The additional money left in the private economy by the new tax bill will equal to the penny any additional deficit. That's estimated to be around 100 billion a year. This will appear as private hoards, "savings", which will make its appearance in cash, equities and bonds and be transformed as it circulates in the economy into investment, goods and services that will reappear as cash equities and bonds etc. as the additional fiat money circulates. If this money were to appear on the demand side I would expect some substantial inflation, and soon. But being distributed mostly to the supply side, as it seems it is going to be, I don't think this will be particularly inflationary in the CPI, at least not initially. But of course it will be inflationary within the equities and bond markets. Equities and bonds will continue to rise at rates above their built in 2%. Ultimately, however, almost all of this additional money should make its appearance as inflation.
There are two problems I see. One is we don't know how long "ultimately" is, and the other is the distribution of the new fiat money. I think it's distribution will accelerate wealth inequality rather than going the other direction, which is really what we need now. Extreme wealth inequality is socially destabilizing and comes with a host of practical problems. We are going to be making matters worse for ourselves on that front. I see the overall impact of the tax Bill, despite some very sensible features, as a negative.
The new tax Bill may assist the Fed in its balance sheet normalization as they sell bonds to hit their Reserve Accounts target. That part of the Tarp money will come back out of the private economy and back into Fed hands. Too bad very little of it will wend its way back to whence it came, the ether. It will be needed by the Treasury to fund the additional deficit and balance the liability of all those bonds the Fed will be selling. Money once it is in the private economy tends to stay there. There is not enough lost in the washing machine to make a dent. The only way to get it back out is to run surpluses, i.e., raise taxes/cut spending, and surpluses repeated are deflationary, and we don't want that. We walk a tight rope between too much and too little. The Fed is amazingly good at it most of the time now, but why do I get the impression Congress hasn't a clue?
There are two problems I see. One is we don't know how long "ultimately" is, and the other is the distribution of the new fiat money. I think it's distribution will accelerate wealth inequality rather than going the other direction, which is really what we need now. Extreme wealth inequality is socially destabilizing and comes with a host of practical problems. We are going to be making matters worse for ourselves on that front. I see the overall impact of the tax Bill, despite some very sensible features, as a negative.
The new tax Bill may assist the Fed in its balance sheet normalization as they sell bonds to hit their Reserve Accounts target. That part of the Tarp money will come back out of the private economy and back into Fed hands. Too bad very little of it will wend its way back to whence it came, the ether. It will be needed by the Treasury to fund the additional deficit and balance the liability of all those bonds the Fed will be selling. Money once it is in the private economy tends to stay there. There is not enough lost in the washing machine to make a dent. The only way to get it back out is to run surpluses, i.e., raise taxes/cut spending, and surpluses repeated are deflationary, and we don't want that. We walk a tight rope between too much and too little. The Fed is amazingly good at it most of the time now, but why do I get the impression Congress hasn't a clue?
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