[Winstonm]

hrothgar, on Mar 8 2007, 09:48 PM, said:

mike777, on Mar 9 2007, 05:29 AM, said:

Ok I agree an economy cannot be based on debt and/or on a fiat currency.

So you're in favour of what?

The gold standard?

I obviously do not know as much about this situation as you, but I would prefer any commodity - corn, gold, wheat - something of value as a basis for what printed money is worth. Richard, I can't argue with you on either an intellectual level or a scholarly level - I only hold a associate degree - so take this from the prespective of a fairly ignorant argument, but one that makes sense to me from a more logic/common-sense-based concept.

I have heard the definition of money that it is a medium of exchange, which makes it simply a barter tool in a barter system, does it not? How can the dollar be backed by the "full faith and credit of the United States" when that dollar's value is determined by barter in a money exchange? What is the guarantee of that "full faith and credit", that I can exchange my used dollar that was worth 1.87 pound for a new dollar tomorrow that is worth less?

My view is a better definition of money is that it is a representation of value. The deed to a house represents the value of ownership of the house, but is much simpler to tote around, stamp, copy, and such. Without this representation of value, money is nothing more than a representation of an obligation, or a debt bill, the debt being satisfied by replinishment with new debt - but this is not the type of debt that creates real value, such as debt taken on to replace infrastructure, to build factories, or build houses - this is debt as accounts receivable/accounts payable - of no true value except to the appearance of the balance sheet.

If somehow the Euro were to replace the dollar as the international standard of trade, especially in oil, the value of holding dollars would plummet, the exchange markets would be flooded with dollars, the dollar value would plummet, meaing interest rates would soar, and the U.S. economy would collapse in a heap - and that to me is the greater national security risk than a bunch of poor Muslims blowing themselves up now and again.

And the only reason this risk exits is because the U.S. does not control the value of its own dollar.

[mike777]

How much is the value/productivity of the people of the USA?
How much is the value of the land?
How secure and true is that value?
Is the value greater somewhere else given the risk?
How much is the future value discounted back to today?

However you answer these questions is how much the buck is worth.

[Winstonm]

mike777, on Mar 8 2007, 10:43 PM, said:

How much is the value/productivity of the people of the USA?
How much is the value of the land?
How secure and true is that  value?
Is the value greater somewhere else given the risk?
How much is the future value discounted back to today?

However you answer these questions is how much the buck is worth.

So what you are saying is the value of the dollar is a judgement based on GAAP estimations of the world's accountants? Are you saying the currency cannot collapse due to the value of the country? What does the long term debt do to the valuation? What value does the U.S. produce to justify its valuation?

If today there were (x) dollars in circulation and tomorrow there were (x2) would the values you suggest have suddenly changed or would the dollar value simply have fallen?

[mike777]

Sure the current value may be too high, low or just right. Your guess is as good as mine.

[helene_t]

Winstonm, on Mar 9 2007, 03:03 AM, said:

How can a consumption tax not favor present savings?

Suppose Vanesa lives in VAT-Land and Indira lives in Income-Tax-Land. Both have a tax pressure of 20%, anual interests of 10% and zero inflation. Both earned 100 monetos last year.

Vanesa could choose between spending her money imediately and getting 80 monetos worth of stuff (20% of the 100 monetos she payed for the stuff was VAT). Alternatively, she could put the money in the bank, withdraw 110 monetos this year, and buy 110-20% = 88 monetos of stuff.

Indira payed 20 monetos tax and could spent the remaining 80 monetos on stuff, getting full value. Alternatively, she could put the money in the bank, withdraw 88 monetos this year and buy stuff for full value.

So until now, the award for saving is the same for both.

However, if Indira has to pay taxes on the interests as well, she has less motivation for saving. In practice, many kinds of interests (value increase of real estate, Swiss bank accounts, accumulating equity funds) are not taxed effectively in most contries so it doesn't matter much.

If we imagine a country in which interests are taxed effectively, then you're right. Especially in the face of inflation: if real interests are 10% and inflation is 10%, the nominal tax base is 20% of which you pay taxes. Back in the seventies living in Denmark, I effectively payed more than 100% taxes of the interests on my bank account. Fortunately, as a child I only saved the anual 20 kroner (3 Euros) I got from my grandma with Christmas so it hasn't impaired my financial position up to this day.

[helene_t]

Winstonm, on Mar 9 2007, 05:34 AM, said:

If somehow the Euro were to replace the dollar as the international standard of trade, especially in oil, the value of holding dollars would plummet, the exchange markets would be flooded with dollars, the dollar value would plummet, meaing interest rates would soar, and the U.S. economy would collapse in a heap - and that to me is the greater national security risk than a bunch of poor Muslims blowing themselves up now and again.

And the only reason this risk exits is because the U.S. does not control the value of its own dollar.

I agree with your assesment of the security risk. But I don't think it's related to the fiat economy. Inflation has been very low for decades, in spite of an exploding dept of the U.S. goverment as well as of the U.S. economy as a whole.

Even if the dollar was bound to something more substantial than paper (be it corn, oil, gold or terrabytes of disk capacity in data warehouses), I think the same scenario could happen. As soon as the US$ collapses, its tie to the chosen commodity would collapse as well.

[Winstonm]

helene_t, on Mar 9 2007, 06:19 AM, said:

Winstonm, on Mar 9 2007, 05:34 AM, said:

If somehow the Euro were to replace the dollar as the international standard of trade, especially in oil, the value of holding dollars would plummet, the exchange markets would be flooded with dollars, the dollar value would plummet, meaing interest rates would soar, and the U.S. economy would collapse in a heap - and that to me is the greater national security risk than a bunch of poor Muslims blowing themselves up now and again.

And the only reason this risk exits is because the U.S. does not control the value of its own dollar.

I agree with your assesment of the security risk. But I don't think it's related to the fiat economy. Inflation has been very low for decades, in spite of an exploding dept of the U.S. goverment as well as of the U.S. economy as a whole.

Even if the dollar was bound to something more substantial than paper (be it corn, oil, gold or terrabytes of disk capacity in data warehouses), I think the same scenario could happen. As soon as the US$ collapses, its tie to the chosen commodity would collapse as well.

Helene, I appreciate your responding to my posts. I understand the value, dedication, and intelligence required to reach your level of education - alas, I was too ignorant in my youth to apply myself.

But I have a question - how could a currency cause the collapse of a commodity? I don't think it possible. Regarding the U.S., the debt creation is only possible due to the fiat currency - a gold backed dollar, for example, would limit the borrowing possible ad debt could not be financed with additional debt. In U.S. history, prior to the repeal of Britton/Woods, war was the only valid reason for the U.S. to incur debt. This was real war, declared by Congress, and supported by the nation's people - not military actions scattered around the globe.

It seems to me that the only things holding down interest rates in the U.S. is a somewhat artificial demand for U.S. treasuries created by foreign central banks holding of dollars - they have to do something with them. For example, the GSEs in the U.S. are basically being sponsored by FCBs - the huge mortgage companies of Freddie Mac and Fannie May have 44% of thier total paper bought by FCBs - this huge amount of buying has kept prices artifially low. Even now, if the FCBs simply rolled over their buying out of GSE paper, the interest rates on these bonds would skyrocket, meaning home mortgage interest rates would skyrocket, meaning a further collapse of not only the home building market but also a crisis for the financial institutions as well.

Surely this is a national security problem.

The difference, as I see it, is that a commodity-backed currency puts an inherent limitation of the debt a nation can assume, as that debt must be repaid through higher taxes and not just with more debt creation.

[Winstonm]

helene_t, on Mar 9 2007, 06:02 AM, said:

Winstonm, on Mar 9 2007, 03:03 AM, said:

How can a consumption tax not favor present savings?

Suppose Vanesa lives in VAT-Land and Indira lives in Income-Tax-Land. Both have a tax pressure of 20%, anual interests of 10% and zero inflation. Both earned 100 monetos last year.

Vanesa could choose between spending her money imediately and getting 80 monetos worth of stuff (20% of the 100 monetos she payed for the stuff was VAT). Alternatively, she could put the money in the bank, withdraw 110 monetos this year, and buy 110-20% = 88 monetos of stuff.

Indira payed 20 monetos tax and could spent the remaining 80 monetos on stuff, getting full value. Alternatively, she could put the money in the bank, withdraw 88 monetos this year and buy stuff for full value.

So until now, the award for saving is the same for both.

However, if Indira has to pay taxes on the interests as well, she has less motivation for saving. In practice, many kinds of interests (value increase of real estate, Swiss bank accounts, accumulating equity funds) are not taxed effectively in most contries so it doesn't matter much.

If we imagine a country in which interests are taxed effectively, then you're right. Especially in the face of inflation: if real interests are 10% and inflation is 10%, the nominal tax base is 20% of which you pay taxes. Back in the seventies living in Denmark, I effectively payed more than 100% taxes of the interests on my bank account. Fortunately, as a child I only saved the anual 20 kroner (3 Euros) I got from my grandma with Christmas so it hasn't impaired my financial position up to this day.

Thanks again Helene.

As you noted, my hypothesis is based on only a VAT with no other tax from a federal government - i.e., no tax of the savings.

Instead of an income tax, simply a national sales tax of X% that applies to any and all purchases and with no tax adjustments of any kind, i.e.. no deductions (with the possible execption of medications and medical expenses for the poor - and that is only because the uninsured must buy their drugs while the insured have them provided.)

[mike777]

VAT, like all sales taxes are very regressive, hurt the poor the most.

BTW interest is taxable in a nonretirement account.
btw the insured pay for drugs....lol...they are not free, we pay in one form or another or do you work for free?

To imagine no other federal tax is fantasy.....who can even count all the different federal taxes/fees/charges...call themwhatever you want? Why do you ignore all other taxes, state, county and city, etc....

What source do you have that says treasuries are in artificial demand? What does that even mean?

[Winstonm]

mike777, on Mar 9 2007, 11:45 PM, said:

VAT, like all sales taxes are very regressive, hurt the poor the most.

BTW interest is taxable in a nonretirement account.
btw the insured pay for drugs....lol...they are not free, we pay in one form or another or do you work for free?

To imagine no other federal tax is fantasy.....who can even count all the different federal taxes/fees/charges...call themwhatever you want? Why do you ignore all other taxes, state, county and city, etc....

If you will read the original comment, I said I "emotionally support" a national sales tax but know it is an impossibility.

I am not ignoring other taxes - I never said "no federal tax". I am talking only of U.S. income tax. Instead of an income tax, I would prefer a national sales tax. The end.
I am aware that interest in a non-IRA is taxable? You seem not to have read what I wrote. My response to Helene was if there were no tax on interest - but if is a little word and easily overlooked.

The corporation you work for pays a huge part of medical insurance, so when you pay your $20 co-pay it is a lot easier on you than the poor guy with no insurance that has to pay $175 for the same prescription - sure, someboy pays for the insurance cost, but who is damaged the most - insured worker or non-insured?

You seem to want me to justify a national sales tax - and I said at the start I think it an impossibility - but on an emotional level, I feel it to be the most fair of all taxes as both rich and poor pay the same percentage and can make the decision whether or not to make extra purchases above what life demands - and thus encourage savings in a non-taxed savings account.

[mike777]

"....feel it to be the most fair of all taxes as both rich and poor pay the same percentage ....."


Well you have hit on the crux of what fair means....many would say....by default this in NOT FAIR"

I am totally lost on your insurance argument...I guess you agree with me 100%.

[hrothgar]

Winstonm, on Mar 10 2007, 08:11 AM, said:

You seem to want me to justify a national sales tax - and I said at the start I think it an impossibility - but on an emotional level, I feel it to be the most fair of all taxes as both rich and poor pay the same percentage and can make the decision whether or not to make extra purchases above what life demands - and thus encourage savings in a non-taxed savings account.

This comment displays a startling amount of ignorance.

Systems based on a sales tax are extremely regressive. It is a well known fact that low income brackets spend a much high percentage of their income than high income brackets.

If I am living on minimum wage basic expenses like food, clothing, shelter, gas, and the like eat up the entire paycheck. Wealthy people may spend more (in absolute terms) on these items, however, this comprises a much smaller portion of their income.

[helene_t]

Winstonm, on Mar 10 2007, 04:15 AM, said:

But I have a question - how could a currency cause the collapse of a commodity? I don't think it possible. Regarding the U.S., the debt creation is only possible due to the fiat currency - a gold backed dollar, for example, would limit the borrowing possible ad debt could not be financed with additional debt.

I'm not an economist and if Matt says something about this you'd probably better listen to him. In particular, I don't know much about the specifics of the U.S. system (i.e. what obligations the FED and the government have towards each other).

The U.S. government's ability to borrow money depends on the market's willingness to accept U.S. treasure bonds, banknotes and FED deposits as payment for commodities and for foreign currency. Suppose a dollar was defined as the value of 4 kilogram of corn, i.e. the FED aggreed to trade banknotes and FED deposits for corn on request. You might think that the market would become sceptical as soon as the U.S. governement dept reached 1000 years of Worls corn production, but this would not cause a problem (unless, of course, some mad bilionaire incisted of withdrawing his FED deposits in corn and take all that corn out of the market, e.g. by sacrifycing it to Neptunus). If anything, the backing of the currency would make the market more confident in the USD and make it even easier for the FED and the U.S. goverment to create dept.

I'm not sure what would happen if the market lost its trust in the U.S. goverment's and the FED's ability to meet their obligations. The simple solution, a devaluation of the USD, would not be possible since it would create disequilibrium on corn markents in foreign currency. Under Reagan, the USD was kept high in spite of a large deficit by means of high interest rates.

[Winstonm]

hrothgar, on Mar 10 2007, 06:56 AM, said:

Winstonm, on Mar 10 2007, 08:11 AM, said:

You seem to want me to justify a national sales tax - and I said at the start I think it an impossibility - but on an emotional level, I feel it to be the most fair of all taxes as both rich and poor pay the same percentage and can make the decision whether or not to make extra purchases above what life demands - and thus encourage savings in a non-taxed savings account. 

This comment displays a startling amount of ignorance.

Systems based on a sales tax are extremely regressive. It is a well known fact that low income brackets spend a much high percentage of their income than high income brackets.

If I am living on minimum wage basic expenses like food, clothing, shelter, gas, and the like eat up the entire paycheck. Wealthy people may spend more (in absolute terms) on these items, however, this comprises a much smaller portion of their income.

This is why my actions do not always follow my emotions as I have found that emotional arguments are frequently wrong - like this one.

[mike777]

Trust me the dollar can be and is very often devalued by the markets. All this really means is the value/purchasing power of the dollar falls in comparison to other currencies. This happens all the time.

What I find surprising that through out history the value of a currency may fall to zero or almost zero and yet a country's economy can recover in a relatively short period of time. Heck you can drop atom bombs and fire bomb cities over years and a country can bounce back. People do matter.

[pclayton]

Right; sales taxes are about as regressive as they come.

I'm still a little perplexed about an earlier comment that said property taxes are also regressive.

[Echognome]

There is way too much here for me to comment on. I should probably start by stating I'm a microeconomist with a specialization in industrial organization, not a macroeconomist. Thus, I'm no expert on a lot of these issues.

But, I will certainly give my opinion on my selected comments.

pclayton said:

I've never believed in 'the more I make', the higher my tax rate should be. Why should I pay more on the Nth dollar?

There are two main reasons for this. The first is that you want to make it as easy as possible for people to attain a level of subsistence. The second is a theoretical argument that the utility of money is diminishing. That is to say, you value your first million dollars more than your second million dollars and your second million dollars more than your third, etc. Thus, when we are maximizing societal utility we should tax the rich more and distribute it to the poor. You may or may not agree with it, but there it is.

Mike777 said:

1) Make death taxes 100% rate.
2) No foundations to pass on money tax free. Full 100% rate at death. See Gates Buffett.. Ford, and Rockafeller, etc.
3) Make life insurance 100% tax rate in full.
4) All gifts taxed at 100% rate.
5) Raise sin taxes and taxes on gambling winnings.

I make no claims that this will solve all tax avoidance schemes but it is a good start.

Horrible, horrible ideas. First off, I presume you mean the inheritance or estate tax (in the U.S. it's an estate tax). If you make it 100%, then you basically take away all incentive for people to invest in future. There is an estate tax that kicks in at very high levels, but even that is controversial. I don't think anyone would support not being able to pass money down to their children or widows when they die. As for 5, the problem with raising sin taxes (such as on alcohol and cigarettes) is that they effect the poor much more than the rich. The big corporations that produce the goods pass on the increase in taxes in price. Note that these goods are very inelastic (meaning a change in price will not affect demand greatly). If you want to reduce consumption, you are better off building quotas or banning them.

mike777 said:

I should add another huge treasury drain is allowing the trading in pension plans and other retirement accounts on a tax free or tax deferred basis. Talk about unfair, if you are poor and do not have one of these accounts too bad...another break for those better off.

These are mainly tax benefits for the middle class (note the tax benefits are capped). They encourage savings for retirement.

winstonm said:

(in regards to inflation)Let's keep it to the U.S., please, to help me grasp it. I can understand that if the population is expanding at 5% then money supply will generally need to expand at the same rate and products and services also. But when money supply outpaces the need, doesn't that dilute the value? Isn't inflation more of a monetary problem than the Keynesian ideas of actual demand creating a bottleneck? Doesn't excess money create artificial demand and urgency to consume when the money value is lessening over time?

First off, population is expanding more closely to the 1% level annually. See, for example: https://www.cia.gov/...ok/geos/us.html

Second, it is much more complicated how the money supply increases. Note that the money supply is also more complicated than just coins and notes (the definition of M0). I'll refer you to the wikipedia article: http://en.wikipedia....ki/Money_supply

The main relevant quote here being: "The United States supply of money, outside of coins minted by the United States Mint, can increase only if the private banks issue more by loaning into circulation through fractional reserve bank lending practices. Subsequently paper notes are increased only as they are printed by the BEP on behalf of the banking system and are swapped at par value by the Federal Reserve with private banks for their already issued electronic credits, which are then expunged from the system by the Federal Reserve. Thus, these printed notes merely replace already issued electronic credits on a one-for-one basis."

Note that the money supply increases or decreases by private banks issuing more loans. Thus, there is a market for loans and it's not an artificial mechanism.

winstonm said:

I have heard the definition of money that it is a medium of exchange, which makes it simply a barter tool in a barter system, does it not? How can the dollar be backed by the "full faith and credit of the United States" when that dollar's value is determined by barter in a money exchange? What is the guarantee of that "full faith and credit", that I can exchange my used dollar that was worth 1.87 pound for a new dollar tomorrow that is worth less?

The role of money is as a store of value and a medium of exchange. Paper notes, checks, credit cards, etc are easier to carry than say 20 goats. That's why they are useful as a store of value. The medium of exchange is because we use money to purchase goods and services and we may or may not want each other's goods and services. I might want to sell economics lectures, but when I go to get a haircut, my barber doesn't want to exchange one for my lectures. The government is playing the middle man by issuing money for exchange. Note that this fiat money is often used even in the smallest forms of government, such as communes.

winstonm said:

If somehow the Euro were to replace the dollar as the international standard of trade, especially in oil, the value of holding dollars would plummet, the exchange markets would be flooded with dollars, the dollar value would plummet, meaing interest rates would soar, and the U.S. economy would collapse in a heap - and that to me is the greater national security risk than a bunch of poor Muslims blowing themselves up now and again.

And the only reason this risk exits is because the U.S. does not control the value of its own dollar.

It's certainly a possibility that another currency, such as the Euro, could overtake the dollar as the most prevalently used world currency. I don't see why this would mean a collapse of U.S. dollar. I think you are confusing a general economic crisis in the U.S. leading to a collapse of the dollar (the cause) with the overtaking of the dollar by another currency (the effect) as you are seeming to imply the relationship would go the other way. As for your last statement, no country controls the value of its own currency. In fact, several countries peg their currencies to the other ones (usually the dollar). Exchange rates are a whole complicated issue of themselves and beyond anything I could tell you.

pclayton said:

I'm still a little perplexed about an earlier comment that said property taxes are also regressive.

Would it help if I said that property tax affects both property owners and renters (who get taxes passed off to them)?

[Winstonm]

Echognome, on Mar 10 2007, 02:47 PM, said:

There is way too much here for me to comment on. I should probably start by stating I'm a microeconomist with a specialization in industrial organization, not a macroeconomist. Thus, I'm no expert on a lot of these issues.

But, I will certainly give my opinion on my selected comments.

pclayton said:

I've never believed in 'the more I make', the higher my tax rate should be. Why should I pay more on the Nth dollar?

There are two main reasons for this. The first is that you want to make it as easy as possible for people to attain a level of subsistence. The second is a theoretical argument that the utility of money is diminishing. That is to say, you value your first million dollars more than your second million dollars and your second million dollars more than your third, etc. Thus, when we are maximizing societal utility we should tax the rich more and distribute it to the poor. You may or may not agree with it, but there it is.

Mike777 said:

1) Make death taxes 100% rate.
2) No foundations to pass on money tax free. Full 100% rate at death. See Gates Buffett.. Ford, and Rockafeller, etc.
3) Make life insurance 100% tax rate in full.
4) All gifts taxed at 100% rate.
5) Raise sin taxes and taxes on gambling winnings.

I make no claims that this will solve all tax avoidance schemes but it is a good start.

Horrible, horrible ideas. First off, I presume you mean the inheritance or estate tax (in the U.S. it's an estate tax). If you make it 100%, then you basically take away all incentive for people to invest in future. There is an estate tax that kicks in at very high levels, but even that is controversial. I don't think anyone would support not being able to pass money down to their children or widows when they die. As for 5, the problem with raising sin taxes (such as on alcohol and cigarettes) is that they effect the poor much more than the rich. The big corporations that produce the goods pass on the increase in taxes in price. Note that these goods are very inelastic (meaning a change in price will not affect demand greatly). If you want to reduce consumption, you are better off building quotas or banning them.

mike777 said:

I should add another huge treasury drain is allowing the trading in pension plans and other retirement accounts on a tax free or tax deferred basis. Talk about unfair, if you are poor and do not have one of these accounts too bad...another break for those better off.

These are mainly tax benefits for the middle class (note the tax benefits are capped). They encourage savings for retirement.

winstonm said:

(in regards to inflation)Let's keep it to the U.S., please, to help me grasp it. I can understand that if the population is expanding at 5% then money supply will generally need to expand at the same rate and products and services also. But when money supply outpaces the need, doesn't that dilute the value? Isn't inflation more of a monetary problem than the Keynesian ideas of actual demand creating a bottleneck? Doesn't excess money create artificial demand and urgency to consume when the money value is lessening over time?

First off, population is expanding more closely to the 1% level annually. See, for example: https://www.cia.gov/...ok/geos/us.html

Second, it is much more complicated how the money supply increases. Note that the money supply is also more complicated than just coins and notes (the definition of M0). I'll refer you to the wikipedia article: http://en.wikipedia....ki/Money_supply

The main relevant quote here being: "The United States supply of money, outside of coins minted by the United States Mint, can increase only if the private banks issue more by loaning into circulation through fractional reserve bank lending practices. Subsequently paper notes are increased only as they are printed by the BEP on behalf of the banking system and are swapped at par value by the Federal Reserve with private banks for their already issued electronic credits, which are then expunged from the system by the Federal Reserve. Thus, these printed notes merely replace already issued electronic credits on a one-for-one basis."

Note that the money supply increases or decreases by private banks issuing more loans. Thus, there is a market for loans and it's not an artificial mechanism.

winstonm said:

I have heard the definition of money that it is a medium of exchange, which makes it simply a barter tool in a barter system, does it not? How can the dollar be backed by the "full faith and credit of the United States" when that dollar's value is determined by barter in a money exchange? What is the guarantee of that "full faith and credit", that I can exchange my used dollar that was worth 1.87 pound for a new dollar tomorrow that is worth less?

The role of money is as a store of value and a medium of exchange. Paper notes, checks, credit cards, etc are easier to carry than say 20 goats. That's why they are useful as a store of value. The medium of exchange is because we use money to purchase goods and services and we may or may not want each other's goods and services. I might want to sell economics lectures, but when I go to get a haircut, my barber doesn't want to exchange one for my lectures. The government is playing the middle man by issuing money for exchange. Note that this fiat money is often used even in the smallest forms of government, such as communes.

winstonm said:

If somehow the Euro were to replace the dollar as the international standard of trade, especially in oil, the value of holding dollars would plummet, the exchange markets would be flooded with dollars, the dollar value would plummet, meaing interest rates would soar, and the U.S. economy would collapse in a heap - and that to me is the greater national security risk than a bunch of poor Muslims blowing themselves up now and again.

And the only reason this risk exits is because the U.S. does not control the value of its own dollar.

It's certainly a possibility that another currency, such as the Euro, could overtake the dollar as the most prevalently used world currency. I don't see why this would mean a collapse of U.S. dollar. I think you are confusing a general economic crisis in the U.S. leading to a collapse of the dollar (the cause) with the overtaking of the dollar by another currency (the effect) as you are seeming to imply the relationship would go the other way. As for your last statement, no country controls the value of its own currency. In fact, several countries peg their currencies to the other ones (usually the dollar). Exchange rates are a whole complicated issue of themselves and beyond anything I could tell you.

pclayton said:

I'm still a little perplexed about an earlier comment that said property taxes are also regressive.

Would it help if I said that property tax affects both property owners and renters (who get taxes passed off to them)?

Thanks for taking the time to give your insights.

[Winstonm]

Quote

QUOTE (winstonm)
If somehow the Euro were to replace the dollar as the international standard of trade, especially in oil, the value of holding dollars would plummet, the exchange markets would be flooded with dollars, the dollar value would plummet, meaing interest rates would soar, and the U.S. economy would collapse in a heap - and that to me is the greater national security risk than a bunch of poor Muslims blowing themselves up now and again.

And the only reason this risk exits is because the U.S. does not control the value of its own dollar.



It's certainly a possibility that another currency, such as the Euro, could overtake the dollar as the most prevalently used world currency. I don't see why this would mean a collapse of U.S. dollar. I think you are confusing a general economic crisis in the U.S. leading to a collapse of the dollar (the cause) with the overtaking of the dollar by another currency (the effect) as you are seeming to imply the relationship would go the other way. As for your last statement, no country controls the value of its own currency. In fact, several countries peg their currencies to the other ones (usually the dollar). Exchange rates are a whole complicated issue of themselves and beyond anything I could tell you.

You may be right about the confusion - this is complicated to a non-economist such as me. Perhaps you can help me understand my argument/question/conclusions?

What I am considering is that because the dollar is the primary currency of trade, it is of benefit for countries who trade, notably China, Japan, and the OPEC countries to hold dollars via U.S. treasury bonds. Because of this demand for dollars, the dollar remains relatively safe from decline - but what happes if the Euro replaces the dollar as the currency of world trade? Because money exchanges are simply markets of trade, wouldn't the large infusion of dollar sells lead to a large decline in the value of the dollar simply due to supply and demand? This would then have a substantial negative effect on the U.S. bond markets, as yields would have to increase dramatically to compensate for the decline in demand caused by the decline in the dollar, it would seem? This fall in value would make imports more expensive, driving up inflation, which would cause further tightening of interest rates.

So my question/comment/argument is that a relatively rapid shift of global trade currency away from the dollar could cause a spiral of higher interest rates in the U.S. and increased inflation that would be very difficult to control or overcome?

Thanks in advance for your answers.

[mike777]

Echognome, on Mar 10 2007, 02:47 PM, said:

There is way too much here for me to comment on.  I should probably start by stating I'm a microeconomist with a specialization in industrial organization, not a macroeconomist.  Thus, I'm no expert on a lot of these issues. 

But, I will certainly give my opinion on my selected comments.

pclayton said:

I've never believed in 'the more I make', the higher my tax rate should be. Why should I pay more on the Nth dollar?

There are two main reasons for this. The first is that you want to make it as easy as possible for people to attain a level of subsistence. The second is a theoretical argument that the utility of money is diminishing. That is to say, you value your first million dollars more than your second million dollars and your second million dollars more than your third, etc. Thus, when we are maximizing societal utility we should tax the rich more and distribute it to the poor. You may or may not agree with it, but there it is.

Mike777 said:

1) Make death taxes 100% rate.
2) No foundations to pass on money tax free. Full 100% rate at death. See Gates Buffett.. Ford, and Rockafeller, etc.
3) Make life insurance 100% tax rate in full.
4) All gifts taxed at 100% rate.
5) Raise sin taxes and taxes on gambling winnings.

I make no claims that this will solve all tax avoidance schemes but it is a good start.

Horrible, horrible ideas. First off, I presume you mean the inheritance or estate tax (in the U.S. it's an estate tax). If you make it 100%, then you basically take away all incentive for people to invest in future. There is an estate tax that kicks in at very high levels, but even that is controversial. I don't think anyone would support not being able to pass money down to their children or widows when they die. As for 5, the problem with raising sin taxes (such as on alcohol and cigarettes) is that they effect the poor much more than the rich. The big corporations that produce the goods pass on the increase in taxes in price. Note that these goods are very inelastic (meaning a change in price will not affect demand greatly). If you want to reduce consumption, you are better off building quotas or banning them.

mike777 said:

I should add another huge treasury drain is allowing the trading in pension plans and other retirement accounts on a tax free or tax deferred basis. Talk about unfair, if you are poor and do not have one of these accounts too bad...another break for those better off.

These are mainly tax benefits for the middle class (note the tax benefits are capped). They encourage savings for retirement.

winstonm said:

(in regards to inflation)Let's keep it to the U.S., please, to help me grasp it. I can understand that if the population is expanding at 5% then money supply will generally need to expand at the same rate and products and services also. But when money supply outpaces the need, doesn't that dilute the value? Isn't inflation more of a monetary problem than the Keynesian ideas of actual demand creating a bottleneck? Doesn't excess money create artificial demand and urgency to consume when the money value is lessening over time?

First off, population is expanding more closely to the 1% level annually. See, for example: https://www.cia.gov/...ok/geos/us.html

Second, it is much more complicated how the money supply increases. Note that the money supply is also more complicated than just coins and notes (the definition of M0). I'll refer you to the wikipedia article: http://en.wikipedia....ki/Money_supply

The main relevant quote here being: "The United States supply of money, outside of coins minted by the United States Mint, can increase only if the private banks issue more by loaning into circulation through fractional reserve bank lending practices. Subsequently paper notes are increased only as they are printed by the BEP on behalf of the banking system and are swapped at par value by the Federal Reserve with private banks for their already issued electronic credits, which are then expunged from the system by the Federal Reserve. Thus, these printed notes merely replace already issued electronic credits on a one-for-one basis."

Note that the money supply increases or decreases by private banks issuing more loans. Thus, there is a market for loans and it's not an artificial mechanism.

winstonm said:

I have heard the definition of money that it is a medium of exchange, which makes it simply a barter tool in a barter system, does it not? How can the dollar be backed by the "full faith and credit of the United States" when that dollar's value is determined by barter in a money exchange? What is the guarantee of that "full faith and credit", that I can exchange my used dollar that was worth 1.87 pound for a new dollar tomorrow that is worth less?

The role of money is as a store of value and a medium of exchange. Paper notes, checks, credit cards, etc are easier to carry than say 20 goats. That's why they are useful as a store of value. The medium of exchange is because we use money to purchase goods and services and we may or may not want each other's goods and services. I might want to sell economics lectures, but when I go to get a haircut, my barber doesn't want to exchange one for my lectures. The government is playing the middle man by issuing money for exchange. Note that this fiat money is often used even in the smallest forms of government, such as communes.

winstonm said:

If somehow the Euro were to replace the dollar as the international standard of trade, especially in oil, the value of holding dollars would plummet, the exchange markets would be flooded with dollars, the dollar value would plummet, meaing interest rates would soar, and the U.S. economy would collapse in a heap - and that to me is the greater national security risk than a bunch of poor Muslims blowing themselves up now and again.

And the only reason this risk exits is because the U.S. does not control the value of its own dollar.

It's certainly a possibility that another currency, such as the Euro, could overtake the dollar as the most prevalently used world currency. I don't see why this would mean a collapse of U.S. dollar. I think you are confusing a general economic crisis in the U.S. leading to a collapse of the dollar (the cause) with the overtaking of the dollar by another currency (the effect) as you are seeming to imply the relationship would go the other way. As for your last statement, no country controls the value of its own currency. In fact, several countries peg their currencies to the other ones (usually the dollar). Exchange rates are a whole complicated issue of themselves and beyond anything I could tell you.

pclayton said:

I'm still a little perplexed about an earlier comment that said property taxes are also regressive.

Would it help if I said that property tax affects both property owners and renters (who get taxes passed off to them)?

Well if the goal is to tax the rich until the rich are no more and transfer whatever there is to the poorest of the poor it is start. I make no claims it makes for a bigger pie for all to share in but then that is the crux of the argument, yes? A bigger pie for all to eat out of even if that means the rich grow richer or tax the rich more. Where is the balance that is best, whatever BEST means.