The times, they are a changing.

Too often these words have echoed throughout history as situations shaped society and the nation. It is without a doubt that without both the good and bad, the United States would not be the nation that it has become today. Unquestionably, world wars and leadership agendas have had a profound effect, however, for the moment, let us focus on the economy of 2007. As I examine some of the primary indicators of the current state of our economy, some glaring issues such as the various money supplies and interest rates immediately strike me as a bit disconcerting. There are some indications that in the very near future there may be some problems facing our nation if the government and/or Federal Reserve do not take swift and immediate steps to thwart the dangers. Although, when one analyzes consumer confidence, money supplies, and interest rate individually, they may not suggest negative future flow. Upon further analysis and comparison with one another, it becomes more apparent there is good cause for concern. Both the federal funds and prime credit rates remained essentially static from the previous years ending rate. The federal funds rate was tabbed at 5.02 percent, which in comparison to previous years is relatively average if not a bit high; especially when looking at the previous 10 years. This may suggest that The Fed is currently looking to pursue a policy where money is not cost preventive for banks to borrow from one another while at the same maintaining a rate that does not necessarily make borrowing low cost. According to an article on CNN, the current state of the federal funds rate indicates, that the economy's stabilized despite the housing slump and that inflation has abated (CNN). The rate at which banks were willing to lend to businesses followed an increasing upward trend, reaching a rate of 8.05 percent for 2007. In comparison to the previous 10 years, it certainly stands out as one of the higher rates of the time. However, growth of the prime rate between the years 2006 to 2007 slowed from where it was trending, taking into consideration the rate at which it was growing in the previous 5 years. This insinuates that The Fed felt consumer spending was healthy overall and they did not view a need to lower interest rates to encourage lower savings rates and stimulate spending. The money supply certainly tells an interesting tale, primarily when comparing the M1 and M2 money supplies. First of all, the M1 growth rate was actually a negative value, -.3 per-

cent, for the year. This means that people were actually spending less money than they had the previous year. However, the M2 money supply growth was 5.2 percent, which shows that people were actually saving 5.5 percent more than they had the previous year. Obviously, this spells trouble for the economy in that if people are not spending money there certainly can be no growth or economic stability. This sudden increase in savings can certainly be explained once one recognizes that the Consumer Confidence Index was 90.5 for the year. Admittedly, not a horrible figure, however, it suddenly becomes alarming when considering the fact that the indices had been hovering over 100 for the years preceding 2007. I find the different indices a bit contradictory in a couple ways. The two interest rates mentioned were both indications that the economy was doing pretty well and was tracking upward. However, consumer behavior spoke differently and suggested a far different reality of the economy. The fact that the M2 money supply was increasing suggested that people were saving a substantially more money than had previously been the trend. In order to try to stimulate spending habits, one would expect The Fed to lower interest rates in hopes of increasing the marginal propensity to spend. This was, however, clearly not the route the consumer took. This either means that The Fed were completely off base with their estimates of consumer behavior, or The Feds decision to establish relatively low interest rates were ineffective with creating the results they were projecting with their policy initiatives. One possible explanation for The Feds decision to hold the interest rate steady from the previous year suggests that the 4.6 unemployment rate was a significant factor in not raising interest rates. The GDP, as well, grew by 2.9 percent during the year, which potentially signaled that The Feds decision to not raise the interest rate was effective at stimulating domestic economic development. Although, I find it a bit odd that the GDP grew given that the study of the money supplies clearly showed that people were spending less and saving much more of their money. The inflation rate for 2007 was also a strong indication that the economy was rather healthy early in the year, as it held steady at around 2 percent. However, a red flag that of less than ideal domestic economic strength was that by November, the inflation rate had more than doubled to an alarming 4.31 percent. The inflation rate in and

of itself should have been a reason that immediate action needed to be taken in order to prevent hardships in the very near future. In my opinion, the best route to try to improve the United States economy in 2008 would be through the pursuit of a expansionary economic policy either fiscally or through monetary policy. An expansionary monetary policy through The Fed would include decreasing the prime credit rate, which would hopefully take away the desire to save as much and lead to further corporate expansion and spending in the economy. Another possible option would be if the government lowered the sales tax. This could possibly lead to consumers spending now instead of waiting to make their purchases in the future. Given the impact of these two options, I certainly would see more value in employing a contractionary monetary policy, since I see the largest issue facing the economy of 2008 as being the mind boggling difference between the two major money supplies.

Works Cited

"Current Inflation." Welcome to InflationData.com. Web. 25 Jan. 2012. <http://inflationdata.com/inflation/inflation_rate/ currentinflation.asp>.

"GDP - Real Growth Rate(%) 2007 Country Ranks." Photius Coutsoukis; Photius; Photios; Fotis Koutsoukis. Web. 25 Jan. 2012. <http://www.photius.com/rankings/economy/

gdp_real_growth_rate_2007_0.html>.

La Monica, Paul A. "Fed Leaves Key Interest Rate at 5.25 Percent - Jan. 31, 2007." CNNMoney - Business, Financial and Personal Finance News. 31 Jan. 2007. Web. 25 Jan. 2012. <http://money.cnn.com/2007/01/31/news/economy/ fed_rates/index.htm>.

"Overview of BLS Statistics on Unemployment." U.S. Bureau of Labor Statistics. Web. 25 Jan. 2012. <http:// gov/ bls/unemployment.htm>. www.bls.-