Inflation or taxes_ How will we get out of this mess

[plusnq]

An interesting article by John Taylor (created the Taylor Rule for interest rates) discussing the options for America with its burgeoning debt problem. Raise taxes 60% or inflate at 10% pa? Which would be politically more palatable and therefore more likely?

http://www.stanford.edu/~johntayl/Exploding-Debt-Threatens-America-FT-5-27-09.pdf

Interested in how others see this affecting Australia?

Cheers

Shane

 

[josko]

Yes, interesting article. We all know that politically, raising taxes is a bad move. Especially at 60%. Inflation will creep up on consumers and I dare say that most of them won't realise how bad 10% actually is until it's on them and another term in office had passed.

A regulator is a good idea but is it too little too late?

I wonder of our problems in Aus. It seems Mr Rudd likes to follow the Bush administration and appease the masses by lowering taxes. In reference to the most recent tax cut, I wonder how he thinks we will repay his stimulous package back. The worse thing is the fact that Australia is really doing quite well...so why the damn tax-cuts?????

Instead of Australia catching the cold, I think America caught the cold and WE sneezed.

Regards JO

 

[Aaron Sice]

mess....? what mess?

 

[Sunfish]

The US has massive problems and they will not be able to "grow" out of them. We however, are nowhere near as badly off and even the stimuli haven't done irreparable harm, so on our own we could grow out of our discomfort.

The US will be forced to welsh on their obligations to the citizens who have been paying into their social security all their lives and the Yanks are a very heavily armed people. It could become ugly. They could not suck enough tax to solve the problem so inflation will have to do it but all the money the Fed is throwing into the pot is still not enough to counter the loss of wealth and de-leveraging in the private sector so there will be strong deflationary forces for a while yet, then the Zimbabwe style inflation.

I have no idea if we will be drawn into the vortex though. China may allow us to decouple from the US. Let's hope so.

 

[steveadl]

I have no idea if we will be drawn into the vortex though. China may allow us to decouple from the US. Let's hope so.

On that point, does anyone have the figures for how much of China's output is taken up by the US? May not be possible for us to decouple from US in favour of China if China is still heavily influenced by US consumer demand - still whacks us, just in a more roundabout way.

 

[GreatPig]

Don't know which would be more palatable, but I'm already taking evasive action against potential personal tax rate increases, and am following good airline procedure by being aware of where the exits are in case of hyperinflation.

GP

 

[Ausprop]

if deflation in the US presents a real problem then a war could be seen as the panacea. Oil prices are obviously sensitive for the US so perhaps north korea could be in for a good booting rather than Iran.

it's time for us to forget about the nexus between the US and Aus. The US is a basket case that will implode in the medium term. Asia can be our only hope. So when pondering how these things will affect Aus, I think start from the presumption that the US is economically stuffed and the USD sidelined. As someone on here quoted somewhere else, once you have accpeted your worst outcome scenario as being reality, you can deal with it and move forward.

 

[steveadl]

it's time for us to forget about the nexus between the US and Aus. The US is a basket case that will implode in the medium term. Asia can be our only hope. So when pondering how these things will affect Aus, I think start from the presumption that the US is economically stuffed and the USD sidelined. As someone on here quoted somewhere else, once you have accpeted your worst outcome scenario as being reality, you can deal with it and move forward.

That's what I'm getting at. I believe Asia is a huge part of our growth going forward, but how much of Asia is reliant on the US for demand? If the US does become a basket case, can Asia carry on without it as though nothings wrong?

 

[topcropper]

That's what I'm getting at. I believe Asia is a huge part of our growth going forward, but how much of Asia is reliant on the US for demand? If the US does become a basket case, can Asia carry on without it as though nothings wrong?

Nope, I don't believe so. There is no one out there who can take over the consumption of the US, or not for a long time anyway. Europe is in as big or bigger mess too, so they won't be it.

See ya's.

 

[Ausprop]

That's what I'm getting at. I believe Asia is a huge part of our growth going forward, but how much of Asia is reliant on the US for demand? If the US does become a basket case, can Asia carry on without it as though nothings wrong?

I think this the essence of the current debate re the rise of China and their ability to grow internally. the BRIC nations will certainly generate a lot of demand.

 

[Ausprop]

"Your a long time dead."

TC should this be "You're a long time dead"? or am I missing a joke?

 

[topcropper]

"Your a long time dead."

TC should this be "You're a long time dead"? or am I missing a joke?

Well..?? I'll have to think about that? Maybe I've got it wrong. Isn't 'your' the same as 'you're'..?? Bit embarrased if I've had my sig wrong all this time.

What's the consensus out there..?? I'll change it..??

See ya's.

 

[MichaelW]

Well..?? I'll have to think about that? Maybe I've got it wrong. Isn't 'your' the same as 'you're'..?? Bit embarrased if I've had my sig wrong all this time.

What's the consensus out there..?? I'll change it..??

See ya's.

Sorry, you've prodded the pedant in me...

You're is short for you are, which is the correct term you're after. i.e. You are a long time dead.

Your means belonging to, i.e. That's your IP, not mine. So, to say Your a long time dead is grammatically incorrect. Ausprop is right...

Cheers,
Michael

 

[steveadl]

^ ^ As Michael said.

 

[Sunfish]

Sometimes I'm an optimist. The last thing the Chinese leadership needs is civil unrest so they will need to keep things bubbling along so that the workers don't have to go back to the countryside where they will stir up trouble.

I think China can replace much of the US exports with domestic consumption. Revaluing the Yuan (which they have wriggle room to do) will make the imports needed for this a little cheaper an their exports can handle a price rise. They are way cheaper than averyone other than Vietnam and if they work on quality the buyers will just have to accept price rises.

There will be a couple of speed bumps but we can do it, methinks.

 

[josko]

Well..?? I'll have to think about that? Maybe I've got it wrong. Isn't 'your' the same as 'you're'..?? Bit embarrased if I've had my sig wrong all this time.

What's the consensus out there..?? I'll change it..??

See ya's.

What's going on today? Everyone is onto the grammar thing!

It's "you're" TC.

We'll get over it!

Regards JO

 

[Aaron Sice]

but lets not forget the INTERNAL consumption of china as well - after all, they hold the worlds biggest individual-country population.

the US is a big market for them, but not the be-all-and-end-all for them.

the US will still consume - it's mantra, consumption is like breathing over there - so it wil reduce but not eliminate. the US consumes MORE than it exports with ZERO immigration (sorry, i mean the green card 50,000pa lottery....yeah, zero).

 

[Aaron Sice]

Sometimes I'm an optimist. The last thing the Chinese leadership needs is civil unrest so they will need to keep things bubbling along so that the workers don't have to go back to the countryside where they will stir up trouble.

I think China can replace much of the US exports with domestic consumption. Revaluing the Yuan (which they have wriggle room to do) will make the imports needed for this a little cheaper an their exports can handle a price rise. They are way cheaper than averyone other than Vietnam and if they work on quality the buyers will just have to accept price rises.

There will be a couple of speed bumps but we can do it, methinks.

sorry - missed this - essentially what i was saying. sorry.

 

[marg4000]

What's going on today? Everyone is onto the grammar thing!

Maybe because there are a few teachers out there and they have probably been going crazy correcting exam papers!!

Cheer up, holidays are here (or rapidly approaching)!!
Marg

 

[chilliaa]

Nope, I don't believe so. There is no one out there who can take over the consumption of the US, or not for a long time anyway. Europe is in as big or bigger mess too, so they won't be it.

See ya's.

This is the whole problem and which is why i never believe in economists over the 'long run'.

Consumption unfunded by national output is the whole problem full stop. (maybe we need accountants in charge instead of economists, or at least we need the Austrian school of economic thought). THe asian countries have been laughing to the bank for the last 30 years based on our rationalised global free trade/protect developing nations blah blah blah way of economic thinking.


Thats why i say we are in for a time of structural change.

Still plenty of money to be made in the future, but not on the pathway that was followed over the last 20 years. Things are reaching a terminal point of inflection. The GFC has been highlighting this, and actually its a good thing the GFC came when it did. Its a major wake up call.

As i have emphasised over the last 18 months of economic and financial termoil, as human beings we relate only to a short period of time (effectively our lives) and we make judgement calls based on near term data. I'm sure many people have had a gut feeling that things seem 'wrong' when we see statistics that show consumption continueously higher than output, but it just keeps happening, so we just get used to it and adapt to it especially when some higher authority tells us its ok because of blah blah blah (anyone having some reflections on some major Greenspan speaches here).


Having said that, there is no need to panick, we are just going through a corrective structural rebalance. This is necessary, and it will support future growth (but that future growth may not follow near term historical paths). So when you see things like:
1) consumption below long term trends (think yay)
2) business investment is down (think which sectors are business investment down)
3) commercial construction down (think yay especially if its more shopping centres, we dont need them we have got excess stock of servicing consumption)
4) unemployment up: think what proportion is short term, and what proportion is structural.

Now the above comments are simplistic, and there are cycles within cycles (and shorter term cycles may conflict with longer term cycles, so you have to be aware of this in the big picture scheme of things). But hopefully you will begin to look outside the square.

The world is like a living organism, it adapts to changing circumstances, but often these things can only be seen over time.