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ZIRP v. Tax Rate Reductions

At UPI, Martin Walker asks, Could U.S. go bankrupt?

Is the Fed running out of firepower? Or, to rephrase the question, is it possible that the central bank of the world's biggest economy is becoming overstretched and overwhelmed by the costs of the crisis?

If so, does that mean the United States could go bankrupt?

The question is becoming urgent, because Tuesday the Fed cut the federal funds rate from an extraordinarily low 1 percent to an unprecedented 0.25 percent, with a prospect of going down to zero.

But even such unheard-of steps might not, on recent experience, revive the animal spirits of entrepreneurs and get bankers lending again.

Why, what on Earth (or, at least in America) could "revive the animal spirits of entrepreneurs and get bankers lending again"? That sneaky little truth has far, far less to do with interest rates and much more to do with taxation.

There is precious little room for low interest rates to be lowered beyond what were already historic lows. But there is plenty of room (ask any business owner) for reduction in the tax rates.

Instead, the only flirtation in Washington are whispers that the Bush tax cuts may be extended (or, not allowed to die) rather than further reductions. There's still plenty of room.

And our burgeoning government's only discussion of cuts begin and end with the Pentagon and Defense, as always. This should be simply stunning. Yet, it passes without much remark. We have become so conditioned as to expect nothing else.

As John Robb put it regarding the Zero Interest Rate Policy, we are down to one of three outcomes, and they are all bad.

ZIRP (zero interest rate policy) has arrived in the US. The Federal Reserve and the US Treasury are now in desperate straights to stabilize the US economic system (and by extension, the global economic system). From a systems perspective, it's also a formal indication that the US and the global economy is now operating far from equilibrium and the Fed/Treasury is using every control input they have to return the system to its previous equilibrium.

Unfortunately, from a systems standpoint, that's VERY unlikely to happen. What will happen is either a monstrous overshoot (overcorrection) or a control system failure that plunges the entire system deeply into turbulence/non-linearity. While the establishment of a new equilibrium point at our current position, where the forces of correction and positive feedback loops are balanced, is possible, it's also unlikely since there isn't an external reference environment available to fix the system to.

ZIRP and taxation rates (corporate or personal) are not exactly competing strategies, but neither are they without correlation. Zero interest rates while not budging still relatively high taxation rates seems quite an imbalanced approach to the larger economic mess.

At some point, the piper must be paid, and government must acknowledge its crippling berth and girth.

Apologies for not applying more thought to this right now, as is required. But at least plotting a few points serves some sane purpose. Interest rates, tax rates, size and scope of government and the irresponsible temptation to cut defense before all else - this is the general context.

Government is made of elected people and their decisions. They have been and continue to fail.


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Comments (4)

I recommend checking out th... (Below threshold)

I recommend checking out the 12/17 IBD editorial about rates before full hyperventilation sets in.

"It's true that interest rates are at "record lows." But real interest rates -- that is, rates adjusted for inflation -- aren't even close to their lows. In fact, real rates rose sharply in the most recent month.

Right now, the real fed funds rate is just below zero. By comparison, real rates had to fall to nearly -6% to spur the economy during the 1980 and 1982 recessions. And if inflation keeps falling, real interest rates will turn positive next month."

In other words - Reagan's team had to essentially give extra money away with their loans. The country didn't go bankrupt or implode then, either.

The real danger is hyperinf... (Below threshold)

The real danger is hyperinflation. We don't have the hundreds of billions of dollars that the Treasury is throwing around now and plans to throw around a few months from now. So the plan is to print more money. We aren't devaluing the dollar: we're debasing it. The Chinese have been propping up our currency, but when it starts to move downward more sharply, they'll have no choice but to cash out on America. (They are said to hold cash reserves in excess of $1T.) The slide will rapidly become a avalanche - much like a run on a bank. The dollar isn't backed by gold: it's backed by confidence. Once that's gone, we're in real trouble.

We are so afraid of devaluation or a recession, we're about to trigger the wholesale destruction of our currency. And we don't have the industrial capacity to rebuild.

Want to know one of the big reasons why no one wants to loan money? If I loan you money for, say, two years, either you'll have the money to pay me back or you won't. If you don't have the money, then I loose. However, if you do have the money, but the value of the money has dropped by 50% during the life of the loan, you can pay me back easily with cheap, devalued money - and I still loose.

In the coming crisis cash (liquidity) is king. Many won't want to tie up their money in new loans or new business ventures.

The word "corporate" has be... (Below threshold)

The word "corporate" has become the kiss of death.

Beating a Dead Horse

How companies treat the dead horse

Dakota tribal wisdom says that when you discover you are riding a dead horse, the best strategy is to dismount.
However, in business we often try other strategies with dead horses, including the following:

1. Buying a stronger whip.
2. Changing riders.
3. Say things like, "This is the way we have always ridden this horse."
4. Appointing a committee to study the horse.
5. Arranging to visit other sites to see how they ride dead horses.
6. Increasing the standards to ride dead horses.
7. Appointing a tiger team to revive the dead horse.
8. Creating a training session to increase our riding ability.
9. Comparing the state of dead horses in todays environment.
10. Change the requirements declaring that "This horse is not dead."
11. Hire contractors to ride the dead horse.
12. Harnessing several dead horses together for increased speed.
13. Declaring that "No horse is too dead to beat."
14. Providing additional funding to increase the horse's performance.
15. Do a Cost Analysis study to see if contractors can ride it cheaper.
16. Purchase a product to make dead horses run faster.
17. Declare the horse is "better, faster and cheaper" dead.
18. Form a quality circle to find uses for dead horses.
19. Revisit the performance requirements for horses.
20. Say this horse was procured with cost as an independent variable.
21. Promote the dead horse to a supervisory position.


Excellent point. Make busi... (Below threshold)

Excellent point. Make business more solvent and able to retain workers by lowering the tax burden at a time of deep recession, as even the Dims. admit. It's Econ. 101, but as we've seen before, the old Dimocrap meme of "soak the rich!" sometimes trumps good economic policy.

It's sort of like a lot of things they do--it's their feelings, and not their clear thinking, that rule the day. Oh, the masses can be as greedy as the kingpin if he's got a powerful congressperson to hitch a ride with (see UAW).






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