“The inevitable has happened”
Gabe Cheng’s famous words are eerily relevant amidst the current economic slow down.
With mainstream media widely reporting that the American economy has entered a recession, inflation at its highest level in years, the Bush administration calling for an extension of it’s tax cuts and the Fed heavily rumored to cut interest rates for the 3rd time it really does look the inevitable has happened. The question remains, however, what course of action is prudent to insure that the slow down isn’t further exasperated by poor fiscal and monetary policies.
Let me preface what I’m going to say with the following:
I’m not, and do not profess to be an economist, but much like the rabid fantasy football player, I know enough to be ‘dangerous’ and like the Vegas handicapper, I’m confident enough to put my money where my mouth is.
I’d like to say the worst action the Fed can take is inaction, but that is not the case. A rate cut is probably the worst thing the fed could di.
What we’re experiencing is a credit crunch induced slow down. Confidence in credit markets is shaken and decreasing the cost of has does little to incite additional borrowing because insecurities about the entire system’s health are running high. Couple the slow down with rising inflation and you’re facing a situation similar to that of 70’s stagflation, in a scenario where deficit spending is not possible to break us out of its grips due to the large debt we’re already carrying.
Instead, I’d suggest a strong fiscal injection through significant and immediate tax breaks for 2007 individual taxes for people making 150k or less who have a higher propensity to spend their money then those with higher incomes to boost consumption at the retail level coupled with accelerated depreciation tax credit for businesses making capital expenditures during the current year (2008). Additionally moving forward I’d like to see the Bush Tax expired and replaced by a windfall tax on windfall earnings whose proceeds will be diverted into tax breaks for middle income Americans. wholesale tax cuts to low to upper middle class Americans combined with an acceleration of depreciation credit to businesses is the best way to buoy consumption and investment as the housing market decreases the wealth effect induced spending experienced over the last decade and a half.
Cliffs – Inflation is a major concern, and cutting interest rates has to date done little to reassure markets amidst waves of bad loan write-offs keep interest steady bail out banks that are ‘too big to fail’, but allow market forces to punish those who practiced ‘irrational exuberance’ during the housing bubble. Keep interest rates flat at recognize fiscal policy must be used to incite consumption in 2008.
2009 and Beyond - Windfall Tax Trap on hedge funds, PE Firms, and others who have windfall earnings (Think Alternative Minimum Tax for the new Millennium). Divert this money into tax breaks to middle income Americans to bolster consumption. Allow Bush Tax cuts to expire, focus these revenues on paying down debt.
