Corse Lecturer
There are big changes that have occurred in the economy over the years. Some positive and others negative. A large number of people now are enlightened on issues related to the economy and are involved in investment. More businesses are growing and resources are continuing to be strained. Greed is common as many people aim to have a large pool of resources at their disposal to grow their businesses as well as finances. There are now many economic vices that are stunting the growth of the economy. This paper will look at some of the economic issues today and how the economic theory provides insight on the discussion of these issues.
In this year’s Berkshire Hathaway’s annual meeting, the use of derivatives by banks in the US was questioned. Derivatives are tools that help to cover risk by deriving borrowed funds from underlying assets. In this meeting, they were identified as destructive weapons. This labeling is because they are believed to have played a role in the financial crisis of 2008. Derivatives help in risk management in organizations by borrowing funds to help cover losses in case of a risk. In case the risk does not occur, derivatives may be used as capital. This situation makes it very tempting to engage in regular derivatives’ trade that in turn may lead to banks getting buried in debts leading to an increase in the risk of economic and financial crisis. In this annual meeting, it was suggested that if derivatives were made illegal (Udland, 2016). The following chart depicts debt increase in banks as a result of increased derivative use from the year 2008.
The economic theory however does not fully support this suggestion because it views the role of derivatives in risk management as of uttermost importance. Derivatives as shown help to manage risks by protecting against the adverse consequences of a risk. However, according to the theory, improper management of derivatives may lead to large debts. These debts may lead to losses rather than profits due to the accruing of large interest rates. Thus, as a result, derivatives may lead to a great financial crisis that would take economic growth back to zero. Through this explanation, the economic theory provides insight on the pros and cons of the use of derivatives by US banks (Stulz, 2006).
Advice on investment ventures is another current issue in relation to the latest economic developments. Successful business people are now offering advice to starting entrepreneurs who want to achieve success. One example of such advice is that a cash flow analysis should be conducted before investing in property. The focus in property investment should be on the future and not on the present hoping for the best. One should be sure about the cash returns that the property investment will bring and not blindly take risks. Another piece of advice from a different party is that one should spread their business risk by using mutual funds. Mutual funds are collections of stocks and bonds. This diversification promotes participation in markets of even not so knowledgeable investors. Regular investment in these funds may lead to these not so knowledgeable investors even performing better than professional investors (Elkins, 2016).
The economic theory supports avoiding blind investment by assessing the risks before investing. Most investors prefer to take lower risks. However, some may take higher risks if the returns will be higher. One should have goals and a plan to achieve them before making an investment. The economic theory further supports diversification in investment so as to spread the risk and thus reduce it. While investing in mutual funds, an investor should however, still identify the risk of each of them ensuring they are low unless the returns will be higher with higher risk. This theory provides insight on the right investment decisions to make to promote profit making rather than losses (Eklund, 2013).
Another current economic issue is the increased risk of financial crisis arising from careless economic decisions and actions. Despite recovering from the great recession, some financiers believe that the mistakes that led to the recession are being repeated and may cause another crisis. Governments are still buying time to properly organize their economies yet not taking any action. So the problems that were in existence in the recession are still there, unsolved (Serwer, 2016). Greed and theft are some of such problems that are pulling us back. The Federal Reserve has been depicted as an avenue where such vices are a regular occurrence. The Federal Reserve and Income tax on citizens was introduces in the year 1913 in the US. Today, the Federal Reserve runs the US financial and tax system. As a result, the currency value has decreased and debt has increased (Snyden, 2013).
Rules and regulations of taxes influence greatly business related decisions thus leading to the paralysis of the economy. The Federal Reserve is creating financial bubbles that will lead to the great destruction of the country’s economy and finances. Financial bubbles occur when an asset’s price increases greatly in a short period of time putting the pricing system at a high risk of collapse. Pricing problems lead to improper distribution of resources thereby increasing poverty levels (Snyden, 2013).Pricing problems also cause a decrease in economic growth rate as shown in the chart below.
The Federal Reserve is seen to have been created by big banks to be of benefit to them and not the citizens. In the last financial crisis, the Federal Reserve loaned interest free money to the big banks secretly yet it has never done the same for American citizens. Thus, it is a system designed to get the government into deep debt because the US national debt has grown significantly over the years. It gets wealth from citizens through taxes, transfers it to the government through loans and then gets profits through payment of interest from loans (Snyden, 2013).
The economic theory suggests that economic bubbles are uncommon in an economy with ideal conditions of operation. The economic bubbles being an oddity provides insight that indeed the Federal Reserve is leading to economic destruction rather than growth. Before the existence of the Federal Reserve and a tax system, the US had great economic growth. The Federal Reserve and tax system are the inventions that came out of the period after the Civil War in the early 1900s. According to the economic theory, the eradication of economic bubbles can lead to the ideal operation of the economy. From this insight, this ideality can only be achieved through the removal of the Federal Reserve and taxing system (Barlevy, 2007).
In conclusion, as more economic and financial issues continue to emerge, we need to come up with ways to deal with the negative ones and incorporate the positive ones. This direction will lead to the continuation of economic growth and ensure proper distribution of resources. Investment advice from experienced and successful entrepreneurs should continue to be encouraged so as to give direction to beginning entrepreneurs. Industries, companies, banks as well as the government should all operate for the common good of all and not to fulfill their selfish desires.
References
Barlevy, G. (2007). Economic theory and Asset Bubbles. Chicago, US: Federal Reserve Bank of Chicago.
Elkins, K. (2016, 29th April). An HGTV star who’s invested in over 100 properties says that you should do one thing before buying any property. Retrieved from https://www.yahoo.com/news/us-economy-posts-solid-jobs-growth-march-004507732.html
Serwer, A. (2016, 29th April). Former Goldman Sach’s President says our Economic situation ‘will end in tears.’ Retrieved from https://www.yahoo.com/news/us-economy-posts-solid-jobs-growth-march-004507732.html
Snyden, M. (2013). During the best period of Economic Growth in US History there was no Income Tax and no Fed. Retrieved from http://www.infowars.com/during-the-best-period-of-economic-growth-in-u-s-history-there-was-no-income-tax-and-no-fed/
Stulz, R.M. (2006). Demistifying Financial Derivatives. New York: Cornerstone Research Inc.
Udland, M. (2016, 1st May). Berkshire Hathaway’s Annual Meeting just wrapped up. Retrieved from https://www.yahoo.com/news/us-economy-posts-solid-jobs-growth-march-004507732.html
