Us & russia analysis

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UEES

PORTFOLIO MANAGEMENT

HOMEWORK
United States Economic Crisis
&
Russia Economic Analysis

BY

FRANCIS G. SOTOMAYOR TORRES

2008-2009
Introduction
The US economy is one of the biggest and most influential economies in the world. Even tough, the US economy is going through a lot of troubles and there is a chance that it may face recession.
The First Part of this research paperseeks to study US most important economic factors such as Inflation, Consumer Price Index and Unemployment in order to analyze the tendencies in which the US economy is aiming in the near future and to understand the current crisis of the US.

US Economy Fundamental Problems

Inflation

The table above shows the inflation rates since year 2000 to August of 2008. If we compare 2008’sinflation with the rates of previous years it is clear that it has increased a lot. For example: On August of 2007 the rate was 1.97% but on the current year it has increased to 5.37% which is a big difference. This increase on inflation might affect the price of the US Dollar ($) against international currencies such as the Euro (€) and also investors might lose profits because of this currency’sdevaluation. Purchasing power might decrease because inflation acts negatively on salaries. It is also harmful for investment because it creates uncertainty, so investors might cancel projects. In other words, investment and consumption decrease.
The inflation’s tendency is more understandable in the following chart which demonstrates the historical cumulative inflation of the US.

Consumer PriceIndex
The Consumer Price Index measures the variation of prices paid by consumers for a certain basket of goods and services considered as necessaries for the daily life. The following chart shows the CPI since the year 2000 to the present.

“The Consumer Price Index (CPI-U) is compiled by the Bureau of Labor Statistics and is based upon a 1982 Base of 100. A Consumer Price Index of158 indicates 58% inflation since 1982. The commonly quoted inflation rate of say 3% is actually the change in the Consumer Price Index from a year earlier. By looking at the change in the Consumer Price Index we can see that what cost an average of 9.9 cents in 1913 would cost us about $1.82 in 2003 and $2.02 in 2007.” (www.inflationdata.com)

Giving the information shown at the moment, it’sclear that purchasing power is decreasing since inflation is increasing. If there exists an increase on salaries, it must be greater than the CPI in order to create an increase on purchasing power, but this action could be harmful on the long-run because it seems that inflation is going to increase, so this measure would be just temporary and useless afterwards.
Dollar Devaluation
“The recentdevaluations of the dollar partly reflect changes in the trade cycle; i.e. worsening prospects of growth and falling interest rates make it less attractive to buy dollar assets. But, in addition to short term factors, the falling dollar is also symptomatic of the structural weaknesses in the US economy. It is becoming less competitive compared to its trading partners.”(What Went Wrong With the USEconomy? )

External debt and the US Current Crisis
The US current external debt is $12.25 billion (www.indexmundi.com). Its external debt has increased since year 2001. One reason might be the war in Iraq; the US government has increased its military expending a lot and that is one of the reasons of why President Bush is criticized. Also adding the $200 billion used by US Federal Reserve and theTreasury Department to save of the mortgage guarantee firms Freddie Mac and Fannie Mae. As well as the loan of $85 billion to keep the insurance company American International Group alive.
“All this spending by the US government will raise the public debt of the US to around $11.3 trillion. That makes it the biggest borrower in the world. The creditors, among others, are the central...
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