Raising and lowering of interest rates excessively is very damaging to a capitalist economy, the middle class, working poor, and small businesses.
When the Fed is trying to slow down the economy with monetary policy, it has to cause interest rates to rise higher than it would if the tax on interest earned, and high appreciation/inflation derived profits where taxed at the same rate. The Fed has to raise interest rates high enough to make the money (debt) investment worth as much as the inflation profit investment. If there is a 50% difference between the two tax rates, then the interest rate must rise 50% more than what would be necessary without the differential tax rate between long term capital gains, and interest income. This difference in tax rates is why mortgage interest rates, in 1980, had to increase to 18%, to purchase a home, to decrease inflation psychology in our economy. The inflation rate was 12%, in 1979, so interest rates had to go 50% higher, to a minimum interest rate of 18%, to make the money (debt) investment as valuable as the high appreciation/ inflation profit investment. In 1986 even after interest rates were raised to 18% to purchase real estate, it took the elimination of the deferential of the lower tax rate on long term capital gains to eliminate inflation expectations in our economy, which allowed interest rates to decrease for some years.
In the early 1990s when the long term capital gains tax rate was again made lower than the tax rate on interest income, the Fed had to cause interest rates to rise, which created a recession, when the economy showed signs of creating high inflation, because of excessive debt (money) creation in the private sector.
Higher than necessary interest rates create unemployment, foreclosures, bankruptcies, closure of small businesses (which reduces competition), depresses world trade. Higher than necessary interest rates damage other countries' economies by not only creating a recession in the United States, but by also creating a recession in their economies.
Higher, or lower than necessary interest rates create problems with capital flows between nations. Too much money flows toward the nation that has the strongest currency with the highest interest rates based on inflation rates. The other nations of the world must lower, or raise their interest rates to maintain their domestic economy, and their exports to obtain the needed gross national product to help maintain prosperity.
http://www.nakedcapitalism.com/2014/09/ilargi-fed-kills-emerging-markets-profit.html
When the Fed tries to stimulate the economy with very low interest rates it is also very damaging to a capitalist economy.
Zero bound interest rates deprive retirees of needed income, reducing their ability to consume, which reduces demand, and consumption during the recession cycle. Very low interest rates increases senior poverty rates. With less income from interest income, seniors spend their savings. After their savings are depleted seniors must turn to government programs to maintain themselves. This situation increases government expenditures and deficits, unless taxes are raised. We should not raise taxes during a recession, because raising taxes reduces demand. As the baby boom generation retires at 10,000 people, or more, a month, this situation will become worse.
Very low interest rates discourage the young, and the working poor to save the money needed to get a leg up on the economic ladder. When interest rates are very low people wanting/needing higher returns on their capital will make riskier, and undesirable investments, which can destabilize the economy, with the possibility of creating another financial crisis in the future.
People at the top of the economic ladder have money to invest, or make debt (money) investments, unlike the people at the bottom of the economic ladder. Implementing the 2% Appreciation/Inflation Taxation Policy would reduce excess demand from the top of the economic ladder during the high appreciation/inflation cycle rather than from the bottom of the economic ladder, as high interest rate policies do. With the 2% policy enacted, people with money investments would remain in money investments, or productive investments, which increases supply, and reduces demand, without raising the cost of production and consumption.
When the Fed has to raise interest rates excessively, to over come the effects of the long term capital gains tax rate, the cost of interest on the national debt rises more than necessary, which reduces the ability of Congress to fund other necessary programs. State government debt is affected in the same manner. The 2% Policy would rectify this operational flaw in our economic system.
When the Fed is making interest rates increase or decrease, the Fed is making an educated guess on how the economy will be performing up to six months in the future. The Fed tries to be correct on it's predictions, but most of the time their monetary policies are lagging, or premature to the economic cycle.
The 2% Policy is a better way of stimulating the economy, and controlling inflation and inflation psychology.
The 2% Appreciation/Inflation Taxation Policy would be based on how the economy was performing each year. The income tax code would remain as it is now, during the recession cycle, and while the economy is in near balance to maintain production, productive investment, and increase consumption in the economy. The tax rates on interest income, and long term capital gains would remain the same as they currently are. If the economy started to become over-heated, and assets and real estate prices began to increase more than 2% a year, the income tax would automatically change based on the asset appreciation/inflation rate before the Federal Reserve raised short term interest rates, and tightened credit to the banks, to increase interest rates.
How would the 2% Appreciation/Inflation Tax Policy operate?
If asset and real estate prices were increasing more than 2%, the tax on savings and money investments (bonds and other debt investments) would automatically decrease based on the asset appreciation/inflation rate, and at the same time the interest deduction would automatically decrease based on the appreciation/inflation rate. This change in our tax code would slow the economy down without raising cost of production, and consumption. This change would maintain employment, and also allow production the time it needs to balance supply with normal demand.
Employment would be maintained, as the economy balances itself, therefore normal consumption would continue with the 2% Policy enacted.
The 2% Policy will increase money (debt) investment and the savings rate during the high appreciation/inflation cycle. This change in our tax code will make available the monetary capital, at the lowest possible interest rate, to increase supply.
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