Economic Theory – Gm Ipo Issue
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With GM just a few days removed from their successful IPO, it is already being touted as a huge success. All of the numbers are currently still being sorted out, so it is unclear whether it is the largest IPO in US history, but I think we can all agree that it turned out a lot better than the banks bailout. With the banks, the government basically threw a bunch of money at them and crossed their fingers. Conversely, with GM, the government took a stake in the company and just sold half of its shares as part of the IPO, so the Treasury received almost $12 billion.
Keynesian economics is defined as: “An economic theory which advocates government intervention, or demand-side management of the economy, to achieve full employment and stable prices.” In laymans terms, the government needed to adjust its spending depending on unemployment rates and inflation. If unemployment is high, then it will put downward pressure on wages, causing a snowball effect on the economy. In that situation, the government needs to spend more money to create jobs. In the case of inflation, the government should take their foot off the gas, spend less and slow down the economy, thus lowering inflation. This theory was successful to some degree in springing the United States out of the Great Depression, but the amount of government spending was less than what John Keynes recommended. World War II was the real reason the Great Depression ended, but after the war economists realized that Keynes theory was correct.
The issue with Keynes theory that came about in the 1970s was the question of what to do if both unemployment and inflation were problems at the same time. Milton Friedmans monetarism then rose to prominence in 1980 when it was finally used to counter stagflation. Monetarists believe that markets are inherently stable in the absence of major unexpected fluctuations in money supply.
Keynesian theory has had a resurgence in the past couple years, mainly in fiscal policy. By spending more money, the government had to replace some of the revenue lost by the recession. Tying this back into the GM bailout, the government had to step in to save a large American company and to jumpstart (pun intended) the auto market. A recent report showed that the auto industry has created 700,000 jobs over the past year. With unemployment still around 9.5%, we need all the help creating jobs that we can get.
It is a viscous cycle, economists say that we will not see unemployment numbers drop considerably until GDP gets over 3%, but how can we get over 3% with so many people out of work? Consumer spending makes up about 70% of the US GDP, so until we can create more jobs, allowing more households to spend more, which will help GDP, then the economy is stuck in the area of grinding out around 2% GDP.
Another obstacle that we need to hurdle is the worry that people have now. One gauge of that is consumer sentiment, which is currently at a 5 month high of 71, but still far off from the average of 89 that we had during the last bull market of the mid 2000s. Another gauge that consumers are still hurting from the recent recession is the US savings rate. We are currently hovering around 6%, which is double from where we were from the 2003-2007 average. Consumers are paying down their debt, savings more for that next rainy day that seems to come more and more frequently.
Forecasting GDP, unemployment and inflation is difficult for anyone to do, especially for someone who just a student of this “game.” However, given the feds second round of quantitative easing and the research provided by the Philadelphia Fed Fourth Quarter survey of professionals, I will give it my best shot.
As mentioned earlier, quantitative easing part II is under way, so short term interest rates should stay low for some time. The Fed wants rates low for many reasons, primarily for the much needed stability of the housing market, so they will stop at nothing to keep rates low for an extended amount of time. Ben Bernanke has expressed their fear of deflation and their monetary policy shows that they are much more afraid of that than they are of inflation. This being said I