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Fed Chair Mr. Andrea Mitchell sez the sliding dollar, which has dropped 40% in value against the Euro the past three years, is probably heading further south.

The Fed chief said an eventual desire by foreign investors to cut the risk of holding too many dollars may lead them away from U.S. assets, unless offered higher rates of return that would make the shortfall "increasingly less tenable." […]

Greenspan said cutting the U.S. budget gap was the best way to boost domestic saving and lessen America's reliance on foreigners to fund the huge shortfall in the current account. […]

"It seems persuasive that, given the size of the U.S. current account deficit, a diminished appetite for adding to dollar balances must occur at some point," Greenspan said.

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  1. “It seems persuasive that, given the size of the U.S. current account deficit, a diminished appetite for adding to dollar balances must occur at some point,”

    HA HA HA HA That’s an oldie but a goodie. Now pull the other one Al

  2. Cool. I’ve been thinking of trying to penetrate the Chinese market for pet rocks.

  3. You wanna encourage domestic saving?

    Make interest and dividends exempt from taxes.

  4. TWC: That’s a brilliant idea. Now, if only I made enough money or had enough investments outside of my 401(k) to make that worth SHIT.

    See, unless you already have a shitload saved or invested outside a 401(k) (IE: You’re rich) it’s not going to be worth your time. “Hey, let me save 2000 dollars a year so that I can make a 100 bucks tax free.

    I can already do that (and do) with a Roth IRA.

  5. Morat,
    The point isn’t to increase domestic savings, not to give you a sack of cash.

  6. Gold at record highs. Crude oil likewise. Dollar at record lows.
    It does make exuberence for bonds seem irrational.
    But how ’bout those leading economic indicators?
    Down, down, down.

  7. TWC-

    I have complete confidence that eliminating taxes on interest would encourage some amount of additional saving, but I doubt it would be a very large amount.

    Say I can get 5% on a certificate of deposit. (That number may be a little high, but let’s err in that direction so nobody can accuse me of lowballing the estimates.) If I invest $2000 I get $100 in interest. I don’t know what taxes on interest are right now, but even if they’re 50%, that’s only $50 saved.

    Is that extra $50 enough enticement to get me to put away $2000 more in a year? Not really. If I save money it will be because I plan to use the money later, not because I want to increase my net worth by an amount equal to the tax on the interest.

    Please don’t think I’m defending the tax on savings. I don’t support taxes on savings, but when somebody predicts that a good action (eliminating a tax) will produce unlikely results (encourage significant amounts of savings, as opposed to small amounts of savings), I think it’s better to question that statement the same way we’d question a bureaucrat who claimed that some new policy would make our lives better. It’s always better to make honest arguments.

  8. Well, the EU is not going to let it slide forever; if it hits 1.35, I am fairly certain that they’ll start buying currency like made; the European economy can’t stand that sort of differential. And look for the central bank of Japan to go to bat with the EU; they too can’t stand that sort of differential.

    As to the account deficit, does anyone expect anything to be done about that? I don’t.

  9. …like mad…

  10. Don Boudreaux over at Cafe Hayek makes some good points along these lines. Namely, why all the hubbub about the debt being owned by foreigners? The big debt is bad, but why does it matter who holds the bonds?

    http://cafehayek.typepad.com/hayek/2004/10/what_if.html

  11. “If I invest $2000 I get $100 in interest. I don’t know what taxes on interest are right now, but even if they’re 50%, that’s only $50 saved.”

    Thy growth function is unseemly linear, sir.

    It is $50 now, and much more later. Note the difference in growth in tax deferred savings vs. taxable savings, even if you assume that it will all be taxed upon distribution from the protected account.

  12. Alan Greenspan:

    Step One: Chair a commission that increases the Social Security tax.

    Step Two: Provide testimony in favor of a deficit-exploding tax cut on income taxes (especially at the high end), inheretance taxes, dividend taxes, and capital gains taxes.

    Step Three: Solemnly declare that spending needs to be cut, while bemoaning the expected growth in Social Security spending.

    I swear, if they couldn’t be Republican officeholders, they’d be villians in Jame Bond movies.

  13. Jason-

    Point well taken. Still, nobody saves for the interest. For that purpose there are investments with much better returns.

    One could remove the tax on interest while leaving the capital gains tax on stocks and other investments unchanged. That would have the same practical effect as increasing the rate of return on savings accounts, and would probably make savings accounts more attractive to some people, at least as a stable but low-yield part of a balanced portfolio.

    That, however, smacks of economic micromanagement, and my big thing with taxes is that as long as we have them they should be simple, so as to avoid favoring one activity over another.

  14. He’s the hero of MY James Bond movie!

  15. thoreau,

    Both Austrians and neoclassicals, as I understand it, argue that labor is simply a “factor of production” no different from capital or land.

    So why is it that the GOP considers taxes on returns from capital more morally suspect than returns on labor? Their agenda, it seems, is transferring the entire tax burden to income from labor and removing it from returns on accumulated wealth.

    joe,

    You’re entirely right on SS. We’ve been paying a dramatically higher payroll tax for the past twenty years: an extremely regressive tax, and the biggest tax most working and middle class people pay. The surplus has been used for twenty years to offset part of the budget deficit from tax cuts for the plutocracy. Now that the SS system is about to run a deficit, and the “trust fund” is just a bile of several trillion IOUs, they want to cut the benefits that we paid for with twenty years of high payroll taxes.

    Greenspan is a fucking scumbag.

  16. The tax haters sure get quiet when the taxes under discussion are regressive, eh Kevin?

  17. The tax haters sure get quiet when the taxes under discussion are regressive, eh Kevin?

    It’s all about whose ox is gored. So much for principle.

  18. Nah, I seriously doubt most Reasonoids are high income earners.

    More like groupies.

  19. I may be simplistic but:

    This is about whether foreign investors will tolerate a net loss from their investments.

    If I make 10% return in US dollars which fall 20% relative to my home-land currency, I am losing my homeland security. Hence why should I finance the US debt?

    Is this more worrisome than terrorists? We met the enemy and they is we.

  20. I think a growing part of the GOP would prefer to tax consumption rather than labor or investment directly. While the degree of the effect is debatable, I think its pretty obvious that even if the poor don’t care, that the overall effect will certainly be to encourage more saving at the expense of immediate consumption. I am not sure what constitutes a “significant” change, but I am pretty confident in the principle that if you incease the cost of the good that competes with another good, that you will see a change in some actions.

    Agree that the dollar can’t continue to decline without other nations getting ancy. The question is what can they do? They could increase deficit spending or maybe lower their targeted funds rates, but I don’t view these as realistic. They will likely buy dollars but it is certainly open to discussion how much they would have to buy to stop the slide. Abset a change in our government’s love of deficits and a lack of US savings, a low dollar may be here for quite some time.

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