Bellerbys Economics - Mr Stephenson

Monday, January 21, 2008

Crazy Guy Alert!

President Bush's pressure to introduce a $150 billion tax rebate to reduce the risk of recession in the US is almost exactly NOT the response that economists would have liked. It is a Keynesian response rather than a supply-side response.

It will increase aggregate demand leading almost certainly to even higher inflation than the current 4% in the US. This in turn will almost certainly lead to higher interest rates and further damage.

There are only two realistic ways in which the $150 billion could be financed - either by reducing the US foreign exchange reserves which stand at $188 billion and which are probably a bit higher than necessary in the modern world - or by borrowing overseas. The latter (and more likely) route will lead to a further fall in the dollar - so if your parents have dollar accounts somewhere - tell them to bail out now. This will also displease the Chinese government who also hold most of their foreign exchange reserves in dollar bonds - the sooner they invest this money in British businesses like Bellerbys, the better for them, that's what I say!

Of course, it's good that the President plans on giving the tax rebate to lower middle income families as they are more likely to spend the money on domestic products than richer people - but that's not much of a compensation in the grand scheme of things.

There is a third way it could be financed - by reducing the $700 billion defence budget - but most of that is already committed to maintaining a US presence overseas.

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