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Letters by a modern St. Ferdinand III about cults

Gab@StFerdinandIII -

Plenty of cults exist - every cult has its 'religious dogma', its idols, its 'prophets', its 'science', its 'proof' and its intolerant liturgy of demands.  Cults everywhere:  Corona, 'The Science' or Scientism, Islam, the State, the cult of Gender Fascism, Marxism, Darwin and Evolution, Globaloneywarming, Changing Climate, Abortion...

Tempus Fugit Memento Mori - Time Flies Remember Death 

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Thursday, January 3, 2008

We need tax cuts not massive interest rate cuts.

Defending Central Banking policy.

by StFerdIII

Central banks are like tax-collectors. Necessary but hated. Managing monetary policy is a non-political, independent activity, that generates little enthusiasm and even less knowledge amongst the general mass. For many investors and speculators central banks should be slaves of the market, beholden to only economic and stock market concerns. Thankfully they are not.

Central banks have two primary concerns. The first is to make sure that inflation levels are moderate. The second is to control the money supply and the amount of currency which goes into the financial sector. These preoccupations supercede anything else including stock market concerns, asset deflations in certain industries, or price corrections in specific markets. The Fed does not micro-manage economic affairs.

This macro-focus drives many people wild. When stock markets are volatile or decline, the financial industry clamours for immediate rate cuts. If housing stock and prices must go through a long overdue correction to deflate greed, speculation and dumb lending practices; then the Fed must [absolutely must!] reduce rates by 1% or more immediately! Cries of recession and depression haunt every Fed move with no-one apparently happy with either its role, or its policies.

The US Federal Reserve is doing the right thing by focusing on its 2 core principles: 1. control inflation and 2. provide adequate but not inflationary money supply.

The world for central banks is not simple, nor is it dependent on what financial houses and investors want. The US interest rate level is 4.25 %, which for many is far too high. But is it? Many economists predict that total consumer inflation will be close to 3% in 2008, with many commodities – priced in a declining US dollar – inflating at high rates. Some sectors are in deflation – housing, computers, textiles, cars etc. -- but many are seeing inflationary pressures – oil, commodities, health care, education etc. The Fed does not have an easy job to balance these two divergent parts of the economy.

Investors argue differently. In the US the 30-day T-bill rate is under 3% whilst the central bank interest rate is 4.25%. For investors this is a sure sign that current interest rates are far too high, since the market has priced in low inflation and slow economic growth or even a recession. To re-stimulate the economy, lower interest costs, and sort out the housing correction, this view maintains that the central bank should cut rates by a lot more – perhaps even a full percentage point down to 3.25%.

But would that be sensible?

A central bank's main obligation is to protect the value of the currency and stifle inflation. This is particularly important for the US dollar since it is the main currency unit used in global trade. One reason why oil is near $100 is that the US currency has fallen in value over the past 5 years by 25% against its main competitors. With oil and other commodities priced in dollars, a weak US currency only stimulates inflation, higher cost inputs, lower profits, lower incomes and ultimately a lower standard of living.

None of this can be allowed. Central banks and their gradual response to changing economic conditions and their very real concerns over inflation are displaying the right policy choice.

A central bank must ensure that its currency is not unnecessarily devalued through easy rate cuts and that cheap liquidity and easy money does not flood the market. The US housing speculation bubble was caused after all, by low rates, cheap money and poor lending practices. There is no point in repeating past mistakes. Correctly, the US central bank has now restricted money growth to about 2 % per annum, cutting the availability of money which should help restore the US dollar's strength and at the same time it is keeping interest rates at a resonable level so the US dollar will not drop further in 2008.

Making sure the US dollar does not fall further in 2008 is a valid and important central bank preoccupation. It far outweighs the concerns of investors over their falling or volatile stock portfolios.

Along with tight monetary policy a central bank can augment the management of inflation, currency strength and the printing of money, with financial lending facilities to overcome short term borrowing constraints. The European central bank has made $500 billion available, at cheaper than market rates for banks who want to lend to other banks, with the US central bank providing a further $40 billion. Whilst small compared to the $40 Trillion or so of investment and capital funds available throughout the world, it is a significant step to reduce inter-bank interest rates (or Libor), and infusing some needed liquidity into the financial system.

Monetary and central bank policy is rightly concerned with inflation and money supply control. If politicians and investors really want to help the economy they should focus on fiscal policy and in particular tax cuts. Reducing taxes and unnecessary spending would provide a great deal of market and business stimulus in the near term. Tax reductions and reduced government ownership of the economy might take a few years to work their way through the system but they are a necessary antidote to what seriously impairs economic growth and gives rise to recessionary talk – government appropriaton and theft of capital.

Back in the 1980s, after the wondrous years of President Jimmy Carter`s `intelligent and thoughtful` term, inflation was closing in on 20 % per annum. Ronald Reagan and Paul Volcker broke this stagflation of low economic growth and high inflation, through a mix of monetary and fiscal policy. On the monetary side the central bank restored the US dollar`s credibility by pushing up interest rates and punishing inflation, while fiscal policy tax cuts spurred economic growth, investment capital and business profits. Broad tax cuts on marginal personal and corporate income tax rates heralded a return to market discipline. As inflation was defeated and fell, so too did interest rates. Such a message would be most welcome in today`s climate.

It is not popular within the chattering class to propose any variety of tax cuts. The usual cries that it only helps the rich, will punish the poor, will result in budget deficits, or will kill old people, is simpleton Marxist populist class warfare politics. The right tax cuts stimulate everything from the work ethic, to corporate profits and government revenues. They are not evil.

What is evil is the expectation that every market or asset correction must involve (now!) an interest rate cut. This is the denial of responsibility. Inflation is a pernicious disease that must be warded off. Central banks have only 2 concerns – low inflation and a stable currency of value. Politicians and government control fiscal policy and by definition large aspects of economic health. They should be held accountable and responsible – not the central bank – if the economy goes sour.

Don`t deny responsibility. Tax cuts are necessary and those who oppose tax and fiscal reform, should be voted out of office.

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