Why do you think they prompted their friends at the Washington Post to write a major story in praise of a VAT?

The thing is, if they need to generate an additional $2 trillion, they will have to raise taxes by a significantly higher amount than $2 trillion in order to make up for the negative impact that the tax hike will have on growth, and thereby, tax revenues.

There is a real probability that it will be impossible to raise an additional $10 trillion in tax revenues over the short run, no matter what rates are increased to. And over the next ten years, that is the expected shortfall, not $2 trillion. The whole “recovery” plan is being implemented precisely backwards.

Knowledge of the planned permanent increase in long-term government spending immediately hurt the economy. Expectations of major changes in the rate of either deflation or inflation create self-fulfilling increases in either/both. Whether we are still in deflation or not, it’s very reasonable to expect that a major round of inflation will be the result of massive government spending and borrowing. The government will attempt to reduce the deficit by increasing tax rates, which will in turn depress the economy even more. Stagflation is a reasonable expectation. And tax revenues, which are what pay the government’s bills (not tax rates), will go down, not up.

Had the process started with a significant, permanent tax rate cut, bringing them all, including business taxes, down to a uniform tax rate (around 15% let’s say), and had there been no massive spending program set in motion, the effect would have been immediate and positive. Americans would have known that the government would be starting a program of fiscal responsibility. There would be no particular need for people to cut back their spending out of fear of the future. There would not be pressure towards a recessionary environment.

Not only that, but the fact of reduced taxes for most or all taxpayers would mean more economic activity, more profits, more employment, more investment, and more savings. We wouldn’t be talking about deficits for as far as the eye can see, nor about mortgaging our children’s futures to pay for new programs we can live without. And we wouldn’t be losing jobs at a modern record pace.

Since the goverment has no way to generate wealth, it can only pay its bills by taking wealth from others (taxes), or by printing money (inflation). The government will choose to do both. Because the debt service will be larger than anything we’ve experienced before, the government will also become a worse and worse credit risk. If tax rates go too high, economic activity will be pushed down to depression levels. The alternative is to print the money as needed, which will result in higher interest rates, adding even more to the national debt as old Treasuries are payed off by issuing new ones at higher rates.

I won’t be surprised to see interest rates skyrocket at some point in time; maybe not next year, but eventually. That will drive down the value of existing bonds, while the stock market is likely stagnating, and the value of the dollar goes into the tank.

The shame is, it can all be avoided by just reducing both tax rates and government spending. Instead, we’re gong in the opposite direction.

The Fed is walking on a knife edge with regard to inflation. You don’t see the effects in consumer prices yet (except in a few areas), because final demand is way down in the US. As I always say, inflation isn’t too many dollars, it’s too many dollars chasing too few goods. If demand is impaired, there’s no price pressure.

The reality in the private-sector economy still is deflation. But it’s really wacked-out for the Fed to be printing trillions of dollars to fight it. At some point, those extra dollars will have to get sterilized, or else we really will see some inflation that you won’t have any trouble recognizing.

The trigger for that could be a real private-sector recovery that increases the demand for credit and pushes up interest rates. Or it could come from investors deciding that Obama really doesn’t deserve his AAA credit rating. Or it could be both.

The Fed is taking all of this very seriously indeed. They have tools at the ready for sterilizing inflation should it appear. What we don’t yet know is: A) will they work? and B) will they kill the economy even if they do work?

I just read a report which analyzed bond yields (both IG and HY, iirc) of corporations and industries that are heavily unionized. Apparently these companies are paying nearly a 1000 basis-point premium for debt, compared to companies that are relatively union-free.

I see it killing unions.

If lenders won’t give money to unionized companies, then only non-union companies will get money. If only non-union companies get money, then union companies will die. And the unions won’t be allowed into the other companies.

Short term, it would be painful. Long term… Well, bye-bye SEIU and UAW…