Wednesday, April 27, 2011
Timmy's lips
How can you tell if Timothy Geithner is lying? His lips are moving. The treasury secretary has no credibility. He came to the office under two clouds: his income tax avoidance and the AIG bailout. Things have only gotten worse. In fact he may be the worse Treasury secretary since Hank Paulson. His utterances over the debt ceiling are embarrassing. He is asserting without challenge from the clueless news reporters that if the debt ceiling is not raised then the US will default on its obligations. Only a fool would say that and only a fool would believe it. Someone should ask him how a nation with a printing press could ever default on its obligations. The only consequence of not raising the debt ceiling is that the government cannot borrow to finance new spending. As I have noted before, the US takes in enough "revenues" to pay the interest on the existing debt and to actually run much of the government. Moreover, since the Fed is the largest debtholder, then just have the Fed practice forbearance and pay them later. Speaking of the Fed, there are those like Ron Paul who want to abolish the Fed and the gold bugs who want to go to a gold standard. While that is a truly bad idea that I will discuss fully later, the gold bugs say that on a gold standard you limit government spending and the Fed's ability to create money. Obviously they haven't heard of the Emperor Diocletian, whose Rome suffered hyperinflation under the gold standard by debasing the currency by adding lead to it. Nor do they realize that the Congress could just change the value of gold in terms of dollars which could be easily done. No, if you want to control the Fed's ability to create money, there is a far simpler solution, first you need to have 100 percent reserves. The way most money is created is through bank lending via fractional reserves. With 100 percent reserves the banks could not create money. Yes they could still lend but they would have to borrow the money just like nondepositories do today rather than lend from their excess reserves because there would be no excess reserves. Second, there has to be a law prohibiting the Fed from buying Treasuries directly from the US Treasury (re: Timothy Geithner). The fed could continue to buy treasuries that have already been issued and are in the portfolios of the public but they could no longer monetize the national debt. The buying directly form the Treasury as in QE and QE2 give money directly to the Treasury which immediately will spend it. The result is inflationary because the money is generated out of thin air. It you want to preserve the value of the dollar, if you want to combat the threat of inflation, if you want to slow down the unchecked rate of growth in government spending the answer is simple and clear. It is not the gold standard which will only enrich those friends of capitalism like George Soros, it is to constrain the Fed by enacting two rather simple changes in the law.
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4 comments:
I dont think that the fed should be able to buy treasuries at all. If they can buy "used treasuries", they would simply find a way to have a few middleman billionaires to buy and resale for some profit 10 minutes later. If the investors dont have enough confidence in the USA to buy our treasuries, then maybe we should take a hint and cut spending to work our way back to zero national debt and dare I say surplus.
Really, I think none of this economic talk matters much if we dont enact the Fair Tax or some equivalent that will remove all corporate taxes(except on their consumables) so as to help level the playing field with China and their cheap labor and artificially held low currency. Since about 2002, I have thought the free trade (with China specifically) is an insurmountable hurdle that would long term destroy our economy, and only believe it more today. Trumps 20% tariff idea is the dumbest thing I think we could do bc they have our economy in their hands. Such a direct action would surely bring just enough reaction to remind Trump who is in control, but making conditions more favorable here(Fair Tax) is a much more effective and indirect confrontation of the imbalance.
I also believe that most people would favor the Fair Tax if they get past the initial shock of the 23% number and understood how it works. It would actually lower taxes on the poor and anybody who saves money. Saving money could become something of a political statement by limiting revenue to the government. Dont like the wars? obamacare? - save your money and starve the beast.
well I have written a book here. please let me know your feedback and where I have gone wrong.
There is nothing wrong with the Fed buying Treasuries that have already been issued to conduct monetary policy. The trouble is buying them directly from the Treasury which then allows the government to keep debt financing when the market rejects it. The "Fair Tax" is a bad idea. I have written often on this. A flat tax is far superior. Remember a tax on consumables is a hidden tax and one that can be easily changed. A flat tax raises as much money, keeps taxes as a constant percent of GDP. Basic supply and demand: it raises the price of all goods and decreases the amount demanded. Trump is just stupid - enough said. Free trade with China is actually a great idea - if it is truly free trade. We manufacture more than they do and comparative advantage benefits us both ways. Goods are cheaper, real incomes are higher. Let them produce the cheap labor stuff and we do the rest. Remember VietNam, India, South Korea and much of South America also produce our stuff too.
I have to disagree with you on the free trade with china issue bc the labor costs are too cheap and with a communist government in control, they will do whatever they need to do to get/stay on top. You say let them produce the "cheap labor stuff", but they are making almost everything from HDTV's, tools, furniture, etc. If you look at wal-mart about 75% of goods that are not food are made in china. My point is, what is the non-cheap labor stuff these days bc they are beginning to make cars and construction equipment, etc. It is only a matter of time to build the factories, then they are making everything for our factories to compete with. free trade has taken away our jobs on the ground here in the USA and turned our economy into a service sector economy where people must have expendable income to pay for that service. I am a simple man and maybe this is too complex for me, but since the late 90s I couldn't see our economy being able to sustain this shift to service sector in the long term.
I wont argue on the Fair vs. Flat tax bc I dont know enough about a flat tax system, but I disagree with the fair tax being called a hidden tax bc it would be the main tax rate people would have to know about. that also means changing that rate would bring much more attention to the politicians trying to do so. Any tax rate-flat tax included- could be changed in the future by politicians with the stroke of a pen and a vote on the floor if we allow it.
We will agree to disagree. As what always happens wages go up with economic development. Wages in China have increased 20 percent and labor intensive work is going to Viet Nam, Thailand and to South America. Some companies are even coming back here to right to work states. Regardless free trade makes us better off by increasing real incomes as prices go down. The fair tax is hidden because it is included in the price of goods. Its easy for the government to increase without howls from the people. If everyone pays 18 percent or so on Apr 15 they know exactly what the government costs them and if a tax increase is proposed then everyone (rather than the 51 percent now) will have a stake.
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