Monetary Policy, Taxation, and International Investment Strategy

By Victor A. Canto; Arthur B. Laffer | Go to book overview

The broader household financial measures, such as the financial assets/ liabilities, net worth, and the stock market appear as clear, useful measures to forecast future consumption spending as well as future GNP. They do not suffer from any feedback effect and the results are consistent for both informativeness tests. In summary, the broader measures of consumer finance appear well suited to forecasting consumption. Both consumer debt measures and the assets/ liabilities and stock market measure appear useful in forecasting future GNP.


SUMMARY

Different views are expressed regarding the relationship of consumer debt to economic activity. Everyone hates their liabilities and loves their assets. Designated as a liability, consumer debt surely is to be hated. Future interest and principal payments detract directly from the debtor's income stream. In the extreme, debt and the payments that debt mandates have the ability to impoverish. But debt also allows individuals and companies to acquire assets they otherwise could not have obtained and to consume outside the constraints of their current income. In order to evaluate debt, we have to know the purpose to which the proceeds were used and the ability of the borrower to service the debt.

The maximum amount of debt that a consumer could incur without going bankrupt is limited by the discounted present value of his future income plus current net worth. Changes in the income path, interest rates, and current asset values will clearly affect the consumer's debt capacity.

A consumer's debt capacity is determined, in part, by market conditions. Lenders, in the presence of adverse changes in interest rates and market expectations about their future income, will alter their lending limits in order to reduce consumer bankruptcy risks. These changes will tend to bring the economy's debt ratio in line with the new market conditions. In principle, the adjustment could lead to a disruption in the financial market that would, in turn, bring about a retrenchment in the economy. This suggests that changes in consumer debt could be used to forecast the future path of the economy.

Increased real wealth reduces the need to save and thereby lowers the household savings rate. This analysis suggests that changes in aggregate asset values in conjunction with the debt to income ratio provide a much clearer picture of the conditions under which a change in debt is a vice or a virtue.


NOTES
1.
Economics of Eisenhower: Symposium Review of Economics and Statistics, vol. 38, November 1956.
2.
Long-run income growth, r, is calculated from:

YFXt = YPXo (l + r)t

-187-

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Monetary Policy, Taxation, and International Investment Strategy
Table of contents

Table of contents

  • Title Page iii
  • Contents v
  • Figures ix
  • Tables xiii
  • Introduction xix
  • Note xlii
  • PART ONE MONETARY POLICY 1
  • 1: Capacity Utilization and Inflation 3
  • 2: World Money and U.S. Inflation 13
  • 3: Alternative Monetary Theories of Inflation 25
  • 5: The Quality of Inflation Indicators 80
  • 6: The Yield Curve 87
  • PART TWO - FISCAL POLICY 93
  • 7 - Bush's Economic Agenda within a Supply-Side Framework 111
  • 8: Tax Amnesty: The Missing Link 113
  • 9: Fifteen Percent is Fine, but Indexing is Divine 123
  • Notes 144
  • 10: Stylized Facts and Fallacies of Capital Gains Tax Rate Reductions and Indexa tion 147
  • 11: Friday the 13th 157
  • 12: Debt and Taxes Are the Only Certainty 165
  • Note 173
  • 13: Borrowed Prosperity 175
  • Notes 187
  • 14: The Savings Monster 189
  • 15: Are We Climbing the Wall of Resistance toward National Health Insurance? 209
  • PART THREE INTERNATIONAL ECONOMIC ISSUES 219
  • 16: Tax Rate Reductions and Foreign Exchange Rates 221
  • Notes 230
  • 17: The Trade Balance 233
  • 18: National Paedomorphosis 241
  • PART FOUR PORTFOLIO STRATEGIES 255
  • 19: Part I: The Legend 257
  • Notes 267
  • 20: Part II 269
  • 21: The Small-Cap and State Competitive Environment 283
  • 22: International Stock Returns and Real Exchange Rates 301
  • Notes 320
  • Index 321
  • About the Contributors 327
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