I was just reading this long paper (linked at page) by the folks at PIMCO advocating ZIRP (Zero Interest Rate policy) in the US.. The idea is that Zero interest rates coupled with higher taxes and reduced government spending would somehow dissuade competing mercantilistic reserve banks/nations from subsidizing the US consumer and gaming their own currencies.. This would help to strengthen the long term US manufacturing base and real economy.. my favorite quote (and I’ve heard it before in Bill Gross’ "Outlooks") was that "America needs more engineers and less Realtors"
If this comes to pass it will significantly devalue the US Dollar. That will drive all things valued in dollars higher. Everyone will be a millionaire.. there will be wayyyy more billionaires, a few Trillionaires and it will take 20 bucks to buy a big mac. Taxes will be much higher to discourage asset re-inflation (bubbles) and speculation to new unheard of levels.
On the flip side of that you have a world economy becoming more information driven.. This story spotted by Josh in Ron Jackson’s "Lowdown" today features a quote by Laura Desmond of Starcom/Mediavest which suggests that: "a day could come when up to 60% of clients’ budgets are apportioned for what’s now still known as new media" (The Internet)
I agree with both underlying premises (weaker dollar/stronger internet) so you’ll see why I believe that domain names are going to be worth much much more in 10 years time.
The Fed has already taken a huge gamble with the dollar that it looks like losing. It just is not interesting to invest when you are losing more in exchange rates than you are gaining in interest. If those nations underpinning US debt pull the pin, and it now really only a question of who flinches first, then the only way the Federal Government can pay the bills is either to drastically increase interest rates on US Treasuries, cut public expenditure or ramp up taxes. A combination of all three is most likely.
Either way we are talking deep deep recession. And that could be an optimistic scenario!
PIMCO is advocating what?
1) Zero interest rates lower the value of the dollar and cost of money. If nothing else were to change this would cause runaway inflation the likes of which only 3rd world countries have seen.
2) To combat this inflation PIMCO suggest relying on the government (not the Fed Reserve) to adjust tax rates, so that inflation will not spiral out of control. This mechanism would be controlled by a bunch of beaureacrats where probably less than 10% ever ran a business or read an Econ book. Plus, you can only adjust tax rates annually, which is very inflexible for a dynamic economy and does not take into account shocks to the system (9/11 etc.)
Plus you want to assume that the Senate and House will get along so well that we are sure to have a tax rate that will get keep inflation low.
Did anyone forget that as you raise tax rates you lose the incentive to work? Any reason to work overtime if 50-80% of your paycheck (or domain earnings) goes to someone else?
3) Then, the final part of the plan is to reduce government spending? Republicans have been trying to do this for years and it just isn’t happening.
What I don’t understand is why would you reduce government spending if you are raising taxes. Is the government going to end up with a huge surplus and have to decide what is done with the money?
Personally, I want the huge surplus in my hands, not the most inefficient institution in the United States.
The bottom line is that this plan turns over all important economic decisions to the Senate, House and possibly President and we are left with an inflexible system of changing tax rates to combat inflation.
What happens to the independent body of the Federal Reserve? Interest Rates cannot be used to combat inflation and changes in money supply take on less importance.
Why can’t the govt. be a net borrower? Don’t companies leverage up all the time?
Isn’t the reason an entity borrows is because they have a relative certanity they can make a better return on their money now than they pay out in interest? IF these govt. programs do not give the general public a better return/benefit than the cost of the money, then shouldn’t we cut these programs and thus reduce our deficit and interest costs?
Let’s put our faith in the Senate and House, that have no expertise in this area?
No thank you to higher tax rates, less incentive to work/invest/create, huge swings in inflation (or disinflation) and chopping off the legs of the Federal Reserve.
I imagine there are some that don’t even like the idea of reduced govt. spending.
Once you get our “representatives” to stop worrying about their “constituents” and start worrying about America, then you might have a chance to get many important things done.
This radical, deperate plan has no place in sane discussions of economic policy.
>Then, the final part of the plan is to reduce government spending? Republicans have been trying to do this for years and it just isn’t happening.
If you look at real debt growth vs who was president and how many spending increases Bush vetoed in his first term (0), you will see this is not true.
“Bush was the first president since John Quincy Adams not to exercise his veto power during a complete four-year term, even though the Republican-controlled Congress was on a spending spree.”
source: washingtonpost.com/wp-dyn/content/article/2007/06/17/AR2007061700942.html
Look at how much is being spent on defense, and what that is doing to weaken the dollar. Seems like too much defense rots the currency and economy from the inside out. Too bad we were defending the wrong stuff while selling economic stability and our freedoms wholesale.
***FS*** All the more poignant considering you’re a veteran Aaron.
With all due respect to Mr. Wrixon:
The Fed does not care about the fluctuations of the value of the dollar, except as it affects U.S. inflation.
The value of the dollar is affected by world market demand and speculation.
As U.S. interest rates fall, all other things remaining unchanged, the value of the dollar will also fall. But this is the equilibrium of the markets. Generally as the dollar falls, the cost of foreign goods in U.S. markets increases, potentially aggravating inflation upward and putting upward pressure on interest rates.
As for foreign investors pulling out of the United States; where are they going to put their money? The euro has vaulted to new highs, but is there really any confidence in the long run in the economies of Europe, which have been plagued with nagging inflation, slow growth, lack of innovation and market inefficiencies. Would you have confidence in buying the euro at today’s levels? The markets in China have seen a huge influx of capital that may continue for years, but the govt. there is still not enamored with free market systems, and there will be growing pains.
The free-market economy of the U.S. has been the most resilient and consistent in the world. This has great value to long-term investors (not speculators) who value consistent growth and an accomodating government. I would venture to say that now is the perfect time to buy the dollar, at its low point and with everyone stating that the sky is ready to fall.
There are signs of regional weakness in the U.S. economy, but no signs of any looming recession. The Fed has lowered rates to calm market fears of a debilitating credit crunch due to the problems in the sub-prime mortgage market.
The fears will subside. The housing market will work thru its problems. The dollar will strengthen and the U.S. economy will continue to grow at envious levels.
The American economy is unquestionably the most efficient in the world. Although the dollar has lost a bit of its allure, it is still king of the hill.
>Then, the final part of the plan is to reduce government spending?
>Republicans have been trying to do this for years…
Cough, hack! Step back from the koolaid dispenser, dood!
http://angrybear.blogspot.com/2007/09/ranking-presidents-fiscal.html
>Cough, hack! Step back from the koolaid dispenser, dood!
C’mon guys let’s not resort to the typical Democratic response of personal attacks.
Next thing I’ll hear that Ted Koppel has found a guy in North Vietnam that confirms that John Kerry knows more about economics than George Bush.
Anyone have any strong facts for me? Yes, the 1st Bush increased spending because of a Demo controlled House and Senate. The President doesn’t control the pork barrel, he can only attempt to shape public opinion to push thru his programs. Reagan did this masterfully, Bush Sr. did not. Do you actually believe the President is responsible for recessions (or the economy on the whole) instead of the Fed Reserve.
The fact is the George Bush II tried to reform Social Security and was stonewalled.
Yes, we do spend more on defense than we did in the Carter days, but this can be argued to have created the fall of the Soviet Union (at least speeding the process) and thus weakening Communism throughout the world. Defense spending, like all government spending does have a positive effect on the economy (and I do not work in the defense industry nor do I approve of their rampant overcharging).
Yes, spending of all types increases debt and puts pressure on U.S. interest rates. But, can you name an economy in the world today that comes close to matching the safety and consistent growth of the United States? There is a reason foreigners buy out debt and it is not out of the goodness of their hearts.
Fact: The Pimco plan wants to put main control of the economy with the legislature and executive branches.
Fact: Dropping rates to 0% significantly reduces the cost of money, will drop the value of the dollar much more and significantly would increase inflation. If rates drop to 0%, where is the incentive to lend money to anyone? I will borrow money all day long at 0%, but who is going to give it to me; the Government (subsidy?).
Fact: Pimco’s plan calls for Congress to co-operate with each other and reduce spending.
Does anyone believe this is possible?
Most representatives are more worried about keeping their jobs than doing what is right.
And Dems and Repubs are at each others throats flinging “koolaid” comments back and forth instead of working together as Americans. Term limits might work, but could create an even poorer talent pool than we have to put up with now. Until the incentive for Congress is to tackle the tough problems and have the knowledge to reach intelligent solutions, we are spinning our wheels.
Fact: Increasing taxes certainly will slow down the economy and have an effect in decreasing inflation, but this is a blunt instrument that can only be adjusted once a year, and will have no effect on market shocks (9/11 etc.). Also, unquestionably, higher taxes reduces the incentive to work (hard), and reduces the payoff to create and invent.
So, I am looking at an economy where no one will lend to me, except possibly the government, and I will have less incentive to work, create and invent, and we will put Congress, with their lack on econmic/financial knowledge in charge of the whole thing. I don’t care what Party you belong to, that plan is a muddled mess.
Now we can finger point, argue about defense spending levels, argue about the war in Iraq, and even debate how Ted Koppel was able to find an ex-North Vietnamese soldier that somehow saw and recalls John Kerry valiantly fighting in Vietnam.
But someone stick to the point and discuss the facts about the economic plan proposed by Pimco.
Are my facts off/wrong?