Learn the causes of recession by understanding gross domestic product and the laws of supply and demand. Know how the federal government uses fiscal and trade policy. Realize how the Federal Reserve fights inflation while spurring growth with monetary policy. See how financial markets on Wall Street influence Main Street and your neighborhood. That has happened throughout the history of U.S. recessions. When the economy contracts for years, it’s called a depression. Learn the difference between recession and depression. The most important part of the economy is consumer spending. The other three components are business expenditures, government spending, and net exports. The U.S. economy is no longer the world’s largest. China has outpaced current U.S. GDP statistics. The U.S. is the world’s second-largest economy, while India and Japan follow in third and fourth place. Demand, or personal consumption, drives almost 70% of the economy. A lot of this occurs during the holiday shopping season, which starts on Black Friday. The recession increased unemployment. Many people became discouraged over ever finding a job and dropped out of the labor force. As a result, 38.1 million, or one-third of Americans are poor or near poor. That’s one reason the U.S. economy has slowed. Income inequality wasn’t caused by the recession. It began worsening through the 2000s. Inflation is difficult to stamp out. Once it occurs, people begin to expect ever higher prices. They will buy now before prices go up more in the future. That increases demand even more. Another cause of inflation is an increase in the money supply. The U.S. government measures the current inflation rate with the Consumer Price Index, but it sometimes gives misleading information. The commodities market determines oil, gas, and food prices. They can skyrocket and plummet within months. The Federal Reserve uses the core inflation rate instead. That excludes energy and food costs. If inflation occurs in assets, such as housing or stocks, it’s called an asset bubble. The opposite is deflation; it occurs when prices fall. That also happens to assets, such as housing prices and stock portfolios. That creates stock crashes and economic crises. Deflation is worse than inflation for an economy. The president starts the budgetary process each year, but only Congress has the government spending authority. For example, President Obama’s economic stimulus package was his idea, but Congress approved it. Spending outpaces revenue, creating a budget deficit. Each year, it is added to the national debt. One large contributor to the deficit and debt is the Bush tax rebates. They follow the theory of supply-side economics. It says that lower taxes will eventually spur the economy enough to replace the loss in taxes. That hasn’t happened. But tax rebates are very popular because people hate paying them. Many have proposed a flat tax or a fair tax. The primary objective of monetary policy is to control inflation. Its secondary objective is to stimulate the economy. It is also charged with the smooth functioning of the banking system. For this reason, the Fed chair is often called the most powerful person on the planet. In 2009, Ben Bernanke was named Time’s Man of the Year. As a Fed chair, he took aggressive steps to address the 2007 banking meltdown and the 2008 financial crisis. Yet, many critics argue that the United States should return to the gold standard. Trade agreements, like the North American Free Trade Agreement, seek to reduce trade costs and increase each country’s GDP. The World Trade Organization attempted an ambitious worldwide trade agreement in the Doha round of trade talks. That didn’t work since the European Union and the United States didn’t want to end agricultural subsidies. Instead, the United States pursued bilateral and regional trade agreements. These include the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership. If they were approved, they would be the largest trade agreements in the world. Exchange rates affect trade by changing the value of the U.S. dollar. The dollar is the world’s global currency. Most international trade contracts are done in dollars. When the dollar is strong, it allows the prices of oil and other commodities to fall. That can create deflation. The building blocks are stocks and stock investing. They are riskier than bonds. The safest are Treasury bonds. The riskiest are junk bonds. You can invest in either with mutual funds. Many wealthy investors let hedge funds do the investing for them. Others seek higher returns by trading in risky commodities, futures contracts, and credit default swaps. This made many argue for more regulations on Wall Street.
