Article review methodology and analysis

¶ … New York Times 'Shift in Washington stirs economic jitters abroad' examines some of the impacts of the mid-term elections on the U.S. And global economies, including the financial markets. The article details some of the expectations that the markets have with respect to the financial climate. For example, the U.S. deficit is expected to rise with a Republic Congress that is determined to maintain the Bush tax cuts but has no answers to reduce spending. The result of this, markets fear, is that the U.S. dollar is going to be depressed. This may have some positive impacts for firms in the U.S., such as increasing export competitiveness, and improving the value of foreign currency revenue on American income statements. These outcomes could ultimately help the U.S. economy, but they will also be related to negative consequences as well.

Of key importance to finance is the prevailing interest rate. The article argues that with a gridlocked Congress, the task of restoring the U.S. economy will be left to the Federal Reserve. This will have a couple of implications. The first will be a continuation of the present low interest rates and the second will be moves to drive up the rate of inflation. The interest rates will allow for the monetary supply to remain at its present high levels. For companies looking to borrow, funding should be easy to acquire under this circumstance, and it should be cheap. Ideally, these low rates will spur an increase in business investment, particularly long-term projects. Financing should be easy to come by. In addition, the threat of higher inflation (a consequence of a lower dollar) could spur firms to take advantage of this monetary expansion sooner rather than later. Inflation will eventually need to be met with higher interest rates.

At present, U.S. firms are not expanding for a couple of reasons, one of which is overcapacity. A lower dollar will improve market opportunities abroad by making U.S. goods and services more competitive internationally. This will help to address overcapacity. The other reason is that there is no timetable for an increase in interest rates -- businesses can delay investment until better times because there will be no cost associated with that delay. A rise in inflation would help to address that, as businesses would know that low interest rates will have to end at some point -- they would now be viewed as a finite opportunity and costs would be associated with inaction.

The biggest risk, the article argues, to the financial environment is that the U.S. economy would cease to be a driver of economic growth. Europeans interviewed in the article are already worried about their role, but as developing nations experience strong growth they are poised to take over leadership roles in the world. While this sentiment is perhaps premature and alarmist, there are significant implications would China, India and Brazil begin to take over. Those countries would attract investment at a faster rate than would the U.S. economy, which would have a negative impact on the financial environment in the U.S., which has long enjoyed a significant influx of foreign capital.