Eclectic Forecasting Research Paper
1.
The year 2007 is the third year of a series of three consecutive years of broad-based growth in the world. Although developed economies and underdeveloped economies had a world average growth of 3.4 % in 2007 with a previous growth of 4.9 in 2006, the perspective for that year was to an increase in the world growth in 2008 with a value of 3.6% (QUOTE). In the year 2006, 96 of 159 economies of the world increased their gross domestic product with a value higher than 3%, and only nine countries had a negative growth in 2006. The challenge for 2007, according to the policymakers of the United Nations, International Monetary Fund, and World Bank, was the ability to sustain the previous growth of the world economy for the following years. The other challenge for the economy was how to boost the growth in the developing countries aligned with the Millennium Development Goals signed by more than 100 countries in New York in September 2000. The growth of developed economies as United States of America, Canada, Europe and Japan had the perspective to maintain strong for 2008 and the following years instead of the perspectives for the undeveloped countries where the growth has a high dependence on China, India and other emerging economies (United Nations).
The unemployment rate was 4.4 percent in the first quarter of 2007 in the United States of America. The previous unemployment rate was the lowest since 2001. The Same situation had the Euro Zone with the lowest unemployment in more than ten years. In that year, the analyst had a positive perspective about the unemployment for the following three years, that is, from 2008 to 2010.
The inflation for the United States of America was 3 percent in 2007, and the analyst had the expectative to slow to 2 percent for the year 2008. In the Euro Zone, the inflation expectative for 2008 was 2.2 percent.
The year 2007 was at the peak of an economic cycle with low inflation and low unemployment with a growth rate of 3 percent.
2.
The National Bureau of Economic Research has a committee with the objective to study and analyses the evolution of the United States business cycles. The business cycles have four parts: peak, trough, recession and expansion. The peak is the moment when the economy when the economy is booming with low inflation, low unemployment and high volume of sales in the manufacturing and service industry; the peak is the end of the expansion and the beginning of a recession. The trough point is the moment in the economy with the lowest output of the economy with high unemployment and low sales in manufacturing and service industry; the trough is the end of the recession and the beginning of the expansion process. A cycle may have different lengths from two years to ten years. An example of a short cycle was between January 1980 and July 1981; the economy was in a peak point with cycle duration of 18 months. An example of a long cycle was between July 1990 and March 2001; the economy was in a peak point with cycle duration of 127 months (National Bureau of Economic Research).
The NBER considers the Industrial Production Index from the Federal Reserve in conjunction with the real Gross Domestic Product, unemployment, inventory volumes and sales.
3. In the first months of 2007, the process of homes in the United States of America increased to historic high values (with adjusted inflation) and the borrowed values of homes and properties. The quality of the new mortgages started to decrease in that year; several mortgages had collaterals in new securities in a form of mortgage-backed securities. Fannie Mae and Freddie Mac were the two financial institutions that were the leaders in the mortgage market in the United States of America.
After August 2007 the Federal Reserve authorities started a plan to supply large quantities of US dollar cash with different procedures. The Federal Reserve increased of the spread between the 3-months and overnight interbank loans interest rate. The Federal Reserve Bank created new procedures for lending and the administration of securities option in the United States market. One of the most important measures was the rights extension from the commercial banks to the investment banks to the mortgage administration of both institutions.
The Federal Reserve worked in agreement with the European Central Bank and the Swiss National Bank the extension of swap lines between the US dollar and the European Euro and the Swiss franc respectively. The Federal Reserve helped the investment bank, Bear Stearns, to continue operations and to be taken by another investment bank, the JP Morgan Chase. Other measures applied by the Federal Reserve were:
■ 100 billion dollars in Term Auction Facilities.
■ 200 billion dollars in Term Securities Lending Facilities
■ 36 billion in foreign exchange swaps, including the Bank of Japan, Bank of England, Central European Bank and the National Swiss Bank.
■ 30 billion dollars in Primary Dealer Credit Facility.
4. The government in 2007 was confident about the United States economy and the previous three years performance. 2007 is considered by the National Bureau of Economic Research a peak in an economic crisis, but the government official did not take the recommendations of the advisors about the beginning of a recession the following year. The officials of the Federal Reserve Bank evaluated the conditions of the economy for the following years, and they concluded the economy had a high exposure to the economy of the external debt and the low quality of mortgages. The Federal Reserve applied a policy of interest rate increase in the three previous years to reduce the speed growth of the economy without success.
The government continued the increase of national debt to finance the government operations affecting in the short term increase in the output and the Gross Domestic Product of the country.
Several authors as Kevin Casey and Robert Kiyosaki knew from more than five years ago the high probability of an economic crash in 2008. They compared the balance of debt of the economy, the GDP and the spread between the liabilities and assets of the economy. The expectative was the beginning of a recession, but it was difficult to determine in 2007 how the financial crisis will be for the following three years. Both the Federal Reserve Bank and the government did not apply an ant cyclical plan to avoid a potential economic crisis. The United States of America entered to the presidential in 2008, and the policymakers did not apply the respective corrections in the economy to avoid the 2008 financial crisis (Cecchetti).
5. The 2007 economic situation has similarities with the 2016 economy in the United States of America. The unemployment levels of 2016 are the best of the previous five years, similar to the 2007 scenario. The inflation levels of 2016 are with a similar value (year to date) to the 2007 inflation. The Dow Jones, NASDAQ and Standard and Poor's 500 are in their higher values of the previous five years.
There are differences between 2016 and 2007. The first difference is the importance of the Chinese Yuan (CNY) in the global economy. In November 2015, the International Monetary Fund accepted the CNY to be included in the currency basket of the International Monetary Fund Special Drawing Rights. That event increases the importance of the Chinese currency in the world affecting the dollar predominance.
Low prices in commodities (real value) and an increasing offer of oil products in the market. In 2007, there were low prices in commodities as steel, oil, gold and other; similar to the current prices of the commodities. The difference is that, in 2016, the oil market changed the supply and demand configuration. The United States of America is the most important producer of crude and refined oil in the world thanks to the development of shale gas technologies with a similar experience in Canada. Iran and Iraq started an increase in oil production. In the demand size, The US has stagnated the consumption per capita of fossil energies thanks to efficiency technologies and China reduced the oil consumption due to expectative of low growth of the economy.
Works Cited
Cecchetti, Stephen. Federal Reserve policy responses to the crisis of 2007-08: A summary. 2008. 10 July 2016.
National Bureau of Economic Research. US Business Cycle Expansions and Contractions. 2016. 11 July 2016.
United Nations. World Economic Situation and Prospects 2007. 2007. 11 July 2016.
