2009+World+History+Final+Project+D+Jenny

  

=  = As money continues to be the biggest factor in people’s lives, economy is one of the primary concerns of many. Despite people’s constant wants and needs in order to make a living in the world we made for ourselves, it is evident that the economy is not doing well and //that //seems to be putting people in foul moods. But it’s not the situation, it’s your reaction to the situation, according to one Robert Conklin. Consumers (that’s us) may actually have the power to change the state of the economy by having more confidence.  What does economy mean, anyway?   Economy is defined as a way of using the resources within a political region in terms of production and consumption of goods and services and the supply of money, according to Oxford Dictionary. (Oxford Dictionary)

Some of the main factors involved in determining the economic state are: · GDP · Stocks · Consumer Spending and Saving · Employment rate  Steven Colbert is an American satirist who hosts The Colbert Report. While the show is intended for humour, he does provide some insight into various matters at hand, in this case, market psychology. media type="custom" key="3899773"
 * //__Steven Colbert’s Market Psychology__ //**

In the video, Colbert addresses the topic of market psychology and that positive outlook may enhance the current economic situation. He believes that if President Obama gives people incentives to spend money, the economy will be alleviated. He interviews Jim Cramer, who is the host of “Mad Money” as a market commentator and attempt to convince him that psychology plays an important role in the economy.  How exactly does psychology play role in the economy? 

 <span style="font-family: 'Times New Roman', Times, serif;">Consumer confidence fundamentally refers to how good individuals feel about the overall state of the economy and their personal financial situation. It has a major impact on the shape of the economy and it is also impacted by the shape of the economy. ( The Impact of Consumer Confidence on Business and Investing) There are two primary measures of consumer confidence: <span style="font-family: 'Times New Roman', Times, serif; color: rgb(175, 40, 95);"> Consumer Confidence Index (CCI) <span style="font-family: 'Times New Roman', Times, serif;">, which measures how optimistic or pessimistic people feel about the economy for the upcoming months and it is based on a survey for over 5000 households conducted by Conference Board. <span style="font-family: 'Times New Roman', Times, serif; text-transform: uppercase;">and <span style="font-family: 'Times New Roman', Times, serif; color: rgb(92, 69, 150);">Consumer Sentiment Index (CSI) <span style="font-family: 'Times New Roman', Times, serif;">, which measures people’s feelings on their personal financial state and it is based on a telephone survey for 500 households conducted by the University of Michigan. ( The Impact of Consumer Confidence on Business and Investing)
 * //<span style="font-family: 'Times New Roman', Times, serif; color: rgb(255, 87, 0);">__Consumer Confidence:__ //**

There exists an intricate relationship between the economy and consumer confidence. Basically, if the economy is good and consumer confidence is high, they spend more and expands the economy. If the economy is bad and the consumer confidence is low, they save and contracts the economy even further.

As so many people know already, the current economic state is not very good, in fact, we are going through what’s called an economic recession. Consumer confidence is not measured just to see the psychological state of people but to, in fact, determine the current economic state. Consumer spending drives 70% of economic growth and if consumers are wary about the economy, they will tend to spend less of their money and the economy will continue to decrease its rate of growth.

<span style="font-family: 'Times New Roman', Times, serif;">The world officially went into recession in 2007. Economic Recession is literally the contraction of the economy. An economic recession occurs when GDP growth is negative. GDP is the dollar amount of final goods and services produced within a country and it determines basically how much money a country has and the overall economic performance of the country. Its causes are increases in money supply, interest rates and inflations. When the inflation rate goes up, people stop spending money, which has a detrimental effect on the economy. ("What is Recession?")
 * //<span style="font-family: 'Times New Roman', Times, serif; color: rgb(40, 93, 175);">__Economic Recession__ //**

In order to understand the correlation between consumer confidence and the current economic recession, one must be aware of the fundamental reason for the recession.
 * //<span style="font-family: 'Times New Roman', Times, serif; color: rgb(93, 174, 41);">__Subprime Mortgage Crisis__ <span style="font-family: 'Times New Roman', Times, serif;">

media type="custom" key="3899777" //** <span style="font-family: 'Times New Roman', Times, serif;">The subprime mortgage crisis refers to the current situation in which people have made mortgages but failed to pay them back thus making many lose money. In the beginning of the 21st century, the global economy was prospering and the prices of houses were going up at tremendous rates. Because of this, people were buying houses and selling them almost immediately in order to gain profit. Because so many people wanted to buy houses, they started to loan money from the banks and the banks established a system where they lend mortgages (money to purchase the houses) to these people and have them pay back over a certain period of time. This system was working out fine because people were eager to buy house as and they were able to pay back the mortgages quickly due to the profit they earned. The banks also promoted low introductory interest rates so that people would be hooked.

However, when people were not making as much money as they hoped to, they started to default on their mortgages and they were soon labelled as “subprime” burrowers because they were much in debt. Since these people were not paying back their money, the banks lost money also. Also the intermediaries involved in the Mortgage Backed Security were losing money because the subprime burrowers weren’t paying back their loans. Also the new houses on the market were decreasing in value that discouraged people to buy houses.

This impacted the global economy because of the Mortgage Backed Securities system where they pool all the mortgages together and divide it up and sell shares to people all over the world. These very people all over the world were not making any money since nothing was being paid back by the subprime burrowers.

<span style="font-family: 'Times New Roman', Times, serif; color: rgb(138, 115, 211);"> <span style="font-family: 'Times New Roman', Times, serif;">The Subprime Mortgage Crisis is certain a major factor in the current economic recession but it is indeed one, and in this very //<span style="font-family: 'Times New Roman', Times, serif;">one, //<span style="font-family: 'Times New Roman', Times, serif;">there are many implications of the crucial role of consumer confidence.
 * //<span style="font-family: 'Times New Roman', Times, serif; color: rgb(138, 115, 211);">__Impact of Consumer Confidence on Subprime Mortgage Crisis__ //**

So the house prices were increasing at first.

When the price of a house increases, who determines the price? Is it something random? Is a person managing a chart that says Today’s Home Value and puts whatever number he wants to?

As an obvious follow up, house prices are determined by consumers and this concept is called Fair Market Value. Fair Market Value is the price a buyer is wiling to pay and a seller is willing to accept for the property ("What Determines the Value of the House?"). When consumers were confident about their financial state, they were willing to buy more expensive houses thus constantly increasing the value of houses. However as consumers’ demand went down, the value of the houses were naturally going down.

Also, because people knew they were in debt, they, not only bought cheaper homes, but stopped spending their money on other things that make a lot of businesses to fire the employees because they were not making money. As the unemployment rate went up, people started to spend even less, causing an economic cycle of destruction.

Understanding the role that consumer confidence plays in the subprime mortgage crisis is important in that it shows the importance of consumer confidence in the current economy because the subprime mortgage crisis is essentially one of the direct causes of the current economic recession. Therefore it is evident that low consumer confidence is also one of the direct causes for the economic crisis and that one of the ways to alleviate said crisis is to increase the CCI, globally.


 * //<span style="font-family: 'Times New Roman', Times, serif; color: rgb(247, 8, 201);">__How does the current consumer confidence look like? (at least, until the last week of May)__

media type="file" key="interview.m4v"//**<span style="font-family: 'Times New Roman', Times, serif;">The predictions and perception of the three interviewed regarding the economy demonstrate a <span style="font-family: 'Times New Roman', Times, serif; color: rgb(46, 70, 168);"> smaller <span style="font-family: 'Times New Roman', Times, serif;"> scale of current consumer confidence all over the world. In the US, about 6 percent of the citizens rate the national economy positively. ("Not a Happy New Year")

According to ABC News’s January article Consumer Confidence 2009: Not a Happy New Year by Peyton M. Craighill, positive ratings of the economy, on which CCI (Consumer Confidence Index) is based, suffered the most in 2008, falling by 25 points throughout the year. In the fourth quarter of 2008, the CCI averaged -50, which is the worst one on record. Considering the fact that the article was written on the 6th of January, 2009, just after the end of year 2008, it does indeed portray what the current consumer confidence is like. ("Not a Happy New Year")

In CNN’s February article Consumer Confidence Plummets, it states that consumer confidence has fallen to the lowest level since the 1967 inception as people hesitated to spend due to rising unemployment and what they hear on the news. ("Consumer Confidence Plummets")

<span style="color: rgb(36, 157, 188);">
 * //<span style="font-family: 'Times New Roman', Times, serif; color: rgb(36, 157, 188);">__The impact of consumer confidence on economy__

media type="custom" key="3901795" <span style="font-family: 'Times New Roman', Times, serif;"> //**

<span style="font-family: 'Times New Roman', Times, serif;">Consumer spending is very important in the current economic recession because people have saved too much, which contracted the economy and hence the recession. Consumer confidence is directly related to consumer spending because people would tend to spend more if they are confident about the economy. This would impact not only the flow of the economy but also the employment rate. (Economics: Principals & Practices) <span style="font-family: 'Times New Roman', Times, serif;">Employment rates are important in determining the state of economy because if more people are employed, more people are making money – increasing the GDP. When people start spending, businesses start hiring more people in order to increase their output as demands increase. (Baumohl 104) <span style="font-family: 'Times New Roman', Times, serif;">GDP, or Gross Domestic Product, is the basic measure of the amount of money within a country based on the value of all goods and services produced. It is the most definite way to determine the economic state of a country because it clearly shows how much money the country has in circulation within it. (McGraw Hill 64)
 * //<span style="font-family: 'Times New Roman', Times, serif; color: rgb(93, 174, 41);">Consumer spending & saving //**
 * //<span style="font-family: 'Times New Roman', Times, serif; color: rgb(175, 40, 95);">Employment Rates //**
 * //<span style="font-family: 'Times New Roman', Times, serif; color: rgb(0, 0, 255);">GDP //**

Consumer confidence affects the GDP indirectly as GDP is heavily weighed on consumer spending. If a consumer is confident about the economy, they tend to spend more, as demonstrated by the subprime mortgage crisis when people were willing purchase more houses despite their weak financial situation. When people start spending, businesses start hiring more people in order to increase their output as demands increase, as previously stated, and this inevitably increases household’s incomes – thus raising the GDP and allowing for economic expansion. (Baumohl 105) <span style="font-family: 'Times New Roman', Times, serif;">Stock is a share of a company’s financial assets, entitled to an individual. By buying a company’s stocks, one faces a chance to receive the company’s profits in the case of a prosper in the company’s business.("Stocks Basics") How stocks work is that one buys a number of shares of a company as a form to keep one’s money and constantly keep a watch on its fluctuating value because it shows the value of his or her possessions since one has the right to sell their own stocks or buy even more from the same company. Because people cannot usually predict the change in stock values, they sell their properties when they think the value is at the highest point and if they see the pattern and are aware that stock values are increasing, they would buy more and sell them almost immediately.
 * //<span style="font-family: 'Times New Roman', Times, serif; color: rgb(0, 128, 0);">Stocks: Why it is important currently //**

The Dow Jones Industrial Average is an index of the average welfare of the stock value of 30 different selectively chosen companies. Even though companies and their stock value have different patterns, the Dow Jones shows the investors on average, how the overall stock prices are doing. The Dow Jones is monitored closely globally because it has been proven that taking the average of only thirty actually are able to show the overall stock values so that people are able to know the average current stock values that would impact not only the people who invested in the thirty Dows but all people who invested in stocks. It is now easy to see that when stock values go down, the value of individual financial assets go down and it affects not only one country but potentially the entire world.

Stock prices are mainly determined by consumer confidence since, due to its elasticity of supply, when demand escalates, the stock prices escalate also. As consumer confidence stock prices would rise that encourage more investments in equities and greater consumer spending because growth in consumer confidence would impact their spending and attempt to purchase the stocks since they believe that stock values will go up. Also increasing values in stocks means that the companies are becoming more public, which would gain trust from the consumers and eventually attract more investors and have the stock values rise even more.

Not many people save their money in cash because of inevitable inflation which would cause for the value of their money to continuously decrease, eventually actually having less than when they first liquefied their assets. So they invest their money by buying stocks because records show that stock values almost always increase after a ten year span, as in, every ten years, stock values always went up. People all around the world invest in companies all around the world, meaning that stocks are a large portion of people’s possessions all around the world and they are supporting people’s finances. That is the reason why it is crucial that stock prices rise: the value of people’s possessions will increase, increasing the consumer welfare. <span style="font-family: 'Times New Roman', Times, serif; color: rgb(187, 129, 129);"> <span style="font-family: 'Times New Roman', Times, serif; color: rgb(128, 128, 0);">The Great Depression <span style="font-family: 'Times New Roman', Times, serif;"> of the 1920’s refers to the world’s first major global economic down turn, which occurred after the World War One and eventually became one of the causes of the World War Two. The Great Depression was triggered by the Stock Market Crash in 1929 at Wall Street’s New York Stock Exchange.
 * //<span style="font-family: 'Times New Roman', Times, serif; color: rgb(187, 129, 129);">Stocks: Repeating History //**

Much like how the subprime mortgage started, when Wall Street, then the financial capital of the world, was booming, optimism about the US economy became abundant. To take advantage of the soaring stock market, many middle income people began buying stocks on margin. Buying stocks on margin works very similarly to mortgages as they pay a small portion of the stock’s price as a down payment and have the stockbrokers loan money to them. Like mortgages, it is a well developed system when the stock prices were rising enough for the stock owners to actually pay back the stockbrokers; however, if the stock prices were to plummet, the stock owners would have no money to pay back the stockbrokers thus having the stockowners themselves lose money as well as the stockbrokers. (Beck 423)

In the September of 1929, stock prices were unnaturally high and people started to sell what they own, thinking that the prices would soon go down. Eventually few people wanted to buy the stocks because they had no confidence in that the prices would constantly increase. This lowered the stock prices and values and the market collapsed on October 29th of 1929 and started the Great Depression. (Beck 424)

The Great Depression was followed by the stock market crash and its effects were almost immediate: industrial production, prices and wages all plummeted. Eventually, by 1933, one quarter of the American working population were unemployed. As American economy failed, the countries that depended on it also had their economies take on a downturn. (Beck 424)

Because the Great Depression started in a very similar way as the current economic recession, it is possible for the world to once again be in a major economic crisis. In order to prevent this, consumer confidence must rise so that no more businesses cut jobs and decrease consumer welfare globally.

<span style="color: rgb(247, 8, 201);">

//** <span style="font-family: 'Times New Roman', Times, serif;">The four charts above show GDP prices, Dow Jones prices, unemployment rate and Consumer Confidence Index.
 * //<span style="font-family: 'Times New Roman', Times, serif; color: rgb(247, 8, 201);">__How much of an impact exactly?__ <span style="font-family: 'Times New Roman', Times, serif;">

The charts given above were collected in order to see if there are any correlation among them and see the effect of consumer confidence in more technical and observatory manner.

Evidently they do.

Since all the charts, as they are from different sources, have different time spans and intervals as well as different format, it was difficult to see whether they actually correlated or not. When the charts were juxtaposed, they showed incredible correlations in their patterns.

The most common range of time in the four charts is from 1999 to 2007.

Within that range the stock market and the GDP price has at first increased, experiencing a steady decrease in the flow until around 2003 when it starts to go up again until 2007 when both of the graph takes on a sudden drop. The comparison of the two charts shows that GDP and the stock market are closely related.

The general common pattern of the two charts is also related to the unemployment rate; however, the patterns for the two are inversely proportional, as in, it is the direct opposite of the other. Unemployment decreases as the stock values and GDP prices increase because decrease in unemployment rate means that the economy is doing well, which is determined by stock values and GDP.

Since the three charts that are compared are the stated determinants of the economy, it might not be that much shocking or impressive because their relatedness to one another does not prove anything, especially it had nothing to do with consumer confidence so far. But the CCI chart demonstrates the point that consumer confidence does have a major impact on the economy.

The pattern of Consumer Confidence Index is directly proportional to the pattern of GDP prices and Dow Jones and is naturally inversely proportional to the unemployment rate pattern.

<span style="font-family: 'Times New Roman', Times, serif;">

The combined chart all too clearly shows the truly perfect correlation among the four charts. (Just look at the unemployment rate – it’s a total mirror image of the other three charts. The lines in the three other charts even overlap at certain points.)

The evident similarity in the four charts demonstrates and clearly shows that consumer confidence does, in fact, impact the economic growth in a major way.


 * //<span style="font-family: 'Times New Roman', Times, serif; color: rgb(255, 87, 0);">__How to increase consumer confidence__ <span style="font-family: 'Times New Roman', Times, serif;">

media type="file" key="econ 1.m4v" //** <span style="font-family: 'Times New Roman', Times, serif;">Economy is a <span style="font-family: 'Times New Roman', Times, serif; color: rgb(147, 174, 91);">cycle <span style="font-family: 'Times New Roman', Times, serif;">that must be triggered in order to have an effect on the economy. While it seems puzzling that consumer confidence should rise in order to help the economy since consumer confidence rises due to economic growth, there is a way for consumer confidence to increase; however, this process must be provoked by an action despite the irony of the situation as consumer confidence leans towards psychology as to actions. <span style="font-family: 'Times New Roman', Times, serif; color: rgb(209, 22, 16); font-size: 110%;"> People must start spending their money. <span style="font-family: 'Times New Roman', Times, serif;"> media type="custom" key="3900665"

As shown in the ToonDoo, in the long run, people will benefit from spending their money during the recession because when they start spending money, the businesses that produce the goods and services will start to increase their output to gain even more money. They will eventually start to hire more people and as more people are provided with jobs, each household income will increase thus increasing the GDP. Also, people would spend their money on stocks as well, increasing the stock value and allowing for economic growth. <span style="font-family: 'Times New Roman', Times, serif; color: rgb(107, 255, 0);"> Beautiful. <span style="font-family: 'Times New Roman', Times, serif;">

//** <span style="font-family: 'Times New Roman', Times, serif;">Despite the fact that people appear to be wrangled by economics, they are not necessarily aware that economy is <span style="font-family: 'Times New Roman', Times, serif; color: rgb(210, 132, 132);">a concept that humans have created themselves <span style="font-family: 'Times New Roman', Times, serif;">. While the nominal value of money is what people actually decided upon in the beginning of economics, the actual value of the money is constantly changing due to people’s minds and their expectations of the economy. Consumers have the power over the economics but currently, the consumers, as unstable the consumers have made the economy in the past, are reluctant to spend money because they are not aware that in the long run, their spending will come back in the form of stable economy and this reluctance contributes to their negative outlook of the economy. This is understandable since if they lose their money in the current economic recession, they would have immediate negative effects first. However, as desperate as they are, <span style="font-family: 'Times New Roman', Times, serif; color: rgb(124, 238, 132);">people should be positive and confident about the current economy because their confidence can potentially allow for positive changes <span style="font-family: 'Times New Roman', Times, serif;"> in the four sectors of the economy: GDP, consumer spending, unemployment rate and stock values. It is clear that consumer confidence, as in consumers' positive outlook on the economy, has a huge impact on the economy as it has a great potential to relieve the economy. Even though it is difficult for all the consumers to suddenly spend their money when the News constantly reports negatively on the economics, people must have certain degree of optimism and start investing, if they are reluctant to purchase more goods. Regardless of the difficulty in keeping it or even raising it, people's positive attitude towards the current economic state is important because it contributes much to the economy itself.
 * //<span style="font-family: 'Times New Roman', Times, serif; color: rgb(154, 116, 154);">__Conclusion__ <span style="font-family: 'Times New Roman', Times, serif;">

<span style="color: rgb(0, 0, 128);"> <span style="font-family: 'Times New Roman', Times, serif;"> media type="custom" key="3900755" //** <span style="font-family: 'Times New Roman', Times, serif;">By coincidence or other, during the last of week of May, consumer confidence started to “soar.”
 * //<span style="font-family: 'Times New Roman', Times, serif; color: rgb(0, 0, 128);">PS: Last week of May: Just when Jenny starts to wrap up her project…

CNBC’s May 26th of 2009 article Consumer Confidence Sees Biggest Jump in 6 Years, does a successful job in showing as to why it is important for consumer confidence to increase. As consumers started to suddenly become more confident in the economy, the Dow Jones industrial average went up by 120 points. The sudden boom in a factor of the economy has helped to prove that it is, in fact, important to have positive outlook of the economy because it does have its immediate effects ("Consumer Confidence Sees Biggest Jump").

<span style="font-family: 'Times New Roman', Times, serif;"> Download: (Changes have been made to the wiki link)

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