A Bankrupt Bargain on Taxes

[FreeStateDemocrat]

By WILLIAM D. COHAN
While Wall Street’s moguls and whiz kids might not want to admit it, the best way to figure out what’s really happening in the economy is to read the daily newspapers. You’ll learn all you need to know there. And the zeitgeist is fairly bubbling these days with an array of stories that seem to be pointing to serious economic trouble ahead. We can no longer ignore the message that is being broadcast loud and clear: We must get our fiscal house in order and take meaningful — exceedingly painful, yes — steps to close the $1.3 trillion federal budget deficit. You can be the most zealous Keynesian economist on the planet and still know that at some point we cannot continue to have both guns and butter without serious repercussions. And we have clearly reached that point.

That’s why the news of the proposed tax-cut deal between President Obama and Congressional Republicans is so distressing. Adding $900 billion to the budget deficit — paid for with more borrowing — is the last thing we need if we want to show the world we are serious about fiscal responsibility. Do we genuinely think that the Chinese, the Japanese and the Persian Gulf oil barons will continue to finance our deficit, except at increasing cost to us?

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Then the conversation shifted to Bernanke’s “60 Minutes” interview. James Grant, the exceedingly prescient editor of Grant’s Interest Rate Observer, provided a global perspective: “The dollar is the world’s currency, it’s the Coca-Cola of monetary brands. But the Fed is America’s central bank and only America’s. And the Fed’s remit is to attend to the domestic economy. So Mr. Bernanke having that interest — and unemployment, for example, worries him terribly, as well it might — he isn’t thinking about how the Saudis feel or the Japanese or the Taiwanese. What he wants is a little more inflation, which he is persuaded that he can control. As for the rest of the world, they say, ‘Wait, are these the same guys who saw exactly none of the credit crisis of 2008 coming? I mean, none of it? These are the people who are going to protect us against it?’ They don’t believe it.”

Not surprisingly, Grant is on to something here. What Bernanke and company may not have factored into their monetary equation is how little the rest of the world — our creditors — trust American financial policies these days, which of course will make what Washington is trying to do all the more difficult.

contd

http://opinionator.blogs.nytimes.com/2010/12/09/a-bankrupt-bargain-on-taxes/

[RC]

1. Ever notice the really important tidbits sink like boulders?