Weekend Musings

October 17, 2011

The motto of European debt crisis negotiators seems to be, “why do today what can be put off until tomorrow?”  For two years, hard deadlines have come and gone with officials making minimalist concessions and then only when threatened with dire market consequences.  Some pundits are starting to suggest that it may be worth it to toss Greece out of the club and see if Lehman-like fiasco really ensues.

Analysts continue to back away from forecasts of a double-digit U.S. recession.  Consumers are still managing to spend, and third-quarter growth looks likely to be stronger than growth in either of the first two quarters of this year.  I still see peril ahead, in the form of tighter fiscal policy, a lack of improvement in housing and unemployment, weaker global demand, and a firmer dollar, and difficult financial market conditions.

Republican candidate Herman Cain’s 9-9-9 dash for tax law simplicity has caught the imagination of many voters.  The last of his nines would be a 9% national sales tax.  Economies where sales tax increases have been imposed often see growth tank and inflation spike at the point of introduction.  One notable example was a increase to 15% from 8% in Britain’s VAT on non-luxury items in June 1979.  Economic growth in response contracted 8% in 3Q79, and prices soared 4.3% on month in July and to a 12-month increase of 15.6% from 11.4%.  As another example, the introduction of a 3% Japanese sales tax at the start of 1990 coincided with the peak of that nation’s bull market in equities and housing.  GDP, which had been extremely buoyant in the final quarter of 1989, fell about 2% in 1Q90.  Later, when the sales tax was raised to 5% in April 1997, GDP growth swung from +3.7% in 1Q97 to minus 3.4% in 2Q and remained negative in the third quarter.  In yet another instance, the introduction of a 7% goods and services tax in Canada at the start of 1991 coincided with recessionary growth.

At a high school reunion, I heard expressions of cynicism about the state of corporate greed.  One joke that caught the prevailing mood tells of a CEO, a school teacher and a tea party member sitting around a table on which a plate with ten cookies rests.  The CEO takes nine cookies and  points at the teacher.  Then turning to the tea party supporter, he whispers, “he wants your cookie.”

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.


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