Posted on 01/12/2005 6:32:22 AM PST by tmp02
NEW YORK - Alan Greenspan, that Matador of the Money Supply, the esteemed Impresario of Interest Rates, has suffered precious few slings or arrows over his many years as chairman of the Federal Reserve. Even the White House has had to offer its critiques off the record for fear of roiling the markets or upsetting the chairman's Elvis-in-Vegas-like following. So when the chief economist of one of the world's most prestigious banks calls Greenspan a bum, that's a big deal.
And yesterday it happened. Stephen Roach, the chief economist for Morgan Stanley & Co. (nyse: MWD - news - people ), one of the most powerful investment banks and one of the 50 largest companies in the world, says Greenspan has "driven the world to the economic brink."
Writing in an upcoming issue of Foreign Policy, Roach says that when Greenspan steps down as chairman of the Federal Reserve next year, he will leave behind a record foreign deficit and a generation of Americans with little savings and mountains of debt. Americans, Roach says, are far too dependent on the value of their assets, especially their homes, rather than on income-based savings; they are running a huge current-account deficit; and much of the resulting debt is now held by foreign countries, especially in Asia, which permits low interest rates and entices Americans into more debt.
The "economic brink" line is from the headline of a press release sent by Foreign Policy. In an interview this morning, Roach said, "That's a little extreme." He does admit the nation has prospered on Greenspan's watch. Still, he does not disavow the haymakers he directs at the chairman's chin.
"This is no way to run the global economy," Roach says. So far, the Fed has bucked the odds, Roach adds. But the longer the situation exists, the more chance there is that it will spell danger for the United States and the world.
Roach lays the blame for the peril at Greenspan's door. But first he takes out after his outsized reputation. Greenspan is not responsible for defeating inflation in the 1980s; Paul Volcker, his "tough and courageous predecessor," deserves more of the credit, Roach says. Greenspan's monetary policy deserves some accolades for the 1990s boom, but former President Bill Clinton's fiscal policy and other factors were equally responsible, Roach says. Greenspan may deserve some praise for softening the recession that followed the stock market meltdown, Roach concedes, but the chairman's cure may result in "bigger problems down the road" and "the biggest bubble of all: residential property."
Many have credited Greenspan with saving the world following the 1997-98 Asian financial crisis. Time magazine went so far as to put the gnome of Constitution Avenue on its cover, under the headline "Committee to Save the World." Though it is the case that the world did not end, "In truth, the world weathered the Asian financial storm only to chart increasingly dangerous waters in the years that followed," Roach writes. "Global economic imbalances have intensified dramatically since 1999."
A good chunk of the U.S. prosperity is owed to these imbalances, Roach says: "Asian countries holding enormous stocks of U.S. dollars recycle this cash back into the United States by buying U.S. [Treasury bills]. This process effectively subsidizes U.S. interest rates, thus propping up U.S. asset markets and enticing American consumers into even more debt. Awash in newfound purchasing power, Americans then turn around and buy everything from Chinese-made DVD players to Japanese cars."
While the economist has nothing against DVD players, he does say, "Asia and Europe are increasingly dependent on overly indebted U.S. consumers, while those consumers are increasingly dependent on Asia's interest-rate subsidy. The longer these imbalances persist, the greater the likelihood of a sharp adjustment. A safer world? Not on your life."
Roach even questions Greenspan's political independence. He does not claim the chairman is a partisan Republican, but he does fault him for being a "cheerleader for policies such as tax cuts...that could make the endgame all the more treacherous."
Greenspan is to central banking what J. Edgar Hoover was to fighting crime. He will soon surpass the fondly forgotten William McChesney Martin as the longest-serving Fed chairman. But his term as a member of the Federal Reserve Board of Governors expires in just over a year from now, and America will have to do without. Roach says, "Greenspan will be a tough act to follow." But the difficulty may not be living up to the chairman's reputation so much as cleaning up his mess.
Rah Rah Rah!
Both the government and consumers spend too much. Roach is just pointing that out. A reckoning is coming, as it always has in the past. Greenspan has employed extraordinary measures to stave it off - we should have had a full correction in 2000-2002. How much longer can he do it?
Well, that's it. I'm charging up all my credit cards!
Ah, so we should be taxing ourselves into a better prosperity. Gotcha.
Meanwhile, every dollar given back to the taxpayer/consumer is a dollar not charged on an Asian-backed credit card. Go figure.
If cutting taxes means higher deficits, as it has over the last 3+ years, then every dollar in tax cuts does indeed translate to another dollar put on the asian-backed credit cards. I believe that interest on the debt is now the 2nd largest federal outlay. Take a look at the taxes you paid the federal government last year, 30% or so of it went to pay interest on the debt, and the largest holders of U.S. debt are China and Japan.
Would someone please explain to me - within the framework of the US Constitution - why it is that we even have a "Federal Reserve" that is in fact operated by a group of international bankers who have absolutely NO accountability to the US taxpayers, yet essentially run all of our economic futures?
Cutting taxes does not mean higher deficits. Spending more makes higher deficits. Perhaps if we eliminate a couple of departments and RIF a couple hundred thousand Federal freeloaders we could cut down the deficit and provide a ready source of labor to displace the immigrants now flooding the nation.
I'm sorry, but your suggestions make way too much sense, and must therefore be censored before too many decision making individuals read them. Please report yourself to the moderators for the adequate unjust punishment. /pseudo sarcasm
Spending more WHILE cutting revenue = higher deficits. They are both part of the equation
Perhaps if we eliminate a couple of departments and RIF a couple hundred thousand Federal freeloaders we could cut down the deficit and provide a ready source of labor to displace the immigrants now flooding the nation.
Don't hold your breath. Remember, we need to fully fund no child left behind and medicare expansion!
'Cuz they can.
Our job, as Conservatives, is to bring America back into line of the founmder's intentions.
Limited government,
No taxation without representation (I was never asked, via referendum, to OK the 'emissions control' test ... 20 - 50 bucks a pop, depending)
No National bank (especially an INTERNATIONAL one)
More contemporarily ... get rid of the UN
and a whole bunch of et cetera's.
What have you been smoking? Tax cuts always increase revenues! It frees up more disposeable income for citizens to spend and invest thereby stimulating the economy.
Read this
...and this
...and this
Cutting taxes also does not necessarily translate into lower tax revenues, something that was demonstrated during the 1980's.
Maybe China has the answer?
In absolute numbers no, if you cut taxes revenues will still rise due to other factors. However, revenues will not rise as much as they would have had taxes not been cut.
If you want to test your logic, would you argue that cutting federal taxes down to say, $1.00 per person per year would lead to an increase in federal tax revenues?
BTTT
This process effectively subsidizes U.S. interest rates, thus propping up U.S. asset markets and enticing American consumers into even more debt. Awash in newfound purchasing power, Americans then turn around and buy everything from Chinese-made DVD players to Japanese cars."
but he does fault him for being a "cheerleader for policies such as tax cuts...that could make the endgame all the more treacherous."
Why would you be against Tax Cuts if Americans are in debt?
In an interview this morning, Roach said, "That's a little extreme." He does admit the nation has prospered on Greenspan's watch. Still, he does not disavow the haymakers he directs at the chairman's chin.
I don't agree with everything Greenspan and the administration has done fiscally, but this guy sounds like a jackass and wants attention.
"Drink and dance and laugh and lie,
Love, the reeling midnight through,
For tomorrow we shall die!
(But, alas, we never do.)"
Dorothy Parker
You might as well make it $0 for that silly example...
FWIW, CATO analyzed tax policy through the 1980's & 1990's. Here is a summary:
Even income tax revenues grew substantially in the 1980s. In 1981 income tax receipts totaled $347 billion; in 1989 they totaled $549 billion, a 58 percent increase. In fact, income tax collections grew only slightly slower in the 1980s than in the 1990s despite income tax rate reductions in the Reagan years and increases in the Bush-Clinton years. Real income tax revenues rose by 16.3 percent from 1982 to 1989 after the top income tax rate had been reduced from 70 percent to 50 percent in 1983, and then to 28 percent in 1986. According to the latest (August 1996) Congressional Budget Office (CBO) forecast, real income tax revenues will have grown by 17.9 percent from 1990 to 1997, following the raising of the top income tax rate from 28 percent to 31 percent in 1990 and then to 39.6 percent in 1993. [19] On a purely static basis, the 1990 tax increase raised $380 billion less in income tax revenues from 1991 to 1995 than had been predicted. [20]
If you ask 2 economists about the economy, you'll get 6 opinions.
Your theory sounds magnificent. If cutting taxes means more revenue, then by all means end taxation and have unlimited revenue. Go back to the drawing board, and check into cutting expenses and government to create prosperity.
This is a sophomoric, exaggerated rant. In our current situation of opressive taxation, cuts are a good thing. If we ever reach the level that would fail to support the Constitutionally mandated functions of government, I'll look you up.
Well, I am not exactly the economist, but I think your above point is more an example of the law of diminishing returns than an argument against cutting taxes. The other side of that coin is the obvious truth that over taxation reduces revenue just as surely as over reduction of taxes. An example of "logic" of the type to which you refer would be the imposition of a tax of 99% per person per year of their income. Not likely to lead to increased revenue.
I think though, that I am right in stating that the Reagan years demonstrated that lowering tax rates does not have to lower tax revenue.
None of this helps to reduce spending deficits if congress isn't paying attention to national income vs expense.
At this moment in time, I have read that American citizens are being taxed at a historically high rate, equal to that of WWII, the highest in our history. Arguably, much of the tax revenue is absolutely needed national defense, comes to mind for instance. But if we quit spending it on massive social engineering programs and bureaucracies and other areas where our gov't has overstepped its constitutional bounds, I think it safe to say that tax revenues could be substantially reduced with no ill effects. Quite the contrary in fact, removing the state from areas where it has no business would probably be pretty beneficial.
Unless one thinks that it is in our interest for gov't to spend our money for us, on the assumption that it would do it more responsibly, for instance not overborrowing! Or that the gov't, in a free country, even has the right.
tmp02 wrote:
My 'gloom and doom' for the day.
The "best" thing is a cut in spending, but since that isn't going to happen, I'm not sure I'm comfortable with the current approach of cutting taxes and instead funding our government via increased borrowing from China and Japan.
Your example is not valid because you have changed the progressive income tax to a flat per capita tax.
Aren't we always on the brink of ruin? Might do the world some good to have to start all over again.
100% Tax rate - 0 Revenue
Somewhere between 0 and 100 is the maximum revenue.
The question is do you think we are on the left or right side of the peak? Evidence is we are on the side of diminishing returns with increased taxes.
And we can only hope that they continue to finance our debt. If they decide to cut back, as they have been giving inklings of doing, then we must increase the interest payments on debt to get foriegn governments to buy more of it. Guess where that money comes from?
Again, not true. Read some of the information in the links I provided.
Oppressive taxation harms the economy as a whole, thereby decreasing govt. revenues. Is it possible to have too low of a tax? I would suppose that it's theoretically possible, but the reality is we'll never see it.
Your extreme example of a $1.00 tax entirely misses the point and ignores reality. Try reversing the logic and ask yourself: would a 100% income tax on citizens and corporations would permanently end the govt's budget woes? Clearly, both are invalid examples.
The fact is, given the real level of taxation with which we live, cuts stimulate the economy and result in more revenue.
"Well, that's it. I'm charging up all my credit cards!"
If you owe the bank $50,000 you have a problem. If you owe a million dollars, the bank has a problem. Rack up the debt and lets see how it sails.
Apologies for the poorly formed sentence.
I think the root of the problem is that we've got a tax system that is basically insane. I'd have no problem paying more in taxes in exchange for something like the national sales tax, which I'd argue for most people would result in saving money, and it would certainly do more than anything else I know of to remove power from Congress to muck with our economy.
That being said, in the current situation I'm increasingly concerned that the impact of our policy of continuing to cut federal taxes is that we need to continue to increase our borrowing from foreign governments, especially China and Japan, and that we will gradually have to increase interest rates to make U.S. debt attractive. I guess the question you have to ask yourself is are you comfortable with a tax cut paid for by borrowing money from China and Japan?
1LongTimeLurker wrote:
Guess where that money comes from?
Then how do you explain that federal revenues rose at a lesser rate under Reagan than they did under Clinton?
See the CATO analysis I posted.
I wholeheartedly agree! Spending cuts and tax cuts are not mutually exclusive, but complementary.
So you are comfortable with borrowing the money to pay for the tax cut from China and Japan?
Greenspan's monetary policy deserves some accolades for the 1990s boom, but former President Bill Clinton's fiscal policy and other factors were equally responsible, Roach says.
Oh, well then. That explains it.
read these two charts carefully - the rate of accumulation is slowing, which means that if we don't cut our deficit, then guess what, we have to increase interest rates to attract buyers. Guess where that money comes from?
Yeah, it would have been nice to see Phil Gramm and those in Congress who forced Clinton into accepting a balanced budget plan to get some credit. Oh well, pigs may fly some day.
You're talking like a Democrat. This is the "all money belongs to the government" view. Nobody "pays for the tax cut"! Taxes are paid to the government. A tax cut is the government confiscating a little less of my money.
The fact that China and Japan have invested billions in the US treasury is a simple matter of their seeking a good return on their investment, which, apparently, they cannot get in their own country.
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