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

[BaronVonBigmeat]

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

The act of creating new capital, manufacturing new machines, is
called investment. A government has two methods to pay for its consumption:It can tax people or it can sell bonds. Taxes are just confiscation and are taken entirely out of private investment. Bonds that
mature in the hands of private parties (not the central bank) compete
with corporate bonds. Because the buyers hold them to maturity, they
are interested only in receiving interest and would buy corporate bonds
if the treasury did not offer them a higher interest rate. Thus, the two
forms of fiscal policy, taxing and borrowing from the public, either
confiscate or crowd out an equal amount of private investment. Bonds
sold to the central bank (either directly or to private dealers who pass
them on to the central bank before maturity) are paid for with a check
that the central bank writes against itself. (translation: they create money out of thin air--Baron)

The treasury then deposits this check in a commercial bank, allowing commercial banks to buy government bonds amounting to several times the amount that the central bank bought. (The exact multiple is determined by the reserve requirement.)(translation: corporate banks are given the legal priviledge to loan out money they don't actually have, roughly 8 times their actual reserves, thus creating money out of thin air, again. This is not a free market banking system!--Baron) Thus, the two forms of monetary policy, selling bonds to the central bank and to commercial banks, are effectively just printing money and using it to buy capital away from private investors. Capital consumed by a government through fiscal and monetary policies was
never idle but would otherwise have gone to the creation of wealth.

...Thus, the institution of central banks is built on a deception. By
assuming that all short-term credit instruments function as money, they
can issue money certificates while claiming to leave the stock of money
in the broader sense unchanged. If they operated like counterfeiters
and just printed money and then went out into the world to spend it,
they would receive little support from the people. Instead, they accomplish
the same thing but in such a circuitous manner that they receive
only confusion from the people. The treasury issues bonds which may
be purchased by anybody but are mostly purchased by private dealers.
Most of these are resold to the central bank. The check it writes is
deposited at a commercial bank where it is highly valued because it
counts in the reserve requirement that commercial banks must keep to
back up their own checking accounts.

...The commercial banks can spend this new-found money on anything they want, though they are encouraged to spend it on government bonds.
Without a vast and bloated bureaucracy to watch over them, however, it
is difficult to prevent the banks (including savings and loans) from
spending it on get-rich-quick schemes which, if successful, bring great
profits to the bankers and, if unsuccessful, dump great losses on the
taxpayers. The term “national debt” refers to the government bonds
sold mostly to the central bank, some to commercial banks, and almost
none to private savers. Since the central bank and the treasury are both
branches of the government, they have effectively just printed some
money and spent it. The word "debt" is used only to obscure the process
and does not have any meaning in this context.

...To attack the root cause of unemployment, the government must
be prevented from wasting the capital of the nation. Piecemeal
elimination of obvious boondoggles is a move in the right direction.
However, because of the vested interest in each boondoggle, the system
of pork-barrel politics is quite stable. It is more effective to reduce the
government's revenue and leave Congress alone to spend what they get
than it is to attempt to influence specific legislation. Revenue from
taxes has a natural limit: People individually evade taxes that they
consider to be unfair and collectively vote against legislators who
support unreasonable tax bills. Tax revenues are responsive to genuine
emergencies such as an invasion, however, so they may be considered
the measure of how much government people want. To reduce the
revenue of a government down to what people are willing to pay in
taxes (or patriotically purchase in bonds), the central bank must be
eliminated. In the United States, the central bank is the Federal Reserve.
If it can be shown to be unstable, then decentralization of the
banking industry is possible.

Decentralization is not the same thing as deregulation. The term
"regulation" is meaningless without reference to the basic framework in
which banks operate. A stable system can be governed by the usual
laws against criminality that apply to all businesses, while an unstable
system requires a vast regulatory bureaucracy and is still plagued with
corruption. It is naive for people who dislike big government to advocate
deregulation in the latter case, but it is also wrong to assume that
the existence of a central bank is part of the regulations which attempt
to prevent corruption. Central banks and regulatory bureaucracies are
associated with one another, not because they both oppose an inherent
instability in banking, but because the existence of a central bank creates
an unstable system that requires constant policing.

The theory of economics presented in Axiomatic Theory of
Economics is divided into two chapters and they each have a point.
The point of the first chapter is the Law of Price Adjustment. The point
of the second chapter is that the purpose of monopolizing the right to
issue money is to cheapen it. If every bank issued its own money, none
of them could cheapen it for fear of losing reserves to competing banks
and the system would be perfectly stable. A central bank does not
provide stability because, having eliminated its competition, it need not
fear losing reserves due to imprudent management. In fact, without
massive regulation, it causes just the kind of corruption that was seen in
the United States' recent, misguided attempt at deregulation. The purpose of the Federal Reserve is not now and never has been to create
stability. Its purpose is to provide the government with a convenient
method to siphon off the wealth of the nation. A decentralized system
does not do this because, without a central bank standing ready to fill
the treasury, it is unlikely that private banks would consider the government
a good enough risk to grant it credit. At least they would not
grant the government unlimited credit, which is what the Federal Reserve
was designed to do.

Eliminating the Federal Reserve is more efficient than requiring
that the government balance its budget. Balancing the budget is an
accounting trick and to talk about a budget while a central bank exists
is, quite frankly, missing the point. That would be like successfully
besieging a city and then telling one's soldiers to be sure that they pay
for anything they take from the people's homes and shops. The soldiers
would think that their general was mad. The purpose of besieging a
city is to loot it and the purpose of a central bank is to run deficits. And
the national debt, lest anyone misunderstand, is all that the government
has consumed without the consent of taxpayers.

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?

 

[BaronVonBigmeat]

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.)

 

[bush lover]

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.

 

[Toro]

There is a housing bubble.

 

[BaronVonBigmeat]

Why should the Federal Reserve raise interest rates?

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, no bond market bubble, no property bubble.

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.

. 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.

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.

Now the Fed is raising rates again? Why? Core inflation is 2%.

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).

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.

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.