11.23.2011

Look! Up in the sky! It’s a bird! It’s a plane! No, it’s the Economy!

Organization of the Federal Reserve System
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Article by: Scott Hall
            While this may seem a bit ridiculous, many persons in our world really do conceive that their economy is some large strange entity with an evolving hunger.  It is not some mystical beast that feeds off of the land, nor is it big brother with his hand outstretched, it is a very complex network of goods, services, currency, specialty items and people.  In the year 2011, we have reached a plateau where transparency is needed and high in demand, where even the government has admitted to a need to “dumbing down” rhetoric to help us comprehend the jargon.  Politics and law do have a language mostly all their own, so does the economy.  In order to help understand what types of pressures are present, we will explore into the vast areas and history of the reasons tougher times are ahead for everyone. 
Monthly changes in the currency component of t...
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              1791, Alexander Hamilton has a brainstorm and launches The First Bank of The United States (eh.net).  The bank was issued a unique charter, which was for a term of 20 (twenty) years.  This proved prosperous and functioned well enough that when President George Washington appointed Hamilton as Secretary, there was no surprise as to the decision.  Hamilton’s financial prowess was such that when asked by congress to present an economic plan, he was more than ready with a plan that included a way to extinguish the nation’s debt while excising a tax on distilled liquors.  July 4, 1791 the largest stock offering the country had ever witnessed was made available and with it 8 million dollars of investments in “The Bank of the United States” stock.  Eventually the Bank failed and closed, but notes some of its primary customers were merchants, politicians, landowners and even the government.  A model such as this would suggest that banks fundamental reasons for their business is to make money while keeping it safe.
            If you or I were to open a bank, aside from the charter requirements, and we had no reserves, the only way we could say we had money is if a customer came in and deposited their money into our bank for safe keeping.  At that time, even though that customer has their money in our bank, the bank might be able to create reserve cash with it.  Customer B comes in and asks to borrow some money that is half of what Customer A has just deposited.  The bank agrees to the loan based on having half of that initial cash in reserve and Customer B is happy to pay a decent interest rate on the borrowed money.  When all is said and done, the bank generated revenue off of the interest being paid on the loan, the bank can cover the debts and monies being withdrawn from Customer A’s account and the world goes on without a hitch.  This fundamental bit of knowledge makes us thirsty for the answer “who watches them to make sure they aren’t cheating.”  Much like a food chain, there is a chain of entities that watch over the entire structure that goes all the way to the Federal Reserve.  
            On December 23, 1913, the Federal Reserve System which serves as the nation’s central bank was created by an act of congress (federalreserve.gov).  The system is made up of a board of governors totaling 7 members in all, headquartered in Washington D.C. and twelve reserve banks located in various spots throughout the United States.  The primary function of the board members is to establish monetary policies. These 7 members also are a part of the 12 member Federal Open Market Committee.  The FOMC makes key decisions affecting the cost and availability of money and credit available in the economy.
Modern-day meeting of the Federal Open Market ...
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            Simply stated, their decisions are what control is necessary, whether the economy is healthy, what to do in the event of tough times and remembering our model from earlier, as the nation’s central bank they are in business to make money.  The initial 7 members are appointed by the President, and once “elected” serve 14 year terms.  The other 5 members of the FOMC are the bank presidents of the other reserve banks.  The other five serve one year terms on a rotating basis, giving them 12 bank presidents to use as a pool for the rotation, including the Federal Bank of New York.  Along with monetary policy, they also supervise and regulate policies within the banking system, play a key role in the smooth operation of the nations vast payment system, develop and administer regulations that implement major government laws regarding consumer credit and the associated protections as well as set reserve requirements for banks.
Flag of the United States Federal Reserve Bank
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            We now have a feel for the structure and function of banking and the Federal Reserve.  All of this leads to “the root of all evil” or money as you and I more commonly know it.  What is money?  Money is anything that can be traded for goods or services.  It does not necessarily have to be paper or metal.  It could come in the form of sack cloth, leaves or dipping a bit into some prison life, goods such as cigarettes.  Money is versatile within its own region of acceptance and once it leaves that region, it changes to a different representation of its worth.  So basically money means the ability to barter for goods easily.  This is a good thing as in our modern world we would be taken back a bit if someone fixed our automobiles and said, “50 bushels of carrots is your total cost.” In early monetary exchanges this was exactly the system used until around 1690 when we used several currencies such as British, French, Spanish as well as some others (ronscurrency.com).
            We have a bartering system in place with currency that is easy to manage and understand.  We have banks to hold on to our money for safekeeping so that it is available when we need to purchase a specific item or service.  Purchasing goods or services is one more thought in our economic press forward.  Imagine for a moment we are leaders of a region of people.  That region of people, say 15 families, use on a regular basis, 100 gallons of water a day per family and our supply is limited to 1000 gallons a day.  1500 is needed, 1000 is available and 500 needs to be acquired.  If I am leader and have no revenue coming in as a collective for the region, that water deficit goes on without use and the families have to redistribute the 1000 evenly unless I can find a way to pay for the extra need.  A feasible means of acquiring this money is to apply taxes or a fee.  In this case, charging for the water usage is an easy means to generate the revenue needed to purchase the needed deficiency.  This purchase outside of our own region pays the people who help to get that water to us, the business costs associated with it and drives up that region’s general wealth which results in a healthy money exchanges.  This model would also work well if it included the company that supplies the water hiring the workers from the region in need. 
            Within our world, needs such as water, electricity, food, fuel, clothing and shelter are just a few of the basics we need to survive and while they are not all inclusive, missing one or two of them may make your personal living situation rather uncomfortable.  In order to obtain these items, we must go to work and earn “money” so we can purchase their use.  The term “money” is in quotations here because technology has influenced our world where actual paper printed currency is evolving into digitized cash amounts.  Direct deposit, withholding in our 401k retirement packages and even paying those utility bills electronically is becoming more and more efficient, reducing cash or even checks. Remember, money is anything that can be used to acquire goods or services.  Back to work.  Working is fundamentally needed in our society, not only does it provides the ability to go to the store and procure our wants by achieving pay; it gives us a sense of purpose. 
            Would you be willing to work for free?  Of course not, unless there were to be some magical outcome at the end of your journey, such as an internship that lands you a decent job with that new company that are growing fast or free meals during work.  When we go to work for the very first time, we are indeed working for that magic outcome, for free.  For example an employer pays every 2 weeks and withholds the first paycheck.  This means you will work for a period of one month before being paid for your first two weeks of employment, in essence you have worked for free or delayed pay, but unless we apply a bit of critical thinking it is unclear as to why employers may do this.
            Employers / Businesses acquire the money to pay you for your work through sales, liquidity of assets or other revenue generating means.  Before they can pay you the wages you have earned, that company has a few of its own bills to pay, like taxes, other wages, energy usage or utility usage, retirement matching and a variety of items which means a primary goal is for maximum profitability of business (flashcon.org). Once you receive your paycheck for that work, you will notice taxes being taken out of your gross amount of earnings as well.  This revenue helps to fund your local state and federal governments as well as the local leaders in your area (local taxes) for the services that they provide such as law enforcement or fire departments.  In this model we can see the business needs to either make an amount equal to what it needs to pay to break even, or work to make the company profitable, so they can grow.
            Growth means taking a set amount of your earnings overall and reinvesting it into the business so that items can be updated or that new ad campaign can go through to full scale and the end result is more product sold and more revenue generated.  A very risky venture and it is one that many business owners weigh in their quest for success and one that contributes too many failings or closings.  These companies produce many of the goods citizens use daily, such as that tube of toothpaste or toiletry which also drives the economy.  This far we have seen a need to keep our money safe, a system of check and balances for the banking business that reports to the Federal Reserve, the oversight and influence the reserve has on the congress, the need for work and how our money actually is being used.
            All of the factors presented thus far are contributors to our economy.  Other contributing factors are persons who are willing to take a chance on investing in a company’s success.  This investing is usually done through stocks or money markets in the form of stocks or shares of a company.  Stock fundamentally speaking is ownership in a company.  Depending on the type of stock, preferred or common, certain rights are given to its holders.  Most commonly, the right to cast a vote on issues within the company, giving the shareholder a voice in the decisions is very attractive, until realistically we see that the investment has to be either short term or long term in order to receive the maximum benefit of our investment.  In essence, when we buy stock we are entrusting the company to invest wisely and maximize their profit for the shareholders benefit.  The benefit is the dividends paid over a set length of time and the deficit is the stress on our patience when faced with tough economic times.
NYC: Federal Reserve Bank of New York
Image by wallyg via Flickr
            The place to be is New York City.  It is the town that never sleeps and is the heart of many financial districts including our beloved NYSE (New York Stock Exchange).  The title is prestigious; the actions are either buy, trade or sell shares and investments within a group of companies listed within the exchange.  The NYSE is special in this respect as with our current state of Occupy Protests, their focus is correct.  The NYSE is where the top percent of the country’s wealthiest trade and to be listed as a member, one must be invited.  This is no reason for those whom may not have particular wealth to despair; there is always the NASDAQ (National Association of Securities Dealers Automated Quotations).  Most of the companies that do not qualify for the NYSE trade here and yes its open to public investment pending one could obtain a qualified business to assist in their choices of investments. 
CHICAGO, IL - MARCH 15:  A trader signals an o...
Image by Getty Images via @daylife
            It is not all about stocks and whether or not the company may make a profit.  In some cases items such as gasoline futures, grain futures, cattle or livestock demand for consumption, oil, energy and even the investing companies themselves depending on business type can affect the NASDAQ numbers.  Manufacturing those goods and how well those companies are performing also can contribute to trying to decipher what is the best route to take in securing our countries wealth and future growth and maintain a thriving environment so we can live and work to continue to drive and push forward.
            To help simplify what we have reviewed we can say: we work to make what we eat or do and pay taxes or fees upon, in order to get it to our home and / or table while trying hard to save for an uncertain future.  We have a safe place for our money to rest and plenty of things to buy.  Where we get these things either comes from within our own borders or is outsourced to another country to make and ship the item or good to our homeland.  This means trading (bartering) as well as purchasing.  The United States has a region known as the corn-belt that supplies up to 35% (percent) of the world’s corn demand.  The largest importer of corn in the world is Japan and relatively speaking, if we sold to them alone would equate to 35% of our country’s wealth.  Easily manageable numbers are every accountants dream, the world trade market and what we offer out to other countries and what we buy from other countries translates into either a Trade Surplus or Trade Deficit.  Out of those two items, the United States is suffering a Trade Deficit, meaning we buy more from abroad than what is being bought from home, this fact has been dominant since around 1972, when the US had a Trade Surplus.
            As we can see, many factors contribute to this entity we know as an economy and there is a good chance we have not even done more than scratch the surface of information.  It is the year 2011, our United States is faced with an uncertain economy including 12 individuals assigned to try and find a way to stop the money bleeding while still being able to provide services needed in order to function as a society. Contributing factors such as a lack of work (tax revenue generator), lending institutions that are crippled by citizens without work that cannot pay debts owed (healthy investing and regional growth), the reserves being protected (Federal Reserve Guidelines for Banking) can only lead to tough outcomes as a result to save our weakened state of economy.   Taxes will almost certainly increase to help fund basic services (public services), Interest rates will go up and banks will revamp their standards, making it much harder to borrow the money we need.
            The bottom lines are: Job availability will have to increase to offset the rising cost to the median income unless the tax brackets are revamped and the wealthy make up the deficit or cuts in spending overall will have to take place, much like the same things that took place during the great depression.  What is the economy?  It is a vibrant colorful world filled with riches, glamour, hard work, diligence and dreams all of which are driven by people. It is beyond time to buckle our belts, tighten our grip and catapult into a new era.  Our economy is projected as tough and as the saying goes, “when the going gets tough, the tough get going”, so let’s go to work.
Readings and Reference Links:         
http://www.federalreserve.gov/otherfrb.htm  (US Reserve Banks Geography)
http://forecastchart.com/graph-us-gnp.html  (Gross National Product Data)
http://irs.gov  (tax information)

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