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PeakTrader:

Many people don’t realize a huge part of the global savings glut is in the U.S., since many foreigners save a large proportion of their incomes.

However, U.S. corporations, including U.S. multinationals, have $2 trillion in cash, or cash equivalents, earning enough interest for capital preservation, while U.S. commercial banks are holding over $2 trillion in excess reserves.

U.S. corporations made huge profits, through efficiencies and market power, while capital flowed into the U.S. through international trade.

The U.S. has a “wall of money” to flood into the economy. Unfortunately, it has been held back by politicians like Dodd & Frank (who are weapons of mass economic destruction, given they facilitated and accelerated the housing boom, creating massive moral hazard, and then when the economy crashed, went to the other extreme over-regulating the financial industry and creating uncertainty).

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Kaleberg, income tax rates are high for some and low for others. There are inheritance taxes and an estate tax.

Higher tax rates may not necessarily lead to more tax revenue.

The “financial sector” is part of the economy. It’s not clear what you mean money has moved from the economy to the financial sector.

There’s more risk aversion and that’s part of the problem, e.g. caused by Dodd-Frank. And, there has been massive buying of U.S. Treasury bonds, for example.

It seems, income taxes have become more progressive.

CBO: Top 40% Paid 106.2% of Income Taxes; Bottom 40% Paid -9.1%, Got Average of $18,950 in ‘Transfers’
December 9, 2013

“The top 40 percent of households by before-tax income actually paid 106.2 percent of the nation’s net income taxes in 2010, according to a new study by the Congressional Budget Office.

At the same time, households in the bottom 40 percent took in an average of $18,950 in what the CBO called “government transfers” in 2010.

The households in the top 20 percent by income paid 92.9 percent of net income tax revenues taken in by the federal government in 2010, said CBO.”

http://cnsnews.com/news/article/terence-p-jeffrey/cbotop-40-paid-1062-income-taxes-bottom-40-paid-91-got-average-18950

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Dannyb2b, I agree. I stated in Feb ’09 (it should be noted, the U.S. had increasingly larger trade deficits, through the mid-2000s, where U.S. consumers bought foreign goods and foreigners bought U.S. Treasury bonds):

1. Obama should change his stimulus plan to a $5,000 tax cut per worker (or $700 billion for the 140 million workers at the time, including through the earned income tax credit), along with increasing unemployment benefits by a similar amount. This will help households strengthen their balance sheets [i.e. catch-up on bills, pay-down debt, increase saving, spur consumption of assets and goods, etc.]. This plan will have an immediate and powerful effect to stimulate the economy and strengthen the banking system. When excess assets and goods clear the market, production will increase.

2. Shift “toxic” assets into a “bad bank.” The government should pay premiums for toxic assets to recapitalize the banking industry and eliminate the systemic problem caused by global imbalances. The Fed has the power to create money out of thin air, to generate nominal growth, boost “animal spirits,” and inflate toxic assets.

3. Government expenditures should play a small role in the economic recovery. For example, instead of loans for the auto industry, the government should buy autos and give them away to government employees (e.g. a fringe benefit). So, automakers can continue to produce, instead of shutting down their plants for a month. Auto producers should take advantage of lower costs for raw materials and energy, and generate a multiplier effect in related industries.

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Dannyb2b, there’s profit from production, which is actual capital creation, and there's exchanging one asset, e.g. money, for another asset, e.g. Treasury bonds, through the commercial banking system, to regulate the money supply.

Much of the profit, over the past few years, has been stored in U.S. Treasury bonds rather than employed in productive assets.

Typically, workers with higher marginal propensities to consume have lower income and fewer assets. So, how can the Fed increase the money supply, enough to facilitate growth, when there are fewer assets to exchange for money?

The Fed already has a powerful effect on growth, e.g. reducing interest rates and raising asset prices for households and firms, to increase production and consumption, ceteris paribus.

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Dannyb2b, profit creates capital. Monetary policy exchanges one asset for another, to create or destroy money.

If money was free, it would have no value. You cannot create (unlimited) assets without any liabilities.

And, the Fed couldn’t regulate the money supply, e.g. to preempt inflation, by just giving away money.

Lower interest rates and higher asset prices induce people to spend and borrow, and reduce saving, a lower cost of capital spurs production, refinancing at lower rates increases discretionary income, lower mortgage rates makes buying a home more affordable, 401(k)s and IRAs increase in value, etc. There are massive multiplier effects throughout the economy.

Daniel, if I pay $2 in taxes and someone else pays negative $1 in taxes, then the government collected $1 in taxes and I paid 200%.

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Dannyb2b, I already responded to your statements and you saw them, because you repeated your same statements again nevertheless.

The Fed creates or destroys money by exchanging one asset for another at market rates.

Low income people have too few assets to exchange for money to increase the money supply enough to generate growth, and the Fed couldn’t sell those assets to drain enough money out of the economy when needed.

If the Fed gave money away, money would be worthless. You cannot create unlimited assets with no liabilities. Even when cutting taxes, the government has to borrow, including from the future, and run budget deficits.

And, Fed policy is reaching its targets through a multiplier effect.

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Bruce, do you think affluent people or low income people are more likely to buy a new car, for example?

And, I think, the tax on a new car is high, while a two-year old used car can be a good deal for a lower income worker.

Also, I may add, taxes and the costs of regulations are embedded in the price of new goods. It’s not just a sales tax, for example, along with other fees.

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The Fed reduces income inequality by smoothing-out business cycles, to maintain sustainable growth, and keeping the country near full employment, ceteris paribus.

Of course, some people believe faster growth won’t be inflationary. However, they don’t know what they’re talking about. Once inflation begins to accelerate, much more tightening will be needed, resulting in even slower growth.

We need fewer disastrous and better economic policies from politicians, e.g. earned income tax credits, progressive tax rates, fewer regressive taxes, better regulations, and the minimum wage.

And, I’ve already explained, the Fed just giving away money to lower income households will cause the collapse of the financial system and another severe recession.

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Dannyb2b says: “Monetary policy can help but it needs to be more effective. Buying assets has too weak an effect on growth.”

Monetary policy has a powerful effect on growth. You’re ignoring the history of the Fed and confusing negative economic factors outside of the Fed’s control with monetary policy.

I stated before, lower interest rates and higher asset prices induce people to spend and borrow, and reduce saving, a lower cost of capital spurs production, refinancing at lower rates increases discretionary income, lower mortgage rates makes buying a home more affordable, 401(k)s and IRAs increase in value, etc. There are massive multiplier effects throughout the economy.

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