The Weiner Component Vol 2 #1 Part 2 The Introduction

Deviations from the long term growth trend US ...

Deviations from the long term growth trend US 1954–2005 (Photo credit: Wikipedia)

Business Cycle

Business Cycle (Photo credit: Wikipedia)

To avoid the vicissitudes of the business cycle and the inequality of the distribution of the National Income, the Gross Domestic Product, we need a new economic model or we have to make intensive changes in our present system.  If we stay essentially with our present model then the government has through a tax and redistribution system to balance incomes. A realistic minimum standard of living has to be set.  Those earning more than this level will have to be taxed on a realistic graduated level.  Those earning less would receive transfer payments from the government to bring their standard of living up to the minimum level which has to allow for a decent standard of living.  With this system, which more or less exists today in many European nations, we can keep the profit system and have all its so-called advantages.  But would this end the vicissitudes of the Business Cycle?

 

The amount of productivity today per working unit/person is constantly increasing.  One individual working continually provides for more and more people.  In order to keep constantly producing goods and services this productivity must be continually used up so more is always needed.  Consumption now becomes as important as production if the economy is to continually grow.  Therefore the consumer whether or not he/she is employed is needed as much as the producer.  This system can only flourish through government taxes and a redistribution of the National Income.  The producers can earn assorted amounts of surplus income which they can spend, save or invest while the unemployed or underemployed population can receive government transfer payments which will allow them to properly consume the necessary goods and services to both keep production going and have a decent standard of living.

 

Of course if we can create a new economic model which would allow for a fair distribution of goods and services without using the profit system then we would be far better off.  But this would probably require a complete change in our overall thinking and value systems.  We would also have to deal with the issues of what to produce and how to produce it without the motivating force of the profit system. 

   

Is it possible?  We would have to separate production of goods and services from money and find another reason to labor other than individual profit.

 

There is a disparity between the use of money as income, a means of exchange, and storage for labor and profits.  The distribution and expenditure of money determines where we are on the Business Cycle.  This, in turn, can throw the economy into recession or depression and cause a breakdown in the production of goods and services and partial or massive unemployment.  The extent of the distribution of money can cause a partial or full cessation in the distribution of goods and services.  They are two separate entities that are tied together in an unwholesome relationship.  If they were separated the economy would be far better off.  The problem, of course, is how to separate them.

 

Generally speaking, the overall public reaction to all of this is to return to the thinking of the late Nineteenth Century: the “safety” of the profit system. This, I believe, President Donald J. Trump will attempt to do; and this, seems to be today, the basic Republican value for economic growth.

 

     MONEY: ITS HISTORY AND USE:  The two entities which keep any economy functioning are self-interest and money.  Self-interest would affect every working individual from owner, entrepreneur, to physical laborer who wants the greatest return he/she can get from their endeavors.  Money is the grease that operates the economy: it is wages, salaries, profits, rents, interest, and dividends.  The spending of money determines demand, production, and also the phases of the Business Cycle.

 

The entrepreneur, factory or store owner will charge the greatest amount they can legitimately and pay his employees the least amount they can get away with.  Thus prices will be as high as possible while money paid to worker will be as low as it can be.  The producer will maximize production to increase profits; the workers will not be able to purchase all the goods and services produced because of low wages and over-production will eventually result.  This will lead to recession, unemployment, business failures, and depression.  Self-interest, which is the major motivating force of the economy, also tends to eventually cause the economy to malfunction into depression.

 

What is the problem?  It is the process of the distribution of money throughout the economy.  Whenever the distribution breaks down the economy goes into recession and depression.  It ceases to operate for the benefit of its members.

 

The use and distribution of money becomes the problem.  What then is money?

 

To understand what it is and its use(s) we need to have knowledge of how money was used both historically and at present.  Presumably, at first, man begins with barter: goods and services were directly exchanged for goods and services.  At some later point in time these were exchanged for their exact value, generally, in precious metals.  Rather than continue using scales to weigh the metal one group of traders, probably the Phoenicians, began stamping the weight on the metal piece.  This became the initial use of money.  The idea was then picked up by other groups or nations and coins came into being: an exact weight of a precious metal with the country or ruler or some symbol stamped on the metal to guarantee its value.  What happens here is that a good is exchanged for its exact value in the metal: equal value for equal value.  This allowed for free trade throughout the Mediterranean several thousand years ago.

 

Money, as it existed at this time, was labor or a good whose value was exchanged for its equivalent in gold, silver, or cooper coins.  Similar worth was exchanged for similar worth.

 

As time proceeded the coins became more ornate.  Rulers images were stamped on the coins, various designs were used.  Different denominations appeared, allowing coins to be minted in different sizes and weights; and also in different metals.  And thus was value exchanged for value, money for goods and services.

 

Of course, into this economic system occasionally various enterprising individuals and/or governments began a process of “watering” some of the coins minted; that is, mixing base metal with the gold or silver, thereby hoping to get more goods and services for less gold or silver.  This process would be done on a large scale by such individuals as the Roman Emperor, Nero; who tended to need more money than he could collect in taxes.  The result was to cheapen the value of the specie bringing about inflation which also resulted in a lowering of overall wages and other disruptive problems to the economy.

 

However, this economic system worked and continued to work successfully as long as conditions in the society(ies) were stable; that is, there is no rapid infusion of massive amounts of gold or if large amounts of money don’t have to be transferred over distant areas.

 

The discovery of the New World by Christopher Columbus brought into Europe, in the Sixteenth Century, massive amounts of gold over a fairly short period of time.  The Americas were systematically looted.  The gold passing through Spain and went on to the Netherlands, which was ruled by the same person as Spain, and then into rapid circulation throughout Europe.  This caused, what has been referred to as, “The Gold Revolution” which decreased significantly and continually the value of gold in its relationship to goods and services, and brought about unbelievable economic hardships to the wage earning working classes of Europe.  Wages remained essentially fixed while the value of the money dropped continually in a never ending cycle of inflation; thus bringing about a tremendous drop in standards of living.  It took about a century for a new reasonable balance between the value of gold in relation to the cost of goods and services to come about.   

 

Another problem which could upset the economies was large scale trade over great distances and/or between different nations. There was great danger from bands of thieves on land or pirates when shipping gold over bodies of water.  A safe way had to be found to ship gold. 

 

During the late Middle Ages different cities, city-states, provinces, and countries became known for producing certain products.  These were desired throughout Europe.  Also some of the Italian city-states, after gaining control of the Mediterranean Sea, gained a monopoly of trade with the East for spices and other products.  (It was the search for a new route to the East that brought about Columbus’ expedition.)  This and other factors brought about a need for the safe transfer of specie over long distances.  In addition the breakdown of Feudalism and the rise of Kings brought about a necessity for the availability of large amounts of money for the payment of armies and other large scale projects.

 

To offset these economic needs there arose in various cities: first in the Germanies and then in the Italian city-states merchant families who eventually traded in money as a commodity.  These became the merchant bankers of the Hanseatic League and the Italian city-states.  They set up branches of their banks in different countries which allowed for immediate transfers of gold; and they became in many cases the new nobility: the merchant princes.  Of the Medici family of Italy two of the women became queens in France and one of the Medici became a pope.  Cosimo, the founder of the family had been a money lender whose symbol of trade was three brass balls.

 

From the Italian Renaissance on (Fourteenth Century) banking was fully developed with the banking families, in many instances, ruling the Italian city-states.  The goods of the East came to Europe by way of the eastern Mediterranean, through the Italian city-states, and on to the general population of the continent.  The fleets of ships plying that sea were controlled by the merchants of the city-states; who also controlled banking and, among other enterprises, made high interest loans to the emerging kings.

 

It was the potential profits from the trade that caused the new nations like Spain, Portugal, England, and France to explore, searching for a new route to the East.  This was the justification for sailing west to get to Asia and thus discovering the Americas.  Prince Henry of Portugal began sending expeditions south, exploring Africa trying to find a river crossing Africa west to east.  Eventually one of the expeditions rounded that continent and was able to bring back to Europe a cargo of spices worth many times the value of the ship and cost of the expedition.  Portugal controlled that trade for about fifty years. 

 

With the new routes and the emergence of pirates in the eastern Mediterranean, Italy lost control of that body of water and the trade and profits moved to the new emerging nations.  Incidentally the Renaissance now became the Northern Renaissance and banking and trade moved to these countries.

 

Money, during this period, remained as it had always been: equal in value to the goods and services for which it was exchanged.  Spain’s looting of the gold from the New World and having it pass directly into the European economy brought about a 90 year period of inflation in the Sixteenth Century but did not change the concept of value for value.  Actually by making gold more plentiful and less expensive it allowed for a more rapid economic growth.

 

With the coming of the wonders of the Industrial Revolution (the development of machines going from wood to metal, transportation: put a steam engine on wheels and you have a train, advances in medicine: ever increasing abilities to fight the assorted diseases, phenomenal population growth, advances in metallurgy, gas and electric engines, etc., etc.) the nations of the planet underwent massive changes: national populations went from the low millions to the high millions approaching and exceeding in one or two cases a billion people.

 

As we moved into the Twentieth Century (in addition to the major wars which wiped out millions) with the tremendous growth of business, of  the needs for ever increasing goods and services there were not enough precious metals to allow for an exchange of goods and services based upon value for value.  For this and other reasons in 1929 we have the Great Depression.

 

Paper money when it was first used consisted of silver and gold certificates which supposedly could be exchanged for actual specie at any time at one’s bank.  (However, if everyone were to do it at the same time there would be a run on the banks and they might well become bankrupt because there was never enough metal to satisfy everyone’s needs.)  In point of fact the Industrial nations eventually got off the direct gold standard by collecting and storing the gold bullion and printing paper money supposedly based upon the value of this stored bullion.  Silver coins would maintain a certain amount of precious metal for a while.  Later in the Twentieth Century virtually all nations will go off the gold standard basing the value of the money on the prestige of the particular country. The remaining silver coins became copper sandwiches.  By the beginning of the Twenty-first Century money is, in all cases, devoid of any precious metal or anything else of real value except the credit of the nation issuing it.

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Since 2008, when the United States went through what is generally called today The Great Recession the country has been recovering from what could have easily been The Greatest Depression in its history.  This economic condition had been building rapidly since the presidency of Ronald Reagan in the 1980s, when all government restrictions on trade, many of which were developed by the Roosevelt administration during the Great Depression, had been done away with by the Reagan administration.  The banking industry in the country had a free hand to do whatever they wanted.  And what they wanted was to increase their profits astronomically.

 

The banking industry convinced a large percentage of homeowners to turn their homes into bank accounts by a process of continually taking equity funds out of their homes.  They did this by constantly refinancing their properties.  In the process of doing this the paper value of the homes continually increased.  Presumably people were spending what they believed was their never ending increases.

 

This became rampart from the Reagan administration on.  By 2007 the oncoming crash was apparent but the banking industry was in denial.  At that point mortgage refinancing was raised to 125% of the appraised value of the home.  In 2008 the crash came and the Housing Industry collapsed.  Many of the banking houses were overextended and also at the point of collapse or bankruptcy. 

 

Since the basic financial structure of the entire economy or nation is based upon the banking structure and their functioning the Bush administration in 2008 lent large amounts to the banks.  This, however, was not enough money and the incoming Obama administration had to make more massive loans to the banking houses in order to save them.  The Obama administration also set conditions about massive remunerations to executives which the Bush people had not done.

All of this was in 2008 and 2009.  The trillions of dollars the Federal Government spent at this time saved the country from going into a more massive depression than that of 1929.  In fact we would still be coming out of it if the government had not jumped in. 

 

What emerged instead has been called The Great Recession.  In 2009 the unemployment rate had risen to 7.6%.  By 2010 it had reached 9.8%.  Thereafter it began to fall, reaching 4.6% by November of 2016.

 

In this process millions of people were underwater in their homes, suddenly owing more on the house than it was worth.  The banks, with aid from the government, largely recovered, with some being taken over by other banking houses.  Even with virtually no regulation some of the banking actions were illegal.  No one went to jail.  Instead the banks paid fines, which taken together were in the billions of dollars. The banks eventually repaid their government loans and executive pay rose to new heights.

 

We are still in a recession, with unemployment at the tail end of December 2016 at 4.5%.  For recovery, on the business model to occur, the range of people not working would have to reach 2.5%.  Is that a future possibility with President Donald Trump?  Probably not.  Since the Republican image of creating jobs has nothing to do with current levels of economic understanding.  They believe that jobs are created by doing away with government regulation.  It would seem that by their way of thinking as pollution increases and so do jobs.

The Weiner Component #147 Part 3 – Money: The FED & the Treasury

English: Chart of M1 money velocity for the Un...

English: Chart of M1 money velocity for the United States. Nominal GDP, and M1 NSA stock data from Federal Reserve. M1 velocity calculated using nominal GDP divided by M1 stock. Data in log transformation. NBER Recessions in gray. Created in Excel. (Photo credit: Wikipedia)

English: A map of the 12 districts of the Unit...

English: A map of the 12 districts of the United States Federal Reserve system. (Photo credit: Wikipedia)

On Wednesday, February 10, 2016, the Chair of the Federal Reserve, Janel Yellen, met with the House Financial Services Committee to give her semiannual report on the state of the nation and answer questions from each of the members.  Again on Thursday, February 11, she met with the Senate Finance Committee to do the same thing.  As she has shown prior she emphasized caution and the need for the FED to carefully monitor the tenuously existing economic conditions in the world.

 

The major problem that exists today is the widening fallout or nervousness from concern over China’s weak currency and economic outlook, which is rattling financial markets around the world.  China’s GDP (Gross National Product) had traditionally been around 8%.  Over the last year or so it dropped considerably while the value of her currency has increased against other national currencies.  A higher Yuan would make China’s goods more expensive overseas.  The Central Government stated that they would lower the value of the Yuan on international markets.

 

This is done, following the Laws of Supply & Demand, by increasing the amount of actual currency available on the international exchanges, supplying more Yuans than are needed.  In this way the Yuan becomes more available than all the other currencies and its value against them drops.

 

This process, in turn, would bring down the cost of Chinese goods in trade with other countries.  Of course, all the non-Chinese markets did not appreciate their currencies increasing in value over that of the China.  This made numerous other countries nervous and some decided to react in a similar fashion.  Consequently a number of governments began attempting to manipulate their currencies.  These actions tended to deregulate international trade.  The United States dollar rose in value against all the other currencies, being considered internationally the most stable.

 

China made two attempts to do this.  Each did lower the value of the Yuan, but in both instances it fell fractionally.  China’s GDP did not rise to its coveted 8%.  Their Central Bank, by attempting to raise the GDP actually, lost control of their economy.  What they had achieved was a currency oscillating in value.  The value of some other currencies have tended to be equally erratic; but the other counties that attempted to manipulate their currency values did not advertise the fact.  Will a new equilibrium be reached in the future?  Probably, at some point.

 

Meanwhile most of the stock markets in these assorted countries went on roller-coaster rides, mainly ending downhill.  Nervous people sold some or all of their stocks; the different stock markets dropped hundreds of points; automatic computer-controlled programs owned by large holders like retirement funds automatically sold; and the drops became even more dramatic.  Exchange rates of the different currencies went on a tetter-totter basis and international stability tethered on a day by day basis

 

Using this information Ms. Yellen and her Board of Directors at the Federal Reserve have to make projections of what the international and national futures will be.  The American Stock Market has lost at least 10%, to date, of its value.  Most stocks are down considerably.  This is also true of most international stocks.

 

The Chinese Government has made two attempts to lower the Yuan.  They lowered it fractionally both times and then lost control of what they were doing.  Everything, inside and outside of China, has been erratic since.  The Central National Banks are now waiting for a sense of equalization to come again.  So far it hasn’t and everyone is still waiting for some return of normality; and this includes Chairwoman Yellen and the Board of Directors of the Federal Reserve.

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In her remarks Yellen said that the Federal Reserve expects to eventually raise its rates slowly; but they are not on any preset course.  She commented that it was possible that the recent economic weakness could prove temporary, and if so it could set the stage for further economic growth and a stronger increase in inflation than the FED is currently forecasting.  If this occurs then the FED would be likely to hike rates more quickly than anticipated.

 

Ms. Yellen said that various economic indicators demonstrate that China, the world’s second largest economy, was undergoing a sharp slowdown.  But recent declines in the value of that country’s currency have intensified concerns about her future economic prospects.

 

This uncertainty led to increased volatility in global financial markets and against the background of monetary weakness abroad, exacerbated concerns about the outlook for global growth, which generally caused the nervous or erratic actions within the various nations.

 

Yellen also stated that the shark decline in U.S. stock prices, rising interest rates for riskier borrowers and further strength in the dollar has translated into financial conditions that are less supportive of growth.

 

“These developments, if they prove persistent, could weigh on the outlook for economic activity and the labor market, although declines in longer term interest rates and oil prices could provide some offset.”

 

She stated that the labor market remains solid, creating 150,000 jobs in January.  That was enough to push the unemployment rate down to 4.9%.  Inflation, however, has continued to fall below the FED’s target of 2% annual price increases.  (At the beginning of February it was .7 of 1 %.)  The shortfall has been steeper recently because of the renewed drop in oil prices and stronger dollar, which holds down U.S. inflation by making foreign goods cheaper for American consumers.

 

But Yellen said the Central Bank continued to believe that the energy declines and dollar strength would fade in coming months.  Inflation would also begin to move closer to 2% as a healthy labor marker pushes up wages.  She also stated that worker pay has started to show its first significant gains since the Great Recession ended 6 ½ years ago.

 

In late 2015 the interest rate the FED charges banks went from 0 to ¼ of 1%.  When the next increase in interest rates will occur is not known.  The FED will examine the indicators again in March.  Many economists believe there will be few if any increases in interest charged by the FED this year.

 

After her report Chairwoman Yellen took questions from each of the members of the Committees, for the House on Wednesday and the Senate on Thursday.

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What Dr. Yellen implied in her statement was that the economies of China, the United States, and many European nations are far healthier than current economic conditions demonstrate.  She indicated that the international economic chaos begun by China will probably soon end in a new financial equilibrium and trade will probably be again balanced between nations.

 

What has caused the stock markets around the world to go through their current gyrations has been nervousness by investors within the individual nations.  It has been fear or an overreaction to the erratic international financing, a sort of terror that the different national economies could follow domestically the international situation.

 

Of course the irony here is that the currency of the United States is considered the safest in the world and the dollar is the most valuable currency available.  Particularly since the U.S. National Debt has supposedly reached about 19 trillion dollars.

 

Dr. Yellen indicated that the FED is doing nothing but wailing for international trade to stabilize again.  At that point the FED will again raise the subprime rate it charges banks another ¼ of 1% bringing it to ½%.  There will probably be very few, in any, raises this year; but it will pick up in the future.  She mentioned that the average depositor is being financially hurt by the low interest rates they’re receiving from their almost required deposits to the banks.

 

While she didn’t state this fact the implication is that countries like Venezuela, that function mainly on one major export like oil, and whose economies have suffered from the drop in oil prices, are now looking for other products or raw materials they can export to raise their economic levels within their borders.  This may take a few years; but that can’t be helped.  The current drop in the price of oil has been matched by the current drops in their standards of living.

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After her remarks Dr. Yellen took questions and comments from all the members of the committee.  Each had a short period to deal with her.  The questions and comments tended to be quite enlightening.  The Democratic Congress people were a bit friendlier in their remarks than the Republicans.

 

One area of interest was that the Federal Reserve has, between 2009 and 2015 transferred over 600 billion dollars to the U.S. Treasury.  This is money that is separate from all the taxes and fines collected.  It was further denoted as no less than 100 billion dollars a year went to the Treasury.

 

The sources of these funds were not mentioned.  Some of these funds are interest on the part of the National Debt which the U.S. Government owns.  The Federal Government admits to owning 40% of its own debt.  That is a conservative estimate.  I would put it up to, at least, 50% or even over 60%.  The Federal Reserve uses parts of the Debt to adjust conditions within the economy at times.  Federal bonds are both short and long term.  Some are always being sold and other expire and are cashed out.  The FED can add money to the economy or National Cash Flow by selling less than it cashes out or the reverse can be done.  If inflation is too low or there is a recession they will sell less than they cash out.  If, on the other hand, inflation is too high then the FED will sell much more than they cash out. Reducing the amount of money available in the economy.  These changes do not necessarily totally solve the economic problem but they were and are a tool that lessens their impact.

 

Forgetting adjusting economic conditions, the rest of the cash transferred to the Treasury was just a simple money transfer.  All of this money was just brought into existence by the FED.  After all they control the printing presses and can issue money within legal limits as they decide it is necessary.  Remember, what stands behind the dollar is the word of the United States Government.  There is nothing else, no entity of value other than the Central Government.  All money today is a token, merely an instrument for exchanging goods and/or services for goods and/or services.

 

There was no mention of the 45 billion dollars a month that was spent for well over two years during this period resolving the housing dilemma created by the banks during the end of 2008 when the Real Estate Market crashed.  The FED bought 45 billion dollars’ worth of fractional mortgage pieces in all 50 states and territories upon which it would never be able to collect its investment.  In essence the FED bought the economy out of the bank caused Housing Bubble.

 

One area of concern that was brought up by several Black members of the Committee was the fact that unemployment is far higher in minority areas of the country, that the general 4.9 percent unemployment was as high as 50% in some of the Black and Hispanic neighborhoods and among young minority members entering the labor market.  Dr. Yellen stated that Monetary Policy was a general force that worked throughout the economy.  It did not differentiate between ethnic or racial groups, that this type of job creation was the province of Congress, using Fiscal Policy to create work projects in area where these people lived.

 

While she didn’t state it this Fiscal Policy was done from 1987 through 1980 during the Administration of President Jimmy Carter.  Assorted Public Projects were built throughout the nation that benefited both communities and created employment in areas that had larger than normal levels of unemployment.

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There is another factor which Dr. Yellen did not mention but that is highly important and that is the velocity of money.  New currency added to the overall economy or National Cash Flow is spent numerous times before it becomes part of the increased amount of money available in an increased National Cash Flow.  It can be spent three to eight times and in some instances as many as twelve times as goods and services are paid for and then reused by the person or institution who receives them.  This is a continuum.

 

If we take five as the average number of times the 800+ billion dollars, the FED added to the economy between 2009 and 2015, as the average velocity in which the money passed through the overall economy the amount of money Dr. Yellen stated was in excess of 4 trillion dollars.  And if we add to that the 45 billion a month that was used to resolve the mortgage crisis for a period of over two years, that makes another 540+ billion dollars, from which the government never collected back a dime.

 

With all this money added to the economy inflation by February of 2016 was 7/10ths of 1%.  The indication is that the total United States economy totally needed these funds, not only to avoid a Major Depression but to just function and grow.  Keep in mind that the overall population of the country is dynamic, constantly growing.

 

If we just consider the taxes paid on this money on a municipality, city, and federal level we are talking about survival for local and state governments.  For example a state like California charges a sales tax of 7½% Imagine how much additional sales tax would be paid by 40 some million people.  States like California and New York have state income taxes which are a small percentage of what the Federal Government collects, but can still be a substantial sum.  Try to visualize the additional amounts collected by these or other states that have their own income taxes.  And, of course, the increased Federal Income taxes on the additional 4.5 billion plus dollars.

 

In all probability the United States recovery from the 2008 Real Estate Crash was brought about by this Creative Monetary Policy brought about by the Federal Reserve with the support of the President.

 

If the Republicans in the House of Representatives were not so Penny wise and dollar stupid as they have been since 2011 when they took control of the House of Representatives they could, as Dr. Yellen suggested in her answers to questions and President Obama earlier proposed, have passed Fiscal Policy laws and the infrastructure of the United States could well be on its way to modernization.  This, in turn, on a more focused basis than just Monetary Policy would have brought unemployment well down from the 4.9% it is now and significantly increased the country’s GDP.  The difference it would have created in the National Debt by the increased government expenditures would have been made up by the increase in taxes on every level of government.  This also could have focused on minority areas which currently have inordinately larger levels of unemployment.

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One of the comments made by a Republican legislator was interesting in demonstrating his ignorance of the basic principles of Macroeconomics.  His comment referred back to the Golden Era of the Federal Reserve when Alan Greenspan was Chairman of the FED and, in the opinion of the legislator, we were living in a Golden Age.  How misinformed or ignorant can anyone be?  There should be an economics literacy test for people running for Congress

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It is because of people like Barack H. Obama, Dr. Ben S. Bernanke, and Dr. Janet L. Yellen that the country is as economically healthy as it is now.  Without them the United States would today be in a dire depression.