Sunday, December 14, 2008

Monetary Policy Error

James Hamilton presents some doubt to John Taylor’s assertions that fed policy actually aggravated the current Crisis, blaming the difficulty on a lack of regulation of the various financial institutions involved. I would forward a third thesis: that the Bush Tax Cuts actually provided inordinate levels of liquidity, straited that liquidity almost solely to Investment capital, and increased the Income generation of that liquidity. The increased volume of funds excited a laxity of loan policy in financial institutions, which grew with practice under the constraints of bonuses paid to Venders of the largest volume of loans and Investments. The intrinsic theory in my thesis states that low Taxes are not only a promotion of economic performance, but if too low, can over-fuel the economy; leading to excessive Resource Costs and multiple duplications of Investment capitalization. Economics need explore the regulatory empowerment of Taxation, also the dangers of Tax freedom.

The Above commentary holds real relevance in view of the Chinese plan to print Money to maintain liquidity. China already possesses an over-capacity in practically every production sector, and the input of extra funds can only have adverse consequences, unless those funds are directly distributed to Chinese Consumers. Any other program will lead only to a prolongation of the over-capacity of production with reduced incentive to develop Consumption for their Product. The worst aspect will be continued duplication of capacity in sectors already saturated under the current pattern of Consumption. Such monetary policy will only make an already bad situation much worse!

This is obviously the wrong path to take no matter whether my thesis is correct:

The author claims the RMB to be undervalued by 30% or more. How would he know? The only way to find out for sure would be if China freely floated its currency. I think the RMB would more likely crash than rise 30% if China floated it at this point. Furthermore, currencies have little to do with the inability of American manufacturers to compete against China. Wage differentials are 12-1 to 30-1 or higher and it is impossible to make that difference up with a RMB revaluation alone. Nonetheless, it is clear that China is playing a game of Beggar Thy Neighbor, "competitive devaluation". Then again, the US seems hell bent on destroying the dollar to boost exports and/or to get consumers spending again, and Japan has threatened to get in on the act by selling Yen and buying dollars. Brown is certainly hellbent on destroying the British Pound. With everyone in on the act, or threatening to get there, the dollar is far more likely to enter a trading range than to crash. lgl


Anonymous said...

I am listening, and you are making sense.

M.G. said...

It is likely that at the end of the day US as well will get on Helicopter Ben and print money against deflation. No alternatives to the economics for Joe the Plumber. The future of the dollar is not bright!