Curbing inflation through taxation

By Marriner S. Eccles, 1944

9 Responses

  1. Promising article about ZIRP at a right wing site.

    Warren, maybe you should try to broaden your distribution beyond Huff Post and Daily Kos. The last time you made an appeal to Republicans, they actually got what you said and did what you suggested.

    1. @ESM, nice article. I am however dubious about his explanation of why businesses are abstaining from investment and growth. He claims, dropping ZIRP will cause the risk-free rate of return to return to a positive value, and the business’s cost-benefit analyses of potential productive projects will improve. Rather, they will make sense again, so they will spring into action. Is that right, or likely? Or is that all there is to it?

      1. @Nihat, nihat, i laughed at the exact point you reference. i read it something like: because interest rate is zero, the financial analysis in deploying borrowed capital looks too attractive. then he declares: just because it looks too attractive, “it cant be right”. so businesses can’t make decisions because paying too low rate of interest to borrow money…..funny.

        the real reason a business won’t deploy capital is their concern is about demand growth….which is really an employment issue.

        i’m guessing that was esm’s point in referencing the article.

      2. @Nihat,
        The interest rate that the Fed sets sets the prime through the spread the banks charge. The prime rate is “the cost of capital.” Why would raising the cost of capital spur investment?

        What raising the rate could also do is strengthen the dollar, adversely affecting exports, while making imports less costly. This would further exacerbate demand leakage and adversely affect investment. Stronger dollar would also drop equities and commodities based on current trends, and higher rates would lower bond prices.

        Looks like a a bonkers argument unless the guy is talking his book. May he’s short tsys?

      3. @Nihat,

        I agree his explanations are off-base. He’s obviously not MMT-compliant. But he also recognizes that maybe ZIRP is having a depressive effect on the economy.

        If so, the mechanism is probably the one that Warren has described. ZIRP lowers private sector interest income, and people tend to spend out of income. If people really do think in terms of the real interest rate they earn (i.e. after inflation), then they have interest expense rather than income, which could really put a psychological damper on spending.

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