it is not directly through the increase in money supply that that happens, it is through the reduction on their interest charges, some slower (like variable loans), some faster via refinancing (which is picking up sharply), in total, a 1% rate cut, could probably provide about $100 Billions in stimulus per year.
This assumes that the demand for loanable funds continues as though nothing has happened. Has nothing happened? If so, the stock market took a dip for no reason whatsoever.
Further, it is directly in money supply. If interest rates didn't instantly effect money supply whatever the multiplier, then there would be no point to interest rates. You have reified the notion of rates as though it is primary. This is a major mistake of the school of demand management. You can't buy a single thing with an interest rate.
As for the impact of a very large tax cut in conjunction with strong monetary stimulus, if it will bring about both budget deficits and pressure on prices.
Why should cutting taxes when the budget is strongly in surplus cause the budget to then go in deficit? Remember, there is nothing happening unusual as you have assumed above, so there's no drawdown. What monetary stimulus? Lowering rates doesn't increase money supply if demand is falling. So, is demand falling or rising? It has to be rising for lower rates to stimulate final demand else you're pushing on a string. If demand is falling, lowering rates has no net effect.
Budget deficits by themselves could force the feds to stop easing.
During the '80s the US ran substantial budget deficits, but interest rates fell persistently across the decade. There is no connection between budget deficits and interest rates. Long before "crowding out" can occur the government has to get out of the market, or the private lenders won't lend, and then government will find itself thrown out of the market. They can't tolerate that so they get religion.
...look at what happened when the fed panicked late in 1999 and flooded the system with liquidity, we got the March bubble.
The stock market isn't the economy although AG is erroneously acting as though that's the case. McChesney Martin asserted throughout his tenure at the FED that the FED should not make policy with the stock market in mind. That means the stock market should not be bailed out of anything. Indeed, AG's move early this year was motivated by an attempt to prevent the stock market from crashing further. He feared rational expectations and the consequences to economy, but trying to manage negative psychology is worse than simply trusting people. They have to trust them anyway, if lowering interest rates can be expected to have a sufficient confidence building result.
Further, the FED pumped in $200 billion at the end of '99 for purposes of y2k, but it didn't have much effect on economy. Instead it drove stock prices up into speculative extreme. Then in February FED suddenly subtracted all that liquidity. The result popped the stock speculative balloon, but had no effect on economy. However, it did take away the great expectations psychology so that when FED started to tighten later in the year, the economy then was exposed to a double whammy of negative psychology.
If you think that the sudden addition of 2% of GDP is not going to be stimulative, I don't know how we managed to get stimuli and "breaking" of the economy with much smaller injections in the past.
When monetary stimulus takes the form of direct injection, the effect is immediate because literally more cash is pushed onto banks and they have to market it. That isn't the case when rates are lowered without direct stimulus. Arthur Burns would have said that what the FED is doing now won't work. It takes direct injections, coupon passes, to get the game going again.
The FED can't afford to do that because it has the potential to rapidly revive an economy which hasn't recessed sufficiently to do the damage necessary to support a sustained recovery. What damage? The damage to great expectations, to demand for higher compensation, and to the belief that real estate can be sold for 20% higher than it was priced last year. One way to cause damage is to generate unemployment. We have that starting now, but it is only starting. Reversing that trend puts us right back where we were last summer. Appropriate tax cutting doesn't reverse it but coupon passes do.
My point was very simple, get tax relief, but don't rock the boat, keep paying at a slow rate $50 to $150 B per year) the debt (until it gets to around 20% of GDP, not much more IMHO), and if indeed OBM is right about those future huge surpluses, avoid those surpluses by gradual tax reduction, don't put all of it in at once spread it over the next five years or so.
This is all built on the assumption that the purpose of tax cutting is to stimulate final demand. That's the worse thing that can be done with fiscal policy of any kind. The purpose of tax cutting is to increase efficiency of output or equivalently, to provide incentive for people to output more with their current capabilities. The Democrats believe tax cutting stimulates final demand, but that wasn't what was observed in either the Kennedy or Reagan cuts. The effect was very gradual because in both cases the cuts were designed to stimulate the capability to produce, not the capability to expend. Once a final demand stimulating cut is exhausted, you're left back where you started. Tax cutting must be applied where the revenue generated from it is renewable.
I have not heard any democrats or republicans suggesting a gradual approach to tax changes, so I am not sure why you label me (a registered Republican) a "Democrat", as if Democrats are better (or worse?) than Republicans.
A gradual approach is based on fear of outcomes of tax cutting. You base your judgements on the demand management model, a model which has been at the source of economic disaster for 50 years. Because you aren't sure, you have to apologize and attempt to neutralize the effect of a "give-away" tax cut. The result is the wrong kind of tax cut which would result in people rejecting tax cutting.
I am not sure why to seek to "define what causes inflation". You may want to determine "causes" of inflation, and indeed , wage pressures might be one of those causes, but there are a number of other causes, such as imbalances between supply and demand
If that is the case, then economy must fail intrinsically, because you equate the natural process of markets with propensity to inflate. Imbalances between supply and demand don't cause inflation. Consider oil. It's price rises according to demand and supply. Then it falls. It's a big component of total expenditures. Does that rising and falling cause inflation and deflation? If you think so, then you are at odds with what Don Patinkin at Harvard definitively showed to the contrary. The fact is that factor price changes cause all things which have an element of the factor in them to change accordingly. Such changes are not inflationary because everything changes including the increased or decreased cost of anything. That's why I had to define inflation because I expected to get this kind of response.
(often, but not always caused by excessive printing of money),
Please tell me when in the last 50 years in the US that excess printing of money, whatever that means, and you don't know what it means, has caused inflation. The FED has gunned the money supply for 5 years running the monetary base at 10% per annum and at time getting it up to 15%, and yet, no inflation. This rate of base growth even with strong productivity gains of 5% per annum, should be expressly, explicitly inflationary, after all, money was growing way faster than output and productivity, so there was necessarily more money for whatever quantity of output. The result: no inflation. Has there been price change in components? Yes, oil, drugs, real estate. The reason why is that these components are not competitive.
or increases in raw material costs (also caused by such imbalances, natural or artificial), as well as permanently (or at least over long periods of time) declines in currencies.
A decline in currency value causes inflation? You have the cart before the horse. Countries which have poor economic policies are often inflationary and so the result is that their currencies are weak.
The hyper inflation in Europe, in the thirties was not cause by excessive wage demands, but overprinting of money and eventually, by engrained inflation expectations (mass psychology play an important role, as strangely as it sounds, in economic "machines").
The hyper inflation in Germany in 1922(not anywhere else)which lasted about six weeks was due to the Allied demand for excess war reparations. That isn't structural inflation. The only inflation that has any consequence is structural inflation. The threat facing the FED now is that if they go in and pump, they risk installing a base of rising general prices against which people try to protect themselves. In each ensuing business cycle the floor rises a little more with attendant increases in interest rates required to bust the cycle.
As for "being" in a recession, I really do not know if we are, so far it looks like a massive inventory adjustment (your 10,000 acres of SUV, and how come their price is not coming down more?).Until we get two consecutive quarters of negative growth in GDP, we are not in a recession, at least by standard "measures".
Why does that arbitrary measure matter in the least? It doesn't. If you make determinations based on such arbitrary standards, by the time you reach a conclusion, the conclusion will be irrelevant. You only need to review the NAPM to figure out whether we are in recession. Do you really think the FED would be in full panic mode dropping rates like a rock, if nothing important was happening?
We may see things somewhat differently on the issue of how much taxes and how big, when you fear that the taxation is taking too much money out of the economy (as evidently it is, if we are going to run gargantuan surpluses), you want to bring receipt and expenditures in balance.
No. We disagree in the kind of tax cut. The only way to get the government in balance is to cut taxes first and force them to cut spending, otherwise it will never get done. This is what this nation has learned over the resistance from the demand management types and their disasters of the past. When you cut taxes the government doesn't have the dough to squander on new spending, but that isn't the case when they have an option to cut spending or not.
If you feel that what ails the economy is lack of investment capital, you try and direct those cut to those that mostly generate that Capital (but it does not necessarily the "Rich", a lot of investment capital is generated from pension money in all its forms).
Is this statement coherent? Since you don't know what capital is, there's no point in trying to imagine what I mean.
If you feel that the economy's week point is weakness in end demand and lack of consumer ability to buy (too much debt), you try and direct, more of the cut there.
Since you believe the problem lies in final demand and you have directed a tax cut there, then how could you say you don't know if we are in recession? |
