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Equilibrium of Capitalism and Democracy

Paper Type: Free Essay Subject: Politics
Wordcount: 1116 words Published: 18th Mar 2021

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The capitalism is meant to be created to give more freedom to whome people choose to buy and sell goods at any price they would like. For example, supply and demand is how capitalism sets prices. If you are selling something, you can charge any price you like for it. But if you are buying something you can pay what you like for it as‘well. The actual price is what the seller and the buyer both agree on. What this normally means is that rare things are worth more money. Lots of places sell apples. If someone tries to make you pay ten dollars for just an apple, you would rather just go somewhere else right? Because I would have. Apple computers, though, are expensive. You can’t buy them cheaper, so it’s a choice of paying what the seller wants, or not having one. This is also going against democracy and capitalism. The Fed cut the Interest Rates by 25 basis points to a range of 1.5% to 1.75%, And the stocks went soaring today on the close. S&P 500 closed in record high, just because of 25 base points. If the whole damn point of stocks and bonds is to ensure the health of the economy how are we supposed to know the economy is healthy right now? Stocks are now monopolized, they are controlled by the minority.

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Basically, lowered interest rates can stimulate the economy and impact the financial markets within matter of hours after the initial change. Look at which types of investments have historically performed the best low interest rate portfolios. The goal of the Federal Reserve, or "the fed“ we might often call, is to keep the U.S. economy fresh/healthy in three ways: minimize unemployment and stabilize inflation. The Fed does this is by decreasing or increasing interest rates. Historically, as the economy has shown signs of weakness, the Fed has responded by cutting interest rates. Here's how it works: a committee within the Fed called the Federal Open Market Committee meets eight times a year to look at the health of the economy.

Over the past 46 years, the performance of stocks, commodities, REITs, and gold was relatively balanced. But during low interest rate environments, REITs and U.S. stocks have been the highest overall performing asset classes. Because interest rates are typically cut during economic slowdowns, defensive stock sectors may be better poised to weather low interest rate environments. We can think of it this way… reduced rates in bonds may cause investors to look for income streams elsewhere. This can cause increased demand for stocks that are known for their steady dividends, like real estate, utilities, and telecom.

Additionally, the whole purpose of the capitalistic environment is to be declared by the people not just by 8 white, rich men. Jeffrey Reiman the author of The Rich Get Richer and The Poor Get Prison also talked about how “Both capitalist and workers protected in their capacity to dispose of what they own, the process by which workers are forced to work gratis can proceed apace.” 1 As clear as this gets, the point of this sentence is that no one is in control of full power. For example, to call a person capitalist he or she cant work for anybody, but instead he or she should have people working for them. In this situation a worker in not a capitalist because he is working for his boss, but his boss is either working for the government or either working for higher ranked boss. But on topic Capitalism and Ideology on the book The Rich Get Richer and The Poor Get Prison, Jeffrey made a connection to “Marxian/ Marxism” in which it means “equal” 2society.

In conclusion Banks need to keep a certain percentage of cash on hand every day by federal law, that's the "fractional reserve" system. Banks are constantly spending your deposits on various financial instruments to make money. Could be equities, bonds, derivatives, whatever. The riskier the better, because they make more yield, and if it gets too risky, they now just expect the Federal Treasury to step in and bail them out. Because of all that spending they have entire after-hours teams dedicated to making sure that the fractional reserve quota is met every night. They do this by lending out collateral (like bonds) to other banks, for a certain percentage interest that they pay back the next day. The Fed gives a "target rate" that banks should use when lending among others, but really, it's a market and the buyers/sellers decide what rates to use. If there aren't enough loaners at the target rate (see A), then banks can't lend their collateral out. There's not enough cash being offered in the market, in other words a lack of liquidity. So, banks have to ask for a loan at a HIGHER rate of interest, meaning they have to pay back more the next day. This is just supply/demand at this point, hopefully it's apparently how the market works and why a liquidity squeeze would cause rates to skyrocket like they did in September.

Since there isn't enough liquidity, in order to force the market rate back down to the "target", the Fed has to step in and offer up cash at the target rate on the taxpayers' dime. Quantitative Easing. But even with all this QE, banks are STILL having trouble getting the cash they need. That's why the repurchase operations (repos) are still straining and in some cases oversubscribed. There's still more demand than supply, and so the Fed has been forced to increase its QE limits even more.


1 : The Rich Get Richer and the Poor Get Prison Chapter Appendix I Page 229

2 : The Rich Get Richer and the Poor Get Prison Chapter Appendix I Page 229-230



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