Why Does the Fed Fear Deflation More than Inflation

Have you noticed that the Fed Chairman seems to be far more concerned about deflation than inflation? It's reflected in his public comments and in the policies being pursued by the Fed.

In a nutshell, when deflation is caused by corrections of bad investments made during a bubble (like the sub-prime mortgage loans and their related derivatives) it is manifested by bad loans that don't get repaid. Individuals and businesses take bankruptcy or they negotiate more favorable terms. Most of the lenders are banks and they don't get repaid. Never mind that the banks made a lot of those loans with artificial money created by the Fed or the fractional reserve banking system. The banks don't like to write off their loans.

In addition, deflation has the opposite effect of inflation. Whereas inflation is caused by an increase in the money supply, deflation reduces the money supply. The effect is to make it more expensive for banks to secure money with which to make loans.

in case you may have missed it, the Fed is owned by the banks. It's completely separate from the Federal government, despite the implication caused by the name "Federal Reserve Bank".

So it makes sense that the Fed is far more concerned about preventing deflation than about preventing the kind of inflation that is caused by an increase in the money supply and by the fractional reserve banking system.

Just my two cents.

Vern

Dealing with the Debt Ceiling

The Republicans who were supported by the Tea party are talking about not agreeing to an increase in the national debt ceiling as a way of putting a lid on more federal spending. Treasury Secretary Geithner is telling lawmakers that failing to raise the debt ceiling could "Have catastrophic economic consequences".

Not mentioned in any of the articles I've seen about this matter is the impact not raising the debt ceiling would have on interest rates being paid on short term U.S. debt. Right now U.S. treasury bills are paying less than 1% interest in trillions of debt. If we don't raise the debt ceiling, it's my understanding that the bond rating services would be obliged to downgrade our credit rating as a nation -- which would result in our having to offer higher interest rates to induce people to buy our bonds and short term paper. This is in addition to numerous other dire consequences predicted by Geithner.

Mark Thiessen in the Washington Post tells us that "The Treasury Department has many tools it can use to continue paying U.S. obligations during an impasse -- such as suspending sales of non-marketable debt, trimming or delaying auctions of marketable securities and under-investing in certain government trust funds." He also argues that if the GOP stands firm, Obama will be forced to agree to serious spending concessions in order to get the debt ceiling raised.

So it looks like a game of high stakes "chicken". Who will cave first?

Vern

Have You Memorized the Entire Tax Law?

Yesterday I received a book in the mail from Commerce Clearing House (CCH), one of the largest tax publishers in the U.S. The book is an analysis of recent 2010 tax laws along with a copy of the actual legislation and the tax writing committee reports. The analysis part is about 500 pages, single spaced, about 11 point type. The part that copies the law is about 9 point type. The complete book is 927 pages. Earlier in 2010, I received a copy of the Health Care Act, which was about 800 pages in size.

Have you read these books? Are you familiar with the changes in the law?

Did you say "Of course not."?

Really! Perhaps you are not aware that you are expected by the IRS and by the courts to able to understand ALL of your obligations under the tax law. It's true. You are. Of course, you can hire a tax professional to help you, but that does not relieve you of the legal duty to be familiar with the full scope of the U.S. tax laws, the related IRS Regulations and rulings, plus any relevant court decisions.

According to www.fourmulab.ch, "... the complete Internal Revenue Code is more than 24 megabytes in length, ... printed 60 lines to the page, it would fill more than 7500 letter-size pages. It contains more than 23,000 cross references to other parts of the tax code or to other parts of the U.S. Code." Based on the printed size of my copy of the tax code, the IRS regulations are about 4 times as large.

It seems to me that we have reached the point where even the brightest tax professionals are unable to understand and advise clients relative to the entire tax law. Like the medical profession, tax professionals have to decide whether to be general practitioners or specialists. Those who choose to be specialists can choose from over two or three dozen major categories of tax law. We have also reached the point where a general practitioner who prepares returns is rarely able to do so without the aid of a computer and tax preparation software.

The tax law has reached the point where it is virtually beyond comprehension. No taxpayer can reasonably be expected to understand the thousands of special rules and exceptions to exceptions. If the taxpayer is unable to understand the law, it is not possible to comply with the law in every respect.

Nonetheless, the Congress continues to add hundreds of new pages to the tax laws every year. At some point more and more taxpayers will decide that the law itself must be scrapped in its entirety and replaced with a totally different kind of tax to provide funds for national defense and other essential services.

Vern
www.offshorepress.com/liberty/