Let us welcome tax competition! – by Pierre Garello
The Fed had already cut its benchmark interest-rate target to near zero. Unable to go lower, the central bank now is essentially printing money to raise the supply of credit and thus push down the longer-term rates paid by families and companies on mortgages and other key loans. The impact was immediately felt.
The US debt bomb poses a growing risk to China and other countries that hold large amounts of their foreign- exchange reserves in dollar denominated assets, primarily US government securities. If foreign central banks are less willing to hold US debt, the Federal Reserve may be the buyer of first resort.
President Barack Obama and congressional Democrats (very few of whom likely have read Keynes’s 1936 book « The General Theory of Employment, Interest and Money ») have dug up the dead economist’s convenient justification for deficit spending in defense of their bloated stimulus legislation. But none ask the most important question: Was Keynes right?
One problem with this blame-game is that last year’s recession was much deeper in many European and Asian countries than it was in the United States.
By the fourth quarter of 2008, as the nearby table shows, real US gross domestic product was just 0.8 percent smaller than it had been a year earlier. The contraction was twice as deep in Germany and Britain and much worse in Japan and Sweden.
In February, US industrial production was 11.8 percent lower than a year before — while Singapore was down by 22.4 percent, Sweden by 22.9 percent and Japan by 38.4 percent.
« We want to accelerate the pace of change on the reform agenda, » Treasury Secretary Timothy Geithner said in an interview after a meeting of the Group of 20 finance ministers and central bankers over the weekend. Mr. Geithner was pressed for action on the regulatory front at the meeting, held just outside London. The administration’s goal is to unveil its proposals before G-20 heads of state meet April 2, to wrest leadership of the thorny topic.
Several serious proposals are being floated in the nation’s capital that would penalize Americans for investing in low-tax rather than high-tax jurisdictions. Proponents say the measures are needed to catch tax cheats — but ignore the fact that most of the low-tax jurisdictions such as the Cayman Islands, Switzerland, etc., already have tax information exchange (for cases of probable cause), or tax withholding, agreements with the U.S. and other countries such as the U.K. and France.
The commitment to buy Treasury securities and additional mortgage-related debt will almost certainly cheer Wall Street, since the combination should mean lower rates for a variety of business and consumer loans.
The Federal Open Market Committee voted 10-0 to hold the target federal-funds rate for interbank lending in a range between zero and 0.25% and to continue using credit programs financed by an expansion of the Fed’s balance sheet to stabilize markets.