Inflation Is More Important Than Taxes

The New York Sun rightly criticizes the New York Times for its monomaniacal obsession with raising taxes. However, the Sun is too sanguine about the Republican candidates' interest in lowering taxes.

While I do not gainsay that Republicans tend to support reduced taxes while Democrats tend to favor increasing them, and I agree that this is a mark in the Republicans' favor, I would add that neither party has been responsible about balancing the budget, reining in spending, or maintaining a steady money supply. In particular, the Republicans have been on a spending spree that has included a considerable taint of corruption. As well, the Republican administrations since 1980, as well as the Clinton administration, have aggressively expanded the money supply at a rate far faster than productivity and population growth warrant. The result has been a 3.7% inflation rate since 1979, and it has only been that low if you (as does the Department of Labor) exclude house prices. Including house prices, the Republicans have given us an inflation rate of over 4% annually over the past 29 years. This dismal performance should be an especially sore topic for New Yorkers, many of whom have been forced to leave the City because of escalating housing prices boosted by ever-escalating Wall Street salaries.

In turn, Wall Street's salaries do not result from Wall Street's market performance, nor from Wall Street's production of value, but rather from unrealistically low interest rates (which are the chief reason for the past 50 years' stock market growth); low interest loans to big business; and incompetently executed mortgage programs that have resulted from the low interest rates. The low interest rates are a government and public subsidy to the financial community. They are a form of welfare. If Wall Street created value, it would not whine every time the Fed raises interest rates. Firms that create value, unlike Wall Street, do not mind high interest rates because their value-creation and efficiency cover rising interest rate costs. Government agencies, commercial banks and Wall Street firms require government subsidies like low interest rates because they do not create value.

The inflated salaries and exit payouts to Wall Street executives and hedge fund managers come from the Fed's artificial expansion of the money supply. The past 29 years' orgy of liquidity has amounted to a large welfare transfer to the ultra-rich, resulting in stagnant real wages and the exit of mainstream jobs from the U.S.

As well, and more ominously, the Fed's monetary expansion has largely been absorbed by foreign governments, who now hold many times the total number of dollars in circulation in the US. Although the argument is made that there is no reason to think that foreign dollar holders will act against their economic interests, multiple large dollar holders (the Saudis, Europe, Japan, China, etc.) each with nearly or more than a trillion dollars who stand to lose significantly in case of a run is a desperately unstable situation. A run or crash in this market could mean hyper-inflation in the US. It is a fools' strategy, and the Republicans have led us to it, with the Democrats' complicity. I have never consented and had not been aware until recently that the money I use every day has been the basis for a large scale shell game that has provided unprecedentedly large payoffs to financial operators while the average American sees stagnant real wages.

Although the Republicans might favor a few percent lower taxes than the Democrats, we live in a dream world where both parties have ignored responsible household management. We risk the coming years to be dire ones because of our unwillingness to demand competence and fairness from our government, and our willingness to believe that counterfeiting dollars can make us wealthy beyond transferring wealth from the general public to debtors.