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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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To: Jim McMannis who wrote (50334)1/19/2006 10:33:17 PM
From: bond_bubble  Read Replies (1) of 110194
 
One of the thing that lot of deflation believers dont understand is this: Why were taxes raised in 1930s? Most believe, it was raised to balance the budget, when in fact the govt was crazily printing money and spending like anything on public projects. Why not print away and spend instead of raise tax to spend more? There is one thing that taxes do well. They control inflation very well!! So, I'm guessing the govt in 1930s was trying to control the PPI (although CPI was also about 4+% from 1934 onwards with an intermittant fall...). It is the inflation (in PPI AND may be in CPI) that makes the deflation more worse. This is because, in a deflation, the demand can be stoked only by lowering the price way below the boom price!! During deflation supply side economics does NOT work because, Say's supply law has a criteria: It works ONLY under full-employment i.e only under full-employment, increasing supply of money will cause increase in demand as well. In a recession where unemployment falls, say's law fails and one has to go to demand side economics i.e lower prices to increase demand!!! So, even in the current deflation, we should see increased taxation and interest rates - the repeat of same mistakes as in 1930s... It is not a coincidence or ignorance. It is the ONLY way possible I think....
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