The Fed Eye

Bernacke and other Fed officers indicate that the Interest hikes might continue, sending the Markets down. It should behoove Us to examine what type information is bothering the Fed. Consumer non-mortgage loans increased at an adjusted yearly 5.9%. Wholesale sales increased by 1.3% in April. The Trade gap with China, basically composed of Consumer and technological products, increased by 9% to $17 bn in April. Wholesale Inventories grew. Electricity generation consumed some 1.039 billion tons of Coal last year. The entire mix states that Consumers have not been restrained from Spending due to the Interest rate hikes.

Inflationary pressures are building, driven by Oil price which averaged over $57/barrel for the first time. All Signs are green for Inflation to start to accelerate. The Fed, and other Worldwide Central Banks, are getting ready for more Interest hikes, even though the Fed knows its own Rates are too high for effective economic performance.

What is wrong with this Scenario?

The Anwser is simple: lack of adequate taxation. What??? Central Bank Interest Rates are inserted into the Economy prior to the Production Cycle, forcing Business (and Consumer) to treat Interest rates as a Production Cost; One which is also quite effective in generating Inflation pressures. Taxes, on the other hand, are placed on after-Production profits generated. Taxes reduce inflationary pressures by slowing the rate of Investment, and by curtailing the rates of purchasing by Consumers. Economists need to realize that Taxation itself has economic consequences beyond simple Investment expansion.

Passage of Estate Tax repeal sends a far worse economic signal than Fed Interest rates can oppose. Capital Gains taxation should be reinstated with their original rates, along with only Short-term Tax impact delays, if Inflation is to be effectively fought. Conservatives enjoy screaming for Tax cuts, saying it is invariably good for the Economy. This is actually quite untrue, especially with Spendthrift Congress and State Legislatures. lgl