Mohan,
I like option three the best.
"3) Implement a precipitous tax cut."
Mind you I'm no economist but I've been thinking for some time of a big sales tax cut. If, for example, there is a national rate of only 8% then the gov't should lower it so that there is actually a negative tax of say 12%(for a effective 20% cut in prices). Now, because such a cut can't be sustained and because you want people to open their wallets NOW, it should be implemented in such a way that the cut declines with time. Perhaps something on the order of a 20% negative cut[in this example you'd have 8%-20%=(-12%)] with the cut declining by say, 2-4% points each month so that by the end of five to ten months you'd be back to where you stated. I think that this would cause the desirable shift of money from underneath the mattresses of Japanese individuals into the corporate hands. Naturally, corporate profits would go way up, and thus corporate borrowing would come way down. In the meantime though, the decline in the amounts deposited in the postal savings accounts would necessarily fall(unless these purchases were done on credit). A precipitous fall in the aggregate amount in these savings accounts could have a very negative, short term effect of the rest of the banking system. This is the part that I'm not sure about. The one thing that I think that I know is that a steep but temporary cut in prices should have the effect of getting the Japanese folks to start spending. The direct cost of the tax cut to the government would be partially offset by the increase collection of corporate income taxes since they would be direct beneficiaries of the cut. In the end though, who knows just how much this would cost the gov't. All that I think I know is this cut would have the same effect as department store sale, especially given that it is temporary. I mean, what if you woke up tomorrow and everything were 20% cheaper? And further, what if you knew that next month if wasn't going to be that cheap. I would imagine that this is the time that you'd run out and get that new car or whatever.
BTW -- I imagine that you would rather hear Dr. Friedman's comments on this, so why don't you try to talk him into joining us in SI. So far I know I've tried but he claims to be just too busy running his company. I think that with enough cajoling he might be convinced to make a few posts a month -- somewhat akin to George Gilder, over in the George Gilder - Forbes ASAP thread. I'm sure that STRATFOR's site has a contact email address - why don't you give it a try? Wait, here it is: <info@stratfor.com>.
Craig |
