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Pastimes : Let's Talk About Our Feelings!!!
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To: Ilaine who wrote (57361)10/6/1999 6:46:00 PM
From: nihil  Read Replies (1) of 108807
 
For almost two decades the dominant emotion controlling saving and investment has been fear of inflation. Before this, most politicians were able to engage in inflationary activities without punishment because economic ignorance was widespread. Thus the initial taxcutting in the Reagan administration (with the resulting deficits) was highly inflationary, and had to be offset by even stricter monetary policy (higher interest). You can still see the hysteria of inflation hawks (like AG) who fire at the mention of inflation. Despite the fact that almost everyone hates taxes, all competent economists recognize that there is a trade-off between monetary policy (interest rates) and fiscal policy (budget deficit or surplus.) With fiscal deficits (owing to taxes being too low, given the minimum level of spending attainable) the necessary offsetting interest rates will be so high as to "draw money from the moon," strengthen the dollar, kill off exports, and reduce domestic real investment. The Baker led Plaza Accords led to the disastrous '87 crash.
The Reagan, Bush, and especially Clinton tax increases led not only to balanced budgets (sort of) but even more important to the expection of balanced budget and low inflation. Coupled with the bull market in stocks (caused by and causing investment optimism) the economy strengthened as the dollar weakened but still foreign portfolio investment boomed, regardless of foreign fears about the falling dollar.
AG is doing the best he can to prick the internet and tech stock bubble (the rest of the stock market is in a deep correction now and cannot well survive any more interest rate shocks. But internet and tech investors don't care about interest rates (they don't borrow, they lend). His fight against inflation in a deflationary world economy simply make things worse.
With the tax increases to balance the budget, the Fed would have crushed the economy into the ground with punitive interest rates.
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