When you read it, you'll likely be lulled into a false sense of security. He starts out sounding very reasonable and reasoned, making one sound non-controversial statement after another. Then this happens:
What's really needed is a fiscal stimulus, enacted now and triggered to take effect if the economy deteriorates substantially in 2008. There are many possible forms of stimulus, including a uniform tax rebate per taxpayer or a percentage reduction in each taxpayer's liability. There are also a variety of possible triggering events. The most suitable of these would be a three-month cumulative decline in payroll employment. The fiscal stimulus would automatically end when employment began to rise or when it reached its pre-downturn level.
Are you kidding me? He wants to reduce tax rates at precisely the same time that the government is going to realize falling tax revenues (falling corportate profits, personal incomes, investment gains)? What would that do to the dollar? Falling interest rates and massive amounts of borrowing to close a spiraling deficit due to increased fiscal expenditures and decreasing revenues would kill the dollar, reserve currency or not, this would be a dollar bloodbath.
Later:
Even if the Fed decides that it should not cut rates further at the present time, (HA! Good luck with that. - Jim) it would not raise rates to offset the stimulus effect of the fiscal change. From the Fed's point of view, the tax cuts can provide a desirable short-run stimulus without the inflationary impact that would result from a lower interest rate and an increase in the stock of money. Some reliance now on a fiscal stimulus rather than easier money would also take pressure off the exchange-rate adjustment. While further declines of the dollar are necessary to shrink the massive U.S. trade deficit, continued rapid declines might lead to counterproductive retaliatory actions by some of our trading partners.
"[T]he tax cuts can provide a desirable short-run stimulus without the inflationary impact that would result from a lower interest rate and an increase in the stock of money." Is he serious? A plunging dollar would again make oil prices surge and that would flow through to the rest of the economy. And for those of you who still insist on looking at "core inflation" only (for whatever reason), $200/barrel oil would flow through the entire economy. Lower interest rates with massive borrowing is an economic disaster in the making.
And the final part of the quote above makes no sense to me either. Announcing this would lead to "counterproductive retaliatory actions" by some of our trading partners who would be forced to start and reallocate foreign exchange portfolios away from dollars.
It seems like we are currently playing a global game of chicken with the world saying, in effect, we don't think that you will move away from dollars in the near future because doing so would seriously impact the value of of your own reserves, that is, you can't afford to move away from dollars. I wouldn't be so sure. If our trading partners become convinced that the dollar is going to continue its decline, why wouldn't they start to get out now while they can? It's a dangerous game we're playing.
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How do you feel about the government bailout? Is this an end to the free market? Apparently it does pay to have bad credit b/c those who have good credit in the same situation will not qualify.
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