Posts Tagged ‘economy’
Fundamental and Technical analyst alike are employing news to guide their trading decisions. Though their degree of usage may vary, it’s better for beginner traders to familiarize themselves with terms that are usually found within the news. Quantitative Easing for one.
Quantitative Easing is an unconventional monetary policy used by central banks to induce support on an economy. It is a stimulant aimed to assist an economy if in case it is in an unfavorable state. The concept behind it is that additional money will flood the market which will give the economy a push by by promoting an increase in lending and liquidity.
It is often carried out by buying financial assets from commercial banks and other private institutions with the newly created money to induce a specific amount of money in the economy.
At present, the world has already witnessed the said boost for three times already. First was during the time of George Bush back in 2008 wherein $500 billion was initially spent on mortgage backed securities. An additional $750 billion was made during the time of Barack Obama’s first term. By June of 2010, $2.1 trillion worth of assets was already bought by the bank.
The second round was demonstrated in 2010 when Federal Reserve provided $600 billion for long-term government bonds. Some claim that this effort was put in vain because the money just ended up in EU’s foreign reserves.
The third was the most recent. The buzz started when Ben Bernanke, chairman of the Federal Reserve in America, had announced last September 14,2012 that the third round of the quantitative easing will be given for the $40 billion a month bond purchasing program and also to continue the very low rates policy.
Though the unconventional way boosted the economy at first, its effect is dwindling as years passes by. Doubts and debates regarding its effectiveness arose from every corner and some became pessimistic about it. The previous rounds taught traders that they should perceive the possible chain reactions that the third easing will produce rather than just the short term effect.
One of the key points in the recently concluded election was about how the “would be president” then would tackle the ominous fiscal cliff. But many, especially non Americans, are still unfamiliar with the term.
The term “Fiscal cliff” was an expression that was used throughout the history especially on budget talks. According to research, the earliest reference to the term was traced back in 1957, when it was used in a New York Times article about home ownership.
At present, the term denotes the effect of a number of laws in the United States which may lead to spending cuts and tax increases. The whooping $7 trillion in spending cuts and tax increases was scheduled to take place at the beginning of this incoming year, 2013, which is approximately 35 days from now. The buzz word first entered the scene during a speech by Federal Reserve Chairman Ben Bernanke to the House committee on Financial Services last February 29,2012.
“Under current law, on January 1st, 2013, there is going to be a massive fiscal cliff of large spending cuts and tax increases. I hope that Congress will look at that and figure out ways to achieve the same long run fiscal improvement without having it all happen at – at one date.”
The laws involved are the Bush tax cuts and the Budget Control Act of 2011. The Bush tax cuts or Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 is an act centered on the two-year extension of the Economic Growth and Tax Relief Reconciliation Act of 2011 provisions which was intended to delay the return of tax rates similar to the Clinton administration. It was passed by the United States Congress back in December 16,2010 and was signed as law by President Barack Obama a day after. It is scheduled to expire at the start of 2013 which would result to tax increases.
Meanwhile, the Budget Control Act of 2011 is a federal statute and was signed as a law by President Barack Obama on August 2,2011 which mainly focuses on debt ceiling and deficit reduction. It is also scheduled to expire almost the same time as the Bush tax cuts and would result to spending cuts.
The two effects would lead to a reduction in the budget deficit in 2013. The abrupt deficit would then lead then to an increased recession on the same year which would greatly damage its present economic recovery.
Money supply is basically the total amount of currency circulating in an economy at a specific time. It involves issued paper money, coins, and other liquid instruments such as funds on checking and savings accounts in the bank.
The value of Money supply is an important macroeconomic indicator because it may impact the economy through price level of goods and services, inflation, and the business cycle. The government or the central bank releases the information annually.
Analyst from both public and private sector carefully monitors it because of its possible effect on the economy. It is controlled through policies, born from careful analysis of economists, regarding interest rates and increase or decrease of the volume of money currently circulating the economy.
The increase of supply most probably lowers the interest rates thus attracting investments, generating jobs in the process, that would most probably land on the hands of the consumers. The more money in the hands of a consumer, the greater the urge to spend. Businesses would then react to this by increasing the rate of production which would walk hand-in-hand with the increase in the demand of labor.
The types of money and its value on the Money supply are categorized in “M”s:
M0 – is the total cash resource circulating the country.
M1 – All the tangible money, such as coins and currency, and the most liquid resources such as demand deposit and traveler’s cheques. M0 + checkable deposits.
M2 – The combination of the previous type and all time-related deposits; savings deposits, and non-institutional money-market funds. M1 + time deposits ( less than $100,000) and other highly liquid savings.
M3 – The broadest measurement of the money. It includes M2 plus time deposits exceeding $100,000, institutional money-market funds, short-terms repurchase agreements, and other larger liquid assets. M2 + large time deposits and deposits above $100,000.
M4 – the sum of all the preceding types.
The degree of importance of these indicators vary from country to country. There are countries like the United States that pay more attention to M2 while M3 outweighs the other types in most European countries. The Great Britain gives more significance to M4.