understand the U.S economy recovery in order
to know if the recent crisis will be followed by another one much bigger or if the United
States will be fully recovered. Through this study, it will examine the current strengths
and weaknesses of the U.S economy.
This work is based on two sources, primary data and secondary data. The primary data
has been collected by three deep interviews and one questionnaire whereas the
secondary data have been selected from several sources such as articles, books, libraries,
Internet.
The first portion of this study will serve as an introduction to the subject and. The
research questions that will lead the structure of this dissertation will also be defined
among this section.
After that, the second part will about the primary data. Through three interviews and
one questionnaire of experts and professionals such as economists from Natixis and BNP
Paribas and market analysts, several arguments will be exposed.
Then, the third section will present the research methodology used to data collection and
data analysis methods while the fourth chapter be composed by findings of the each
interviews.
The two last parts will be the conclusion and a self-reflection about the learning
obtained through this research.
Finally, this research will provide several key points concerning the next few years of the
biggest economy of our world.
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LIST OF FIGURES
FIGURE 2.1 GDP per Working-Age population (2007-2013)
……………………………………… 21
FIGURE 2.2 Real GDP Growth quarterly annualized ………………………………………………… 22
FIGURE 2.3 Household Deleveraging (1990-2013) ………………………………………………….. 22
FIGURE 2.4 Domestic Crude Oil Production and Net Import (2000-2013)
………………….. 24
FIGURE 2.5 US Momentum
………………………………………………………………………………….. 25
FIGURE 2.6 GDP Growth in recovery …………………………………………………………………….. 33
FIGURE 2.7 Productivity growth in recovery ………………………………………………………….. 34
FIGURE 3.1 Research philosophy ………………………………………………………………………….. 36
FIGURE 3.2 Research choices
……………………………………………………………………………….. 43
FIGURE 3.3 Sampling Method
………………………………………………………………………………. 47
FIGURE 4.1 Virtuous Cycle …………………………………………………………………………………… 64
FIGURE 4.2 EUR/USD weekly ……………………………………………………………………………….. 65
FIGURE 5.1 The key drivers ………………………………………………………………………………….. 67
FIGURE 6.1 Kolb’s Cycle of Experiential Learning ……………………………………………………. 74
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CHAPTER 1 – INTRODUCTION
1. Crises of the early twenty-first century
The 21st century has seen a terrible financial crisis during the first decades.
Indeed, the subprime crisis has been one of the most spectacular crises since 1929. The
real estate went down such as the stock market and the banks system were frozen. The
interest rates have increased and a lot of householder has couldn’t pay off their
mortgages and had to leave their house.
The beginning of this crises start just after the 11th September 2001. Following
this tragic event, the government with the Federal Reserve had to react. They have
decided to cut the interest rates close to zero and to inject billions in the economy every
month to launch the U.S economy on the way back of recovery, avoiding a recession. In
that sense, it seems relevant to define what exactly mean a recession as: “two
consecutive quarters of decline in a country’s real (inflation adjusted) gross domestic
product (GDP) — the value of all goods and services a country produces” (Tim Callen,
2008).
This action has give rise to a lot of aggressive loans from investors but also
regular people to get more money to invest on the market. They obtained their credits
helped by the massive development of risky loan with variable interest rates that banks
has gave to people who had not any solvability. The money spent by the Fed will be
turning to financial speculation and real estate investments. As we know now, the
United States has progressively raised his director rates and three years later the real
estate market has collapsed.
The Quantitative Easing has been employed since November 26, 2008 and has
started to be reduced recently. This fact brings some relevant assumptions. Indeed, the
fact that the Federal Reserve is starting to reduce the QE and the slow increase the
interest rates lead to think that the situation is improving and it is time to go back on
the normal policy gradually. The other thought could be that the increase will bring
some new risk such as it has been the case in 2008, or even if the low interest rates
linked to the Quantitative Easing has made damages on the economy through
misallocation of capital for example. Others factor should also be taken in consideration
such as the relation between United States and his foreign lenders. China is the most
important lender of the United States and owns the biggest reserve of Dollar currency.
In this context, the U.S economy is facing a new challenge which is to pursuit the
recovery with a careful management in order to avoid all risk of a bigger crisis.
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2. Background of the Issues
Cycle of crisis and U.S economy recovery compose the background of the issues
here. According Alan Greenspan: “Crisis will happen again but it will be different, that’s
human nature. Unless somebody could find the way to change human nature, will we
have more crises, none of them will look like this one because no two crises have
anything in common, except human nature” (The Age of Confidence, 2009).
The President of the Federal Reserve from 1987 to 2006, attribute the crisis cycle to
human nature. He argues that nobody can change human nature, we will make the
same mistakes again and again but no one will look like each other. The only common
point is in fact the human nature in each crisis that we passed through.
Firstly, it is well known that the experts say that crisis are following cycle and
happen in a particular way. The main reason to support this though is the human
behavior, and this behavior follows a repeat cycle. As Gerard Celente (2013), eminent
analyst has said:”History is repeating itself”.
Secondly, the stimulus undertook by the Federal Reserve to keep the economy
afloat could depreciate the US Dollar in a few years, leading to the US Dollar collapse.
Indeed many factors and analysis lend to a potential currency crisis in the United States.
It is about a significant and relevant topic which can influence the entire world in the
financial sphere but also in our lifestyle because we use money every day.
Thirdly, the United State cumulates the bigger foreign debt or the world. Some
analysts are warning that it could create a big issue correlated to the recovery and the
weakness of the currents economy.
3. Research aim
Following the history of the U.S. economy since the beginning of this century, the
analysis of the economic situation of the United States seems relevant. After 2008, the
United States have been weakened and forced to deal with economics and financial
problems. The necessary has been done to bail out big banks and a huge assurance
company, AIG in order to restore confidence in the system. The country is looking
forward now but the storm did not let up space the blue sky yet.
The aim of this research is to investigate the US recovery in order to evaluate the
sustainability of the latter. Therefore, this study will attempt to build an complete view
of the U.S economy health in order to predict if a bright or dark future is waiting the
country.
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4. Research objectives
According Saunders, Lewis and Thomhill:“Objectives are more generally acceptable
to the research community as evidence of the researcher’s clear sense of purpose and
direction” (Saunders, Lewis and Thomhill, 2009, p. 34). The analysis of the U.S economy
will be helpful in order to detect faults leading to potentials risks and to determine if the
recovery is durable. The overall question is untitled “How sustainable is the U.S.
economic recovery?”
In this sense, several objectives were set up in order to follow a logical order and
adequate on this study:
Define an overall view of the effectiveness of the current policy direction,
Make an assessment of the current strength of the U.S economy,
Make an assessment of the likelihood of a robust recovery,
Bring out a better understanding of the real situation,
To formulate conclusion and recommendations,
5. Approach to the dissertation
The approach to the dissertation undertook by the researcher will have for aim
to get the most complete understanding of the U.S economy health. It will be necessary
to analyze two points of view. Indeed, the best way to evaluate a situation is to take in
consideration the bad and good sides. In this sense, the researcher will brings up several
arguments coming from experts and researches dealing with weaknesses and strengths
of the American economy.
These arguments will come from the primary data collection with three
interviews made by the research with several analyst and economics. The primary data
collection will be completed by a questionnaire. Then, the secondary data will bring
support helped by research in library, internet and other.
Few US analysts and economists had predicted the last crisis. The latter are
warning the government about the next crisis which according to them is pretty close.
These collected data will allow the researcher to build a study to U.S economy recovery.
6. Suitability of the researcher and interest in the subject
The choice of this subject is easily explained by the fact that the researcher
would like to become a market analyst. After two internships as analyst on the currency
market, the researcher is animated by the desire to know more about the global
financial market and his behavior. The fact is that after living the last financial crisis, the
real interesting thing is to think about the next one because being in finance, and be
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aware that another crisis could happen or not, it is a good indicator to know where to
invest or not. Because even during a crisis the money just changes hand to hand and
never disappears. At the end, this subject has naturally interested him.
His experience in internships has also allowed him obtain some contacts in
banks, which will be helpful to find relevant professionals to interview. The collection
data and analyze will be based on eminent economists and analysts coming from major
international banks. It’s “refers to the extent to which your data collection techniques or
analysis procedures will yield consistent findings” (Easterby-Smith et al. 2008:109).
Several of collection data will come from economists who had already predicted the
actual crisis and even the previous ones such as Peter Schiff and Gerald Celente.
Furthermore, as an MBA student specialized in financial market enginery, he is
also able to understand and make conclusion about fundamental and technical data
about the market. After several crises, the studies have shown relevant point that will
be helpful for this dissertation. Finally, the Dublin Business School MBA has open to the
student, the opportunity to study on a international issue, confirming the desire to work
on international level in both his dissertation and the job career.
7. Scope and limitations of the research
In this part, the scope must be defined as the context of the study topic. Meanwhile, the
researcher must stay honest with himself regarding his work. There are always
limitations which have to be mentioned and taken in consideration.
7.1 Scope
The scope of this work is dealing with the economic health of the United States
after the 2008 crisis. The study is occur when the country working on the recovery. The
strength and weakness of this economy will be analyzed.
7.2 Limitation
Limitation are composed by several elements such as unpredictability event which could
happen even if all the indicator of the economy are showing the opposite signs of relief
or concern about the next few years.
Others limitation could be mentioned here:
The number of interviews has been limited due to the difficulty to meet or have
contact with eminent experts and economists. In the three interviews and one
questionnaire that the research has made, there are no US experts or
economists.
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In general, there only few people who are ready to assume the fact there is a risk
of a bigger crisis, so it has been more difficult to treat these arguments.
Due to the time restriction, secondary data may not be enough large.
Due to the number of words, primary and secondary data must stay below
22 000 words. This fact limits the depth of the research when it is about huge
subject such as the U.S economy health.
The subject is linked to the geopolitical aspect. Nevertheless this study must stay
focus on economic and financial aspect.
8. Organization of the dissertation
This dissertation owns 6 main chapters. The chapters are described as following:
CHAPTER 1 – INTRODUCTION
The introduction had for goal to illustrate the interest of the subject and to highlight
what it will intend to achieve in this study. Through this first part, it has been mentioned
the approach, the aim of this research but also several objectives and hypothesis.
CHAPTER 2 – LITERATURE REVIEW
The literature review will support different point of view and helped to get the best
understanding of the U.S economy situation. This chapter will be based on several
writes and thoughts of imminent professional of the U.S economy and financial market.
CHAPTER 3 – RESEARCH METHODOLOGY AND RESEARCH METHODS
Chapter 3 will deal with how the research methodology has been followed and what
kind of research methods have been used for this study. For this reason, several
methods will be analyzed through their own strengths and weaknesses. It will allow the
reader to better understand how this paper has been done.
CHAPTER 4 – RESEARCH FINDINGS AND DATA ANALYSIS
The Research findings and Data analysis part will present what the researcher has found
through several depth qualitative interviews. From these interviews, the researcher will
report each argument relative to the subject in order to complete his understanding of
the overall research question.
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CHAPTER 5 – CONCLUSION AND RECOMMENDATIONS
The aim of this chapter is to bring general conclusions by summarizing the findings from
the previous chapter. At the end of this part, findings will be pointing out the way in
which these particular findings clarify the general issues.
CHAPTER 6 – SELF-REFLECTION ON OWN LEARNING
Finally in this part, the researcher will have a self-reflection about what he learned
during this study. He will also highlight what does the study brought to him.
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CHAPTER 2 – LITERATURE REVIEW
Two economic thoughts will be treated along this chapter to understand the
actual situation, based on the historical facts and argument of each Theory. This
chapter will reveal that the current policy direction is following the Keynesian approach.
It will be discussed firstly about the history and definition of these two economic
thoughts.
1 Keynesian versus Hayek
1.1 History
The Keynesian economists and free market economists reach back to the
1930s and the great depression. In fact, theses economist thoughts were born
respectively from John Maynard Keynes (1883-1946), a British economist, and
Friedrich August von Hayek (1899-1992), an Austrian philosopher and economist.
After the 1929 crisis, a debate takes place between these two economists. Each
economist worked on economic models in order to explain and solve the
financial and economic troubles. The result was that each ones finally bring out
their own model.
John Maynard Keynes is known to have made a major breakthrough in
the field of economics with his greatest work entitled “The General Theory of
employment, interest and money” in 1936. Later, he will become one of the
founders of the monetary system after the Second World War.
In the meantime, Friedrich August von Hayek has been awarded with the
Nobel Prize of economy in 1974 concerning his work joined to Gunnar Myrdal
about the monetary theory and economics fluctuations. Twenty years in the
past, he was writing his book “The Road to Serfdom” where he exposed his
thought about the causes of the 1929 crisis advocating the free market.
1.2 Theories definition
The Keynesian thought is based on “economic perspective that argues
that private sector decisions sometimes lead to inefficient macroeconomic
outcomes. The theory, therefore, advocates active policy responses by the
public sector, including monetary policy actions by the central bank, and
fiscal policy interventions by the government, to stabilize economic output
over a business cycle.” Mikko I Arevuo (3 April 2012).
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The Hayek thought is based on Austrian theory according that”the price
system of a free market was an efficient mechanism to coordinate
people’s actions, and that markets were a result of spontaneous order
that had evolved slowly over a long period of time, as a result of economic
exchanges between people”, and that “markets were highly organic, and
any interference with the spontaneous order of free markets would distort
their efficient operation. “ Mikko I Arevuo (3 April 2012).
1.3 Recommendations of respective theories
1.3.1 Keynes recommendations
Keynes has been considered by Lionel Robbins, director of the
London School of Economics such as thinking “that when free markets
were left to their own devices, this sometimes caused economic slumps,
and that decisive government action was needed to pull the economy
back to an equilibrium state of full employment, as heresy.” Mikko I
Arevuo (3 April 2012).
On the opposite side the Austrian economists thought was that
“free markets, driven by people’s choices tended to adjust to equilibrium if
left alone, and free from government intervention.” Mikko I Arevuo (3
April 2012).
Keynes has writes an economic model called “The General Theory”
published in 1936. In this work, the economist deals with the
employment, monetary policy and management of the interest rates.
John Maynard Keynes argues that “total demand determines the
employment level in the economy, and the existence of unemployment
indicates that aggregate demand is insufficient to employ all factors of
production.” Mikko I Arevuo (3 April 2012). His hypothesis remains that
the capitalism system leads to enough demand level in order to sustain
full employment. Then, Keynes brings up that the public sector has to
control the economy spending in order to solve this lack.
Hence, he lists few recommendations about the well management
on the unemployment field. First, the interest rates have to be reduced as
much as it will necessary in order to boost the private investment.
Secondly, tax system should take place in order to reallocate the wealthy
income which can consume much more to the lower paid. Finally, the
main point of the Keynesian thought is that the government participation
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in the public investment completes the private investment and sustains
spending according to full employment level.
1.3.2 Hayek recommendations
In contrast to Keynes, Hayek does not believe that unemployment
can be settled by an increase of the public spending. He has critiqued this
point relative to the “General Theory”, exposing that unemployment can
only be solved by increases of spending because according the economist,
theses resources are misallocated and lead to crisis such as the 1929
crisis. In that sense, the same spending of resources cannot settle on a
durable way the unemployment. Nevertheless, he sustains that aggregate
spending are linked to the employment level and highlights that a
sustainable solution remains in avoiding wrong investments to reallocate
the spending where the market needs to.
Nicholas Wapshott, British journalist and writer, wrote a book
untitled “Keynes Hayek: The clash that defined modern economics”,
dealing with the two economic thoughts and trying to introduce the both
debater. Wapshott has conclude by indicates that following the process,
it seems appears that the Keynes theory about the economic crises work
on a short term aspect while the Hayek approach reach to be applied on a
longer term period. Hayek adds that the “Trade cycles were a result of the
government interference with the spontaneous order of the markets.”
Mikko I Arevuo (3 April 2012).
One of the main Hayek arguments is that “boom and bust are a
result of wrong investments created by the government interference in
the operation of free market, a result of the very policies advocated by the
dogmatic Keynesians of today.” Mikko I Arevuo (3 April 2012).
Hayek has always clearly define that the perpetual tracking of the policy
at that time has pushed the economy to a crisis while he was trying to
warmed the danger and effects which could result from this approach.
This situation is still relevant nowadays because the monetary policy just
continued to follow the same rules and action undertaken in the past.
The free market thought remains in the fact that the market can
be self-sufficient and self-regulated. In the case of the 2008 crisis, this
means that the government and the Fed wouldn’t interfered which
probably would have lead to a severe depression where misallocation of
capital and harmful major actors of the market, such as several banks and
insurance company, would have gone bankrupt. In that sense, the market
would have cleaned itself, ready to welcoming new actors of the market
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who would have boost the economy through a better market running to a
healthy economy such it has been the case earlier. Instead, the
government and the Fed have followed Keynesian approach and try to
solve the economic issues by interfering into the cycle.
2. Debate on U.S economy health
2.1 Following the Keynesian approach
The Federal Reserve was born the December 23, 1913 with the Federal
Reserve Act signature done by the President of the United States, Woodrow
Wilson.
The idea of the central bank was coming from a severe banking panic in
1907 after that Wall Street had generated lot of speculation. At this time, the
government pushed by the public opinion was leading to political reforms
concerning the banking system. In fact, only fourteen years ago, the United
States had faced to the worst depression ever seen. The resolution of this crisis
was the intervention of the JP. Morgan banks on the system banking in order to
stabilized the economy. After that, the thoughts were turned on the fact that the
financial system needed to be controlled. Hence, the idea of a central banking
authority appears to provide a healthier financial system. Then few years later,
H. Parker Willis and Carte Glass, respectively a former professor of economics
and the chairman of the House Committee on Banking and Finance worked out
on a central bank proposal. During 1912, they submitted this proposition to the
President Woodrow Wilson which with some adjustment would become the
Federal Reserve Act.
The aim of this institution is to monitor the monetary policy using money
and credit conditions in order to tend to stabilize the prices and to reach a full
employment level. His duties are also the regulation of banks to ensure
consumer credit rights and sustain the U.S economy by overseeing the financial
system stability but also to provide financial services to the government.
Since almost the beginning of the Federal Reserve, the Keynesian model
has been followed through several presidential systems. The first step leading to
the Keynesian domination is the Marriner S. Eccles appointment as the Federal
Reserve Chairman. John Kenneth Galbraith, American economist described the
Fed under Eccles as “the center of Keynesian evangelism in Washington.” Henry
C.K. Liu 2010. He claimed the opposite direction from the Hayek point of view
exposing that the economy needed an income policy whereas Hayek sustained
that “each market participant acting independently to maximize his individual
interest represents the most efficient allocation of resources.” Henry C.K. Liu
2010.
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Thomas B. McCabe, William McChesney Martin, Arthur F. Burns, G.
William Miller, have followed one after the other. Then, Paul Volcker became
chairman during the 1970s. At that time, inflation has significantly increased such
as consumer prices. In the meantime, the federal deficit has followed the same
trend. The chairman of the Federal Reserve during this period has intervened in
order to stop the inflation run and bring it under control which has taken time
but has paid few years later.
In August 11, 1987, Alan Greenspan is appointed and will stay until
January 31 2006, the chairman of the U.S Federal Reserve. The emblematic
chairman of the twenty century adds early in this mandate a statement in the
Federal Reserve role: “The Federal Reserve, consistent with its responsibilities as
the nation’s central bank, affirmed today its readiness to serve as a source of
liquidity to support the economic and financial system” (Alan Greenspan
announcement, 1987).
Following the terrorist attack of September eleven, Alan Greenspan has
reduced the interest rates in order to sustain the economy. Overall during his
mandate, the Federal Reserve used several time the monetary policy to control
the economy. This clearly demonstrates the Keynesian behavior that the federal
institution persists to follow. The result during the 1990s was a decrease of the
inflation and the longest expansion time in the United States history, while the
country is not in war.
Ben Bernanke was appointed from the first February 2006 until the
January 31, 2014. Former professor at the Stanford and Princeton University, he
became really involved to the Federal Reserve under the Bush administration
before getting close to the president as chairman of the Council of Economic
Advisers. His mandate matches a difficult period where he will try to sustain the
U.S economy by bailout the biggest insurance company A.I.G with $85 billion and
supporting the takeover of Bear Stearns by JPMorgan Chase. During the 2008
financial crisis, there are several examples of the Keynesian thoughts directly
applied in the economy system. Indeed, the unprecedented stimulus from the
Federal Reserve called Quantitative Easing is one of them.
Janet Yellen has been nominated since the first of February 2014. After
having been the chairman and Chief Executive Officer of the Federal Reserve
Bank of San Francisco from 2004 to 2010, and having a PhD in economy from
Yale University, she is now the chairman of the U.S Federal Reserve. Ms. Yellen is
also a former professor of economics at Berkeley. She sustains that without any
intervention, the capitalistic economy cannot run at full employment. Janet
Yellen is the face of the Keynesians economist of the twenty one century. The
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Obama administration has reinforces the presence of this economic thought by
nominating Ms. Yellen.
Keynesians continue to influence the economy and politics decisions
nowadays. In fact, the reaction faced to the financial crisis represents exactly the
Keynesians behavior which is to intervene decreasing the interest rates and
injecting money in the economy. Indeed, according the White House report 2014
“it is important not to lose sight of the critical policy decisions that averted a
second Great Depression and made it possible for the economy to arrive at this
point.”
2.2 Following the consequences
The consequences of the Keynesian approach today will be treated in this
part. So far, the U.S government starts to obtain result on the last five years of
work, trying to sustain and launch the recovery. The first main indicator to
analyze remains the Growth Domestic Product.
Figure 2.1 Real GDP per Working-Age population (2007-2013)
This graphic comes from the Statistical Office of the European
Communities. It is included in “The 2014 Economic Report of the President” and
posted by Jason Furman, Betsey Stevenson and Jim Stock on March 10, 2014.
This report illustrates the progression of the output per working-age person of
twelve countries that has been affected by the 2008 crisis. It is précised that the
pre-crisis peak is at 100. The graph clearly shows that only two countries are
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above that level, Germany and the United States. This result is assigned to the
monetary policy undertaken by the government and the Federal Reserve
reaction faced to the crisis. This point reveals the Keynesian consequences that
currently occur in the U.S economy. The report adds that “the full set of policy
responses in the United States made a major difference in averting a
substantially worse outcome”.
More precisely, the following figure below is showing that the real GDP
growth has remained above nearly 1.5% per year where it seems to be a support
level, since the financial crisis of 2008. This point sustains the capacity of the
government to launch back the economy on the track.
Figure2.2 Real GDP Growth quarterly annualized
Several reasons lead to think that the economy could continue to
reinforce his growth. One of them is the improvement of deleveraging such as
the next graphic illustrates:
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Figure2.3 Household Deleveraging (1990-2013)
The graphic shows that the household liabilities-to-Income ratio has
decreased since the financial crisis in 2007-2008. During the crisis, the ratio was
about 1.4 times annual disposable income the last quarter of 2007 before to
collapse to 1.1 times annual disposable income the last quarter of 2013. The fact
that households tend to improve the debt pay off is a positive sign because it
shows that the U.S households are able to pay back their debt which leads to an
increase of their spending. In the meantime, according the Bureau of Economic
Analysis, at the end of 2013 the Personal income increased $2.3 billion and the
Personal consumption expenditures increased $44.1 billion which is showing a
revival of the economic pillar called the consumption with a better ability of
households spending (James Rankin, Harvey Davis, 2014).
The other ratio describes on the graphic is the Debt Service Share of
Income which is the minimum payments required by the banks for the
households has decrease from 13% to 10% of the disposable income between
the fourth quarter of 2007 and the fourth quarter of 2013. This improvement is
showing a lower level of debt in the American households. Furthermore, the
household’s balance sheets have been successfully improved since the recession
with 80% of the loose back up. The deleveraging debt adds weight in the balance
with the consumption recovery. The report mentions that the real personal
expenditures of consumption have increased by 2.2% in annual rate.
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Other reasons of good expectations are composed by the diminished
fiscal headwinds. Indeed, the first reason as the presidential report mentions is
the release of hard fiscal policy but also an improvement on the tax uncertainty
that knows the country the recent years. The budgetary consolidation in 2013
should not continue while the deficit continues to decline gradually. The fact is
that last years the growth has been affected by these fiscal policies. Craig
Alexander, chief economist of TD Bank indicates that “With a budget deal that
reduces the drag from sequestration over the next year, the underlying strength
in the private sector should show up in faster economic growth over the next two
years.”
During 2013, the federal deficit was $680 billion while 2014 is expected to
achieve $500 billion which represent 1% less of the GDP. Expectations are facing
a followed decrease of another 1% of GDP in 2015. The fact is that the tax
revenues have increased by 8% during 2013 which has helped to reduce the
federal budget deficit. This means a good recovery from the private sector.
Figure2.4 Domestic Crude Oil Production and Net Import (2000-2013)
Furthermore, the energy boom on domestic consumption represents a
structural trend helping to support the recovery on a long-term. The graphic
below illustrate the Domestic production and the Net import of crude oil. These
evolutions reveal an expected reversal between the both. This means, such the
Presidential report state that the U.S domestic production is expected to exceed
the Net import leading to more energetic autonomy for the United States. This
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argument is a major economical reason for the country to be sustainable on a
long-term.
Figure2.5 US Momentum “Hopeful Signs for U.S. Economy in 2014” from the Wall
Street Journal writes by DAVID WESSEL the January 1, 2014.
As the graphic shows here, the unemployment tends to be reduced at
7.0% at the end of 2013. In that sense, the presidential report quotes an increase
of the employment about 2.4 million in 2013. Forecasters are expecting the
unemployment level continued to improve along the current year.
Regarding the consumption, consumers have start spending again and
household wealth has improved since 2013. The home prices have risen by
14.8% since 2010. The real estate market has been slower to rise and is now
added to the general upswing, marking the positive sign expected growth for the
next year. (Christian E. Weller and Sam Ungar January 21, 2014). In the
meantime, each of the indicator above demonstrate that the U.S economy start
to recover.
The journalist adds that “Fed officials’ latest forecasts, made just before
Christmas, see 2014 growth between 2.8% and 3.2%.” The improvement of the
businesses coming back to good profits is due to the cut of costs while
households seems to have wealthier assets and the stock market raised more
than 25% in 2013. The consumption is back on the track with sales which is
higher by 9% in 2013 towards 2012. The move should lead to the improvement
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of the business investment which is still calm even if the profits are high.
Furthermore, according the article “Economic Snapshot: January 2014” wrote by
Christian E. Weller and Sam Ungar (January 21, 2014), the corporate profits seem
to reach the pre-crisis peaks. The profits have increased by 85% between June
2009 and September 2013, adjusted after inflation. This field was one of the first
to recover during the recovery period.
One more positive side in favor of an easier recovery is that fact that
many corporations have spent a lot of money in order to keep their shareholders
at the table. In the fact, these companies have spent 98% of the benefits after
tax on dividend payouts to keep their shareholders in the game, having well
managed to keep shareholders has been a great thing. This will help companies
to go through a severe period of recession until the recovery time where liquidity
and investment will be welcome (Christian E. Weller and Sam Ungar January 21,
2014).
The Fed has scheduled to keep low interest rates until they have judged
that the economy is self-sufficient which means at least for 2014 and 2015.
Nevertheless, Fed Chairman Ben Bernanke said in his last December conference:
“The economy is continuing to make progress, but it also has much farther to
travel before conditions can be judged normal” (Ben Bernanke, 2014).
At the end of 2013, positive signs came among the U.S economy
landscape. The Federal Reserve decided to start the progressive reduction of the
quantitative easing undertaken as a economical stimuli. This act illustrates the
U.S economy recovery. This means that the Federal Reserve consider the
economy self-sufficient to start to decrease the monetary help.
2.3 Forecast
The International Monetary Fund (IMF) forecast is expected to see 2.8%
of growth during 2014 after 1.9% last year. Christine Largarde adds at CCTV
America: “The economy has picked up, and is what we have forecast further pick
up in 2014. Then, most people who invest, who hire were uncertain. Seeing a
budget deal the tapering by the fed which is a sign of confidence in the real
economy should lead them to invest, to hire and to be more confident.”
In the meantime the OCDE organization estimates the real GDP growth to
achieve 2.6% this years and 3.5% in 2015 (annex n°5). The real private
consumption expenditure should progress from 3.0 in 2014 to 3.2% 2015 (annex
n°6) while the unemployment rates should diminished from 6.5% this year to
6.0% in 2015 after 7.4% in 2013 (annex n°7). Regarding the house savings rates,
4.1% disposable household income is expected in 2014 and 4.0% should be
attempt in 2015 (annex n°8).
