Money: economic principles and functions

Money Supply

According to the historical data available through the Federal Reserve's restructured website, borrowing by American households more than tripled in the decade running from 1995 to 2004, from a mere three-hundred-and-nine billion ($309 billion) dollars in 1995 to almost one-thousand-and-fifty billion ($1,050 billion) in 2004 (Federal Reserve 2009. This massive increase in the money supply made available to households coincides with, and is directly related to, reduction in the federal funds rate beginning in 2002 and lasting until the beginning of 2004 (Federal Reserve 2010). An examination of the monthly federal funds rate breakdown alongside the Total Net Borrowing table published in 2009 for the decade in question shows that during the years of relative stability in the funds rate, borrowing grew at a much slower rate (even declining in 1997) (Federal Reserve 2009; Federal Reserve 2010). As rates dropped in 2001 by more than four full percentage points, growth in household borrowing began to increase dramatically; this growth can be seen to slow down again in 2004, when rates began to climb back upwards (Federal Reserve 2009; Federal Reserve 2010). this shows the clear influence that tight vs. expansionary monetary policies on the part of the Federal reserve has on spending and borrowing.

In this instance, it appears to have been a wise decision to pump more money into the struggling economy; the fact that rates were able to rise back to the same levels as at the start of the decade suggests an overall stability to the monetary supply due to the actions of the Federal reserve in regards to its control of the rate of capital and borrowing in the nation.

Trade and Currency

The United States has run a consistent trade deficit with China since at least the 1990s, and this deficit has grown every year except for two in the two decades since (Export.gov 2010). In recent years (with the exception of 2009, when the deficit was reduced considerably due to a massive slowdown in consumer spending in the United States), this deficit has risen dramatically, from over ten billion dollars in 1990 to well over two-hundred billion dollars ($200 billion) presently, and for much of the past decade (Export.gov 2010). The United States' trade with the European Union is less clear cut, as information is still reported by country rather than with the European collective community as a whole, but there appears to be more actual balance in the trade balance between the United States and the European Union, with trade deficits existent for many countries (particularly Germany, Italy, and Austria) and trade surpluses with others (notably the United Kingdom and Spain) (Exports.gov 2010). The deficits due to tend to outweigh the surpluses in dollar amounts over the twenty-year period, however, suggesting that there is a definite overall deficit in the United States' trade relationship with the European Union (Exports.gov).