Bush's announcement of an injection of money into the US economy through tax cuts - without spending cuts - in order to prevent recession, is classic inflation of the kind condemned by monetarists such as Milton Friedman, who was not wrong in his analysis of the causes of persistent and generalised increases in prices, which is what this policy will lead to. It demonstrates the economic illiteracy of Bush and his advisors. It is the worst possible thing the US government could do. It will lead to disaster.
The US balance of payments deficit has resulted in very large dollar balances being held abroad, especially in China and the oil producing countries. The mere announcement of this fiscal policy will promote holders of dollars to unload them and into currencies that seem more substantial, such as the euro, which is why it has risen against other currencies. The pound will probably fall with the dollar, which will result in widespread price rises in the UK also, especially if interest rates are reduced in the coming months. That is precisely what the Monetary Policy Committee should not be doing but probably will, even though its remit is to hold inflation within certain limits and not bow to political pressure from the government or other groups. Once it caves in, it will have lost its credibility.
Bush's scheme, which is also substantially that advocated by Democrat politicians also, is a re-run of the "dash for growth" pursued by Edward Heath's Chancellor, Anthony Barber, in 1972-73. The eventual result was several years of cumulative inflation at 20%, economic stagnation, and widespread industrial discontent and the destruction of people's savings, as the purchasing power of money continued to slide. Other than in degree, there is no difference between this, and what the Reichsbank did in the 1920s and what Mugabe's government in Zimbabwe are doing now.
Whatever happens, the slump will come. The only question at the moment is whether governments will have have the wisdom to avoid inflation in addition, in their frantic and an inevitably futile effort of avert it.
There is an alternative. Cut the taxes on wages, goods and services by all means. This will indeed stimulate the economy. But the revenue foregone must be replaced by a tax on the annual value of land, to avoid the need to resort to the printing presses and the consequential inflation. Such a tax will not depress economic activity - on the contrary, it would stimulate it. Unfortunately it is too late to introduce it in time to avert the slump, though not too late to promote a faster recovery and prevent a recurrence.
This is because, in a recession, landowners hold sites off the market, awaiting an upturn. If a properly conceived land value tax was applied, then then these sites would be brought onto the market and be made available for construction and industry.
But no politician will embrace it. The concept of land value taxation is not in most government's repertoire of policies. Instead, the US and other countries will eventually be faced with the reality of what happens whenever booms turn to slumps, in the absence of land value taxation. This is a classic land price boom-bust crash of the kind that occurs approximately every eighteen years. The US and Britain will see the large scale inflation and financial ruination that characterised the early years of the Reagan/Thatcher regimes. Prepare for a glut of boarded-up shops and derelict factory buildings. And look for a re-run around 2025.
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