ZIRP v. Tax Rate Reductions

At UPI, Martin Walker asks, Could U.S. go bankrupt?

Is the Fed running out of firepower? Or, to rephrase the question, is it possible that the central bank of the world’s biggest economy is becoming overstretched and overwhelmed by the costs of the crisis?

If so, does that mean the United States could go bankrupt?

The question is becoming urgent, because Tuesday the Fed cut the federal funds rate from an extraordinarily low 1 percent to an unprecedented 0.25 percent, with a prospect of going down to zero.

But even such unheard-of steps might not, on recent experience, revive the animal spirits of entrepreneurs and get bankers lending again.

Why, what on Earth (or, at least in America) could “revive the animal spirits of entrepreneurs and get bankers lending again”? That sneaky little truth has far, far less to do with interest rates and much more to do with taxation.

There is precious little room for low interest rates to be lowered beyond what were already historic lows. But there is plenty of room (ask any business owner) for reduction in the tax rates.

Instead, the only flirtation in Washington are whispers that the Bush tax cuts may be extended (or, not allowed to die) rather than further reductions. There’s still plenty of room.

And our burgeoning government’s only discussion of cuts begin and end with the Pentagon and Defense, as always. This should be simply stunning. Yet, it passes without much remark. We have become so conditioned as to expect nothing else.

As John Robb put it regarding the Zero Interest Rate Policy, we are down to one of three outcomes, and they are all bad.

ZIRP (zero interest rate policy) has arrived in the US. The Federal Reserve and the US Treasury are now in desperate straights to stabilize the US economic system (and by extension, the global economic system). From a systems perspective, it’s also a formal indication that the US and the global economy is now operating far from equilibrium and the Fed/Treasury is using every control input they have to return the system to its previous equilibrium.

Unfortunately, from a systems standpoint, that’s VERY unlikely to happen. What will happen is either a monstrous overshoot (overcorrection) or a control system failure that plunges the entire system deeply into turbulence/non-linearity. While the establishment of a new equilibrium point at our current position, where the forces of correction and positive feedback loops are balanced, is possible, it’s also unlikely since there isn’t an external reference environment available to fix the system to.

ZIRP and taxation rates (corporate or personal) are not exactly competing strategies, but neither are they without correlation. Zero interest rates while not budging still relatively high taxation rates seems quite an imbalanced approach to the larger economic mess.

At some point, the piper must be paid, and government must acknowledge its crippling berth and girth.

Apologies for not applying more thought to this right now, as is required. But at least plotting a few points serves some sane purpose. Interest rates, tax rates, size and scope of government and the irresponsible temptation to cut defense before all else – this is the general context.

Government is made of elected people and their decisions. They have been and continue to fail.

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