Saturday, May 06, 2006

The Fed Base Rate

This Author has great difficulty in perceiving the Fed base rate as a good Inflation-fighter. Imposition of higher rates does not curtail the growth of Government Spending, does not seriously forestall Business Operating borrowing (though it impacts Business Profits drastically), does not cut Consumer Buying for Necessities, and only applies some added Cost to Energy and Materials Costs for Industry. It does inflict serious artificial Cost to large-ticket Items--most notably Residential Housing and Vehicles; the very areas where Energy and Material Costs provide the greatest injury. An alternate definition states excessive Interest rates adversely disturb those very Industries suffering the greatest from the current economic milieu, all Industries where steady performance is mandatory for economic health.

What are the factors most needed to suppress Inflation?

1) Cut Government expenditures which are extremely wasteful of Material Resources and highly Energy intensive.
2) Curtailment of the production of luxury Products, which are again very Energy intensive and highly wasteful in terms of Material Resources. Standardization suppresses Production Costs with less utilization of Resource, and high Productivity ratios.
3) Normalization of Business Profits. An ideal Economic model would portray equalized Business Profits in all Sectors of the Economy, so Capital Investment in any Sector provided a relative equal Return. Financial flow and Investment would become readily available to all Sectors. Economists can explain the ludicrous reality of the spread of actual Investment ratios, and why the ideal Model will never occur. It is not the ideal Model desired, though, only the assimilation of the general property (Our need to narrow the Spread range of Business Profits between Sectors).
4) Reduce the blow of Resource Shortages. The most obvious example of Resource shortage is Oil, but Copper and other Metals and Minerals easily come to mind. These shortages create windfall Profits, whether the Industries and Sectors wish to admit such or not; Business Profits being always a percentage of overall Business Sales, and higher Prices for your Products generates higher Profits.

Study of the Above four factors will indicate only effective macroeconomic policy can possibly induce alteration of the above factors. Congress and Legislatures must learn to limit their compulsive Spending. Adequate Personal Taxes and Capital Gains taxation remains the only means to reduce the production of luxury Goods. Elimination of multiplex Tax deductions and Subsidies and regulated Corporate and Business taxes can bring greater normalization of Business Profits between Sectors, bringing about balanced Spread of Capital investment. An effective Tax structure can drain windfall Profit-taking and subsidize critical Sectors lacking potential. Bush's statement on the need to suppress Government taxation to provide Jobs and economic growth has serious holes in it; the very holes generating the worst Inflation pressures. Is Bush wrong? Not precisely. He and Republicans simply take too simplistic a view of macroeconomic policy. lgl

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