Supply side economics and tax policy

[Biochemist]

Originally Posted by Qfwfq

Isn't this what Greenspan did? I did not mean direct intervention.

Sure. But the reason for interest rate management is not related to the foreign exhange rate. You can even read the Fed board minutes after they are released to see it. The Fed sets monetary policy (i.e., rate targets and money supply decisions) based on dollar inflation. Their objective is dollar price stability. They expect other countries to manage their own currencies. If rates are high in Europe (because of European central bank action) and low in the US, the dollar falls. But the Federal Reserve manages dollar inflation, not the exchange rate.

[Qfwfq]

I'm not here to argue about it Bio, but I've often heard about many a US gov't using devaluation. Slightly more than a year ago a young Californian snot-nosed brat even treated me as if I were an idiot that doesn't know these things, when saying that the dollar is low because that's the way they like it.

I had also, much previously, had a few talks with a gal that was a great fan of Reagan and Thatcher, she had written her grad thesis in economics on Reaganomics. She sure didn't place money supply issues as being unrelated to currency exchange rate. I'm surprised at some of the things you say.

[lindagarrette]

Originally Posted by Biochemist

Decreasing top income tax rates increases income tax revenue. This phenomenon is often referred to as the "Laffer Curve", named after the economist Art Laffer.

The Laffer Curve is an obsolete notion concocted over lunch one day in the early 70s by Laffer and Don Rumsfeld when economic incentives for the rich would supposedly result in the "trickel down" effect. In a global economy it is not even a valid theory.

[lindagarrette]

Originally Posted by Biochemist

Sure. But the reason for interest rate management is not related to the foreign exhange rate. You can even read the Fed board minutes after they are released to see it. The Fed sets monetary policy (i.e., rate targets and money supply decisions) based on dollar inflation. Their objective is dollar price stability. They expect other countries to manage their own currencies. If rates are high in Europe (because of European central bank action) and low in the US, the dollar falls. But the Federal Reserve manages dollar inflation, not the exchange rate.

There are no simple solutions to the current economic downturn for the US. Although the interest rate is not directly related to the exchange rate, they affect each other. That's primarily because of the way exchange rates are handled by various governments. Some peg their currency to the dollar, some recognize that the dollar is shrinking quickly relative to the real value of other currencies. Interest rates don't have much to do with willingness of foreign investors to fund our debt. If the Chinese decided to float the yuan, they could dump their vast amount of dollars on the market and create a massive inflation.

[Qfwfq]

VERRRRRRRRRy interesting, Linda!!!!



BTW, is... is it... is that the very same Don Rumsfeld?

[Biochemist]

Originally Posted by Qfwfq

I'm not here to argue about it Bio, but I've often heard about many a US gov't using devaluation.

I was not aware that we were arguing. I was asking you what you thought the US government does to affect current exchange rates, other than the actions of the Fed. The Fed's actions certainly affect exchange reates, but the intent of the Fed is to manage inflation, not exchange rates.

I do not know what you are suggesting yet. Are you suggesting something that is different that me? If so, what is it?

...She sure didn't place money supply issues as being unrelated to currency exchange rate. I'm surprised at some of the things you say.

Huh? I described above exactly how I think they are related. My point was not that they are not related, but that the intent of the Fed is to manage dollar inflation, not exchange rates. The market value of the dollar against other currencies is a by product of the relative policies of the various central banks.

I dont' think we can be arguing if I don't know what your position is.

[Biochemist]

Originally Posted by lindagarrette

The Laffer Curve is an obsolete notion concocted over lunch one day in the early 70s by Laffer and Don Rumsfeld when economic incentives for the rich would supposedly result in the "trickel down" effect. In a global economy it is not even a valid theory.

What? I was talking about the empirical experience in the US since 1960. Every time we have reduced the maximum tax rate brackets, the revenue from those income brackets has increased. It happenned under Kennedy, Reagan and Bush II. Tell me exactly how this is obsolete???

[Biochemist]

Originally Posted by lindagarrette

... Interest rates don't have much to do with willingness of foreign investors to fund our debt.

You are correct that the relationship is complicated, but the impact of interest rates on US bonds is probably a primary driver. At a slightly more granular level, if the real interest rate return (that is, nominal rates net of domestic inflation) on dollars is higher than the real interest rate of return of other currencies, foreign investment in US bonds rises.

...If the Chinese decided to float the yuan, they could dump their vast amount of dollars on the market and create a massive inflation.

Maybe. But I suspect the Fed would buy back most of the extra cash (by selling bonds at the open market desk) and neutralize most of the monetary expansion. The resultant exchange rate (presumably a higher yuan) would probably cause US trade with China to plummet. That is why I expect they will not do it.

[Biochemist]

Originally Posted by Qfwfq

... is that the very same Don Rumsfeld?

It is the same Rumsfeld. Reportedly, Cheney was at that lunch as well. But I am not exactly clear why anyone would bring up this association, other than to bring out boogie men. The topic is tax policy and federal revenue.

[Qfwfq]

Originally Posted by Biochemist

I was not aware that we were arguing.

And I don't think we should. I think we have kept misunderstanding each other.

Originally Posted by Biochemist

Huh? I described above exactly how I think they are related. My point was not that they are not related, but that the intent of the Fed is to manage dollar inflation, not exchange rates.

I can't remember you saying they are related and you don't prove the devaluation wasn't deliberate, but I won't go looking upstream. One thing I do remember is saying that the lower dollar makes the debt lower and you replying "No, it makes it lower." but I think we should just call it off.

Surely you're not afraid of the boogie man?