In Europe, as in the U.S., taxes have become more regressive, killing off broad-based economic growth. Many European nations are now dealing with the resulting economic difficulties through more middle-class pain – more regressive taxation and cuts to social service programs. It is likely that these austerity measures will contract economic growth further.
Dealing with the debt – directly and indirectly
While Europe, however misguided, deals with its fiscal problems more directly, the United States has taken a different approach. No doubt – we are in sorry shape. U.S. debt, which had been plummeting for decades, soared under Ronald Reagan and George H. Bush. While Bill Clinton made serious progress in reducing the country’s debt and sending it down to levels not seen since before the Reagan years, the presidency of George W. Bush led to a record explosion in the debt, fueled by two unfunded wars and unpaid-for tax cuts. The U.S. debt level has reached a point of crisis. And even something as sensible as the expiration of Bush-era tax cuts for the wealthy is being fought by Republicans – potentially adding $700 billion to the debt over the next ten years. Progressive taxation, it seems, is not an option. To seriously deal with the debt, we would need to raise revenues (taxes on the wealthy are a start), map out a sensible reduction in military expenditures, and provide targeted government spending to jump-start the economy and shore up the nation’s struggling middle class. In place of reasonable fiscal policy, the US is resorting to monetary tactics.
What does this mean for you?
The U.S. government’s lack of action on the debt has meant that the Federal Reserve is the only game in town. Congress, as a result of inept politicians on both sides, is unable tackle these problems head on and provide real solutions. So, instead, in a desperate effort to keep interest rates low enough that we can afford to service the debt and perhaps to decrease the dollar-denominated value of our debt, the Fed has embarked on this massive quantitative easing plan. Here’s what is likely to result:
- Inflation. As more dollars get printed, they all become worth less. Prices adjust to the falling value of the dollar and prices, nominally, go up. The dollars you currently have will buy less at the supermarket, at the mall, and at the pump.
- Low interest rates. The Fed’s program is designed to keep short-term and long-term interest rates low. This may be beneficial if you are seeking a loan, but is bad news if you are a saver. The dollars you save will steadily decrease in value and the interest rate paid will be low — not enough to keep up with inflation. This is a tax, not only on the dollars you are currently earning, but also those you have already saved.
- Good times on Wall Street. In an effort to avoid the artifically low rates being provided at banks and to outpace inflation, some savers will opt to move their money into investments that have more yield, like high-yield bonds, stocks, and emerging markets. There will also be a lot of excess liquidity in the financial markets, courtesy of the Fed, and that money will find its way into various asset bubbles. However, because there are no fundamentals supporting these upward surges, there is likely to be a crash of a horrific magnitude. But the Fed has a lot of fire power, so it probably won’t be soon.
All this adds up to what is in fact a huge tax on the American people. And it’s not targeted to those who can most afford it — it’s across the board. Stuggling families will see their food costs go up, seniors will suffer from anemic rates on bank savings and a weakening of the purchasing power of their hard-earned life savings, and average investors are likely to once again get caught holding the bag when assets bubbles collapse.
QE2 – Nothing more than regressive taxation
The U.S. debt is a serious problem that requires serious solutions, not this cop-out technique being provided by the Fed. By refusing to raise taxes on the wealthy and pretending they are hurting no one, they are hurting nearly everyone through a devalued dollar and inflation. It is a horribly regressive tax that will largely spare the well-off, hurt the majority of Americans, and do irreparable damange to the U.S. economy. Congress should be held accountable for their ineffectiveness regarding tax policy. That inability to reinstate progressive taxation is what necessitated these regressive actions from the Fed and they must be made to answer for the results.
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