Why an Adjustable Tax Policy Is Better Than An Adjustable Interest Rate

Currently our means of exchange (money) is based on credit. Ninety-seven percent of our money is created with credit. Credit has been used as a means of exchange, to facilitate the exchanging of goods and services, since before Christ was born.

In our modern economy financial institutions provide, and control the cost of the means of exchange (credit). Our money supply is controlled by a monopoly, the Federal Reserve System.

Our economy is not operating at full potential, because banks are not providing credit (the means of exchange) to Main St. They are lending it primarily to the Federal Government, Wall St firms and big businesses.

During different economic cycles, the banks use different reasons for why they deny or provide Main St. the means of exchange (credit). Some of these reasons are; 1. The collateral price may not be stable enough. 2. You don't have enough equity. 3.Your income isn't stable, or high enough. 4.Your past credit history is not good enough. Of course most of these reasons can be caused by the economic cycles of recession or inflation in our economy, not by the character of the borrower. Many people, during the current Great Recession, are experiencing these problems when they apply for credit at the banks.

The only way the banks will loan money to Main St. is if the Federal Government guarantees that the bank will get it back.

The government deficit spends to replace the demand that is lost when the banks are not lending to Main St. The Federal Government deficit spends to maintain people’s income to maintain jobs and stabilize prices.

Deficit spending is not the best way to maintain aggregate demand, when there aren’t excessive amounts of money in the savings pool.  Inflation is created when there is insufficient money in the saving pool, because new money must be created when the savings pool is empty.  In other words too much money will be created. Very soon in the economic cycle, there will be too much money in the economy, chasing too few products and services. Economic activity does picks up. The economy is coming out of the recession cycle again.

After the recession cycle, when equity prices are increasing, the banks can't loan the money out fast enough. This causes the economy to heat up, and inflation to be created. The banks will then raise the cost of the means of exchange (credit), making it too expensive to use to facilitate the exchanging of goods and services.
Without a reasonable priced means of exchange to facilitate the exchanging of goods and services, the Main St. economy slows down, and a recession is created once again. People lose their jobs, their homes and go bankrupt.

Because of the increase in the rate of interest for money investments (savings and other money (debt) investments, people's concept of its value changes. As the price goes up, it becomes more valuable, until prices in the economy increase (inflation). Then it becomes less valuable, until the price of money (debt money, or the means of exchange) is increased), then it becomes more valuable again.

But the added cost of the means of exchange (credit) causes the cost of production, and consumption to increase, causing prices to rise again. The price structure of the economy has increased across the whole economy. It is very difficult for an economy to lower its price structure, because of all the underlying cost that make up the prices of goods and services.

The economy repeats it's cycles again, and again. Similar to a dog chasing it's tail. The price structure of the economy goes higher and higher. The banks collect more interest and fees based on larger loans and mortgages. The government collects more taxes based on higher wages and prices.

It would be much better for our economy, if we had an automatic adjustable tax policy, than a bank controlled adjustable interest rate to control inflation and inflation psychology. The Zero Inflation Taxation Policy would not raise production and consumption cost. It would stabilize interest rates, and lower the cost of long term credit. It is more important to have stable interest rates than a static tax policy.

Leonard C. Tekaat is a retired economic analyst with over 40 years experience in the financial world. Search www.economysflaw.wordpress.com for more information on the Zero Inflation Taxation Policy.