27 November 2008
Why we are getting tax cuts

So the Stealth-Taxer General is all of a sudden cutting taxes.  Did be perhaps take a walk in the general direction of Damascus?  Or did he instead read Taxation is Theft and think “How could I have been so stupid all this time?”

Well...no.  Gordon Brown is not someone who lies awake at night wondering if he could, you know, just possibly be wrong.

His problem is with the Depression and his attempts to avoid the unavoidable.

Assets are not worth what they once were.  So anyone who took out a loan on one of these assets is trying to pay it back as quickly as possible and cut their losses.  On the other side of the lending bargain banks are increasingly reluctant to lend.

All this will lead (for complex reasons) to a contraction of the money supply and, hence, deflation or falling prices.  Hooray, you might say.

Alas, modern-day politicians are slaves to the doctrine that deflation is bad.  So they are desperate to avoid it.  So they need to create inflation.  Under normal circumstances this is easy enough - reduce the rate the central banks charge the retail banks for money and let the money supply rip.

But the banks are increasingly reluctant to lend.  Even the ones partly owned by the Government.

So, we get tax cuts paid for by the printing presses which they hope will cause inflation.

There’s another side issue here. If you inflate your currency and on one else does then your exchange rate goes down like a stone.  So, what you need is for everyone to doing roughly the same thing at the same time.  It’s called co-ordination and is the principal reason for the calling of the G20.

Incidentally, I have grave doubts whether this will work on its own terms - it certainly won’t on anyone else’s.  My guess is that anyone given free money will simply put it in the bank.

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