Stock-Flow Trap in US Economy

The model used in analyzing the article is the Balance of payments model. This model determines payments from one particular country to all the others. It condenses all economic transactions that a country performs in a year.

The country’s exports and imports of commodities may exist in forms of goods, services, financial capital, and transfers. This moulds the countries balance of payments. All transactions resulting to any payment or liabilities from debit holders and credit holders are indicated here.

The calculation for the balance of payments involves the Current Account, derived from movement of goods and services; the capital account, consequent to capital transfers and the attainment and the discard of non-financial assets that failed to be produced; and the financial account, which accounts for movement of investments.

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This model involves the economic ideas found in the article like balances between investments both locally and internationally. It also involves the key reason for the high amount of critical stock of US. This model also touches the issue regarding dollar as a prime currency for both US and the world. However, to further explain the model and relate to the article of Eatwell and Taylor, the American Stock-flow Trap, we will need to define another macroeconomic concept, the liquidity trap. (Catherine)

“When expected returns from investments in securities or real plant and equipment are low, investment falls, a recession begins, and cash holdings in banks rise. People and businesses then continue to hold cash because they expect spending and investment to be low. This is a self-fulfilling trap.”(Mike Moffatt)

In the article, the stock-flow trap is the main subject for discussion.

“The stock-flow trap happens when stock/flow ratios become large, players in the financial markets first become suspicious and then may very rapidly flee into liquid holdings as they sell all the liabilities of the economy in question.” (Eatwell and Taylor)

The stock-flow trap creates the very foundations for liquidity trap to happen. This condition, as stated in the article, is also likely happen in stable economies like the US.

During the 1980s budget deficit is $153 billion. This deficit gradually increases to $233 billion during the 1990s. At present, trade deficit still subsists in US economy. From 1980s, several administrations came out with plans to reduce budget deficit but these discrepancies prove that the policies were not that effective. Among these are the present policies of US President George W. Bush.

Based on the article written by Heffner titled “Bush’s Economic Policies Pt. 1” the US government estimated a $5.6 trillion surplus. But upon office, Bush came up with a towering $2.8 trillion deficit. Because of this budget deficit, the federal government made amends through foreign borrowings that lead them deeper into the arms of stock-flow trap. By having these kinds of policies, the US government failed to eliminate the problem regarding critical stocks. Based on this observation, we can say that the US economy has not significantly change from the last two decades. Thus, a stock-flow trap still bounds to happen. (Heffner)

References

1. Catherine, L. M. (August 19, 1999 ). On the Causes of the US Current Account Deficit. Retrieved December 11, 2006, from Peterson Institute for International Economics Web site: http://www.iie.com/publications/papers/paper.cfm?ResearchID=353
2. Heffner, J. (Mar 21, 2003). Bush's Economic Policies Pt. 1. Retrieved December 11, 2006, from Jobs and the Economy Web site: http://www.mikehersh.com/Bush_Economics_Pt_1.shtml
3. Eatwell, Taylor, J., L. (1999, September).The American Stock-Flow Trap. Challenge. 34-49.
4. Mike Moffatt. "What Happens If Interest Rates Go to Zero?"  2006.  The New York Times Company. december 12 2006. ;http://economics.about.com/cs/interestrates/a/zero_interest.htm;.

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