Yes, there is. And it’s quite a high risk, according to the 77th report of the Bank of International Settlements (BIS) in June 2007, which drew a comparison between the current scenario and the onset of the Great Depression in the 1930s. The report pointed to the overheated Chinese economy as the possible source of a crisis that could set of a global recession. But it made it clear that the loose money policies of Alan Greenspan, an overextended mortgage market, and reckless hedge fund and private equity deals in the US were equally dangerous. As bad mortgage debt starts kicking in, American consumption is getting hit hard; credit is shrinking, deal-making is shrivelling up. No more Chinese trinkets in American homes. No more borrowing against your house value. Can the Chinese sell elsewhere? Can Asia pick up the slack?

Maybe. Maybe not. Maybe not all of it. And as faith in US’ ability to buy or pay down its debt, the sellers and the creditors begin to get restless. They start talking about diversifying out of US Treasuries. The dollar shivers. It slides. It threatens to collapse altogether. A sudden run on the dollar is a very real danger at this point. You can talk about controlled devaluation all you want, but the economy isn’t something anyone can control. It’s dangerous nonsense to think that any human or any computer model can do it.

Why do taxes go up when incomes go up? And what can I do if my taxes are used for fighting an unnecessary war?

In many countries, when your income goes up, you move into a higher tax bracket. That is, the rate at which you’re taxed becomes higher. You might go from 28 per cent to 35 per cent or to 50 per cent or even higher in some countries. That’s proportional taxation, and it probably stems from the idea that the marginal value of money is less the richer you are. And so the proportion of taxes you need to pay is set higher.

Now, I’m quite sure that the marginal value of money does diminish as income increases, but I’m not sure the Internal Revenue Service should be the particular act of god that serves to part you from your pile of dwindling satisfaction.

Which is why I’m in favour of a flat tax. It’s simple and effective. The idea, after all, is to get money out of the rich and at the best of times, that’s a matter of squeezing blood from stones. But when you add the federal government and jail time into the mix, it becomes impossible. Instead of wagging sticks at the tax cheats, you’re dangling carrots in front of tax lawyers. You’re inviting a bureaucratic rampage through the fruits of enterprise. And you end up with not-so-fruitful off-shore havens, tax shelters, loopholes, accounting charades. The underworld of modern finance. The result is fat lawyers and thin revenues. When, of course, what any healthy economy needs is fat balance sheets.

As for keeping tax money out of the military machine, short of refusing to pay the IRS — which will earn you jail time — there’s not a lot you can do. Flee the country, maybe.

Why should I care about fiscal deficits?

According to Keynesian economics, which is in the mainstream, you don’t have to. Deficit financing is a good thing. During downturns in the business cycle, the government borrows money and spends, stimulating economic activity. It pays off the debt in the upturns.

That’s the theory. But governments have little incentive to pay any one off since they control the printing presses. They’d rather dilute the money by increasing the supply and reduce their debts that way. Which means that one of the problems that ordinary people might face because of high fiscal deficits is high inflation and currency depreciation. People living on fixed incomes and savers, for example, could be badly hurt. In India, many of these problems were offset in the 1990s because of the high level of foreign and NRI investment and because other currencies depreciated even more than the rupee. But those off-setting factors might not always work that way.

Briefly, running deficits is less like priming the pump, as the Keynesians argue, and more like driving on an empty tank.

Rupee appreciation

Is there something in rupee appreciation that I’d need to appreciate?

The appreciation of the rupee has its bright side and its dark. On the bright side, it means Indians can buy more imported products, travel abroad with greater ease, and flex their muscles a bit more globally.

The negative side is that Indian exporters have a harder time selling their goods abroad. Their costs are up and the local currencies of the importers buy less in rupee terms. Eventually, that means fewer exports and a decline in foreign exchange earnings. But whether that squeezes overall growth depends on many other things.

More Stories on : Economy | Economics | Whackonomics

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page