Personal Finance- National & Global Finance

Just as there are indicators to gauge a business's finances, so are there indicators to measure the financial health at the national and even global level. The U.S. government- particularly the Federal Reserve, White House, and Congress- monitor these indicators and act (hopefully) to minimize the damage of economic crises such as the recent "Great Recession" (or Not-So-Great Depression), as well as to promote the long-term well-being of the U.S. economy. Oftentimes these indicators lead to disagreement amongst government officials and members of the Federal Reserve, as the course of action in each such case may be debatable and involve weighing one risk versus another. In response to a weak economy, the Federal Reserve will increase the supply of money by buying government securities, lowering the interest rate, and lowering the reserve requirement. This tends to increase economic activity, including investment, but runs the risk of undermining the economy by causing inflation. In response to a superheated economy, often characterized by excessive inflation, the Federal Reserve can contract the economy through reducing the supply of money by selling government securities, raising the interest rate, and raising the reserve requirement. As happened in 2001, this has the danger of causing a recession. Determining the ideal course of action is a non-trivial problem, involving navigating between the dangers of each possible scenario. The U.S. is one major participant in this global economy. Given the interconnectedness characterizing the current global economy, economic crises in one country can impact large portions of the world. The health of the global economy is thus of importance to everyone. Free trade is regarded as beneficial to everyone, whereas tariffs are seen as ultimately detrimental to all countries levying them. The reason is that while a country may levy tariffs and other protective measures to protect domestic companies from international competition, other countries will ultimately retaliate and impose protective trade measures of their own; the result (akin to the Prisoner's Dilemma in game theory) is that all players in the national economy lose in the end. The relative strength of one country's currency relative to another can be seen in shifts in the exchange rate between countries. If country A's currency gains strength while currency B's currency weakens buy comparison, $1 in country (using $ in the generic sense) will buy more $s in country B. This also provides an exchange rate risk in investing international; a country A resident who invests $1000 in country B and then tries to liquidate his investment will recover an amount less than his original investment. In addition to exchange rate risk, an international investor will want to invest in a country with a low inflation rate, high interest rate (thus, high real interest rate, defined as nominal interest rate - inflation rate), stable government (i.e. no regular unrest in the streets) which respects the market economy and will not arbitrarily seize assets held by others.