Tax cuts don't matter. (Federal Reserve 101)

Discussion in 'Economy' started by BaronVonBigmeat, Apr 15, 2006.

  1. BaronVonBigmeat
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    BaronVonBigmeat Senior Member

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    Since it's April 15th, I'd like to discuss a common misunderstanding that many well-meaning people on the right have, and that I used to have as well: the idea that if you cut taxes, you automatically reduce the government's grip on the economy, thus benefiting the private economy.

    It's not necessarily true. Allow me to explain.

    I'm a big fan of low taxes. If I had my way, there would be no income tax; after all, we did quite well without one until 1913. And certainly, reducing the government's grab will benefit the economy as a whole. But there's a catch: taxes are not the only way that government extracts wealth from the private sector. There are three ways:

    1) Taxes
    2) Borrowing
    3) Inflation, ie the printing press

    http://www.axiomaticeconomics.com/intro.pdf

    The main thing I would like to point out is simply this. Many times you will hear someone pledge their undying support to Politician A, because he wants to cut taxes. But if we lower one tax, only to raise another tax (borrowing or inflation), what have we really accomplished? What good will your extra refund do you, if your money buys less, year after year? And if we want to stimulate the economy, what good will it do to cut taxes, but then borrow more, thus crowding out private capital?
     
  2. BaronVonBigmeat
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    BaronVonBigmeat Senior Member

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    A short video intro about the Federal Reserve system:

    http://mises.org:88/Fed

    A much longer, in-depth series of three videos, if you have the time:

    http://video.google.com/videosearch?q=money+masters

    A book about the origins of the fed:

    [ame=http://www.amazon.com/gp/product/0912986212/ref=pd_kar_gw_1/002-0189889-7408827?%5Fencoding=UTF8&v=glance&n=283155]The Creature From Jekyll Island[/ame]

    (You'd think a book about banking and currency would be dull as dishwater--it's not. It's accessible to laypersons and utterly astounding. What's interesting to me is, the author is what most would call "right wing", yet a great deal of the book reads like a leftie's list of the evils of capitalism. But what they are mistakenly calling capitalism, is not a free market of any sort. Lefties will sometimes identify the symptoms correctly, but never the actual culprit--instead blaming corporations, or big business, or the rich. Well, it is the rich actually, but only a select few of them, and they are not interested in truly free markets in the slightest.)

    Origins of the Federal Reserve

    What has the government done to our money?

    The Mystery of Banking

    The case for the 100 percent gold dollar

    The Foundation for the Advancement of Monetary Education (big list of articles covering the side effects of fiat currency: trade imbalances, the boom/bust business cycle, the government-sanctioned wealth transfer from taxpayers to banks, loss of manufacturing jobs, etc.)
     
  3. bush lover
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    bush lover Member

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    Why should the Federal Reserve raise interest rates? There is no stock market bubble, no bond market bubble, no property bubble. Last time, the Fed raised rates to 6.5% and pushed the US back into recession. It was our President Bush who counteracted this with emergency borrowing and tax cuts to prime the pump and get us back to prosperity. Now the Fed is raising rates again? Why? Core inflation is 2%. The Fed cannot control commodities prices, which are soaring, because China buys so much in raw materials. But China sends us everything we need at discount prices. So discounted goods from China more than offset higher gasoline prices here, keeping inflation in check. Now India is sending us finished goods even more cheaply than China. Stuff from Mexico is still cheap, but Chinese products are less expensive and better quality. We need the Fed to allow cheap credit, so we can keep buying stuff and borrowing equity from our houses. If the Fed declines to cooperate, then we need more tax cuts, and much deeper this time. It's that simple.
     
  4. Toro
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    Toro Diamond Member

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    There is a housing bubble.
     
  5. BaronVonBigmeat
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    BaronVonBigmeat Senior Member

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    I didn't say they should. I said the fed should be abolished. I don't know what the interest rates should or shouldn't be. Central planning works poorly for wheat and steel for example; I don't think the universal commodity of money is any different.

    There is no stock market bubble (there was, in the late 90's, due to credit expansion), but there is most definitely a housing bubble--the most massive bubble in recorded history, if I've read correctly.

    That's just the thing though, the more you cut taxes (without cutting spending, remember), the more you have to borrow/inflate. Borrowing crowds out private investment. Inflation gives you a shot in the arm so to speak, but causes malinvestment which has to be liquidated in a recession. Kind of like how a drinking binge will always be followed by a hangover. It also devalues the currency for ordinary workers, acting as a stealth flat tax.

    Last time I checked (Money magazine, I think), it was 3.6% and expected to jump to 4%. Keep in mind this number is borderline fraudulent and should probably be closer to 6%+, if you include such minor things as housing and fuel, which aren't included.

    There's another problem with "only" 2% inflation. The natural trend for a country on a gold standard is for slow and steady deflation. Productivity gains are passed along to consumers in the form of lower prices. For some strange reason, people confuse this with real deflation (actually shrinking the amount of money in circulation, which IS bad).

    When you're saying "cheap credit", what that really boils down to is: crank up the printing presses (with banks creating the biggest bulk of the new money). You're benefiting borrowers while hurting savers and retirees. Why is it bad for me to personally counterfeit money, but it's okay for banks to do it (backed up by taxpayer bailouts if they make foolish loans)?

    Also, borrowing against equity and buying stuff is not the sort of thing you build long-term prosperity on! This situation is entirely dependent upon the Chinese central bank's lending, which will not continue on like this forever. If you want long-term prosperity, you want savings, and our savings rate is currently negative.

    We DO need tax cuts. AND we need spending cuts too--otherwise, you're just trading one form of wealth confiscation for another.
     

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