Reply #8: Economic indicators do not point to a market drop this year

[54anickel]

Interesting take on the tax-cuts and loose money policies.

http://www.gold-eagle.com/editorials_04/jackson032304.html

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The rise in commodity prices strongly suggests to me that the Fed’s ‘cheap money’ policy is igniting another boom. The Fed has pushed short-term interest rates down to a 45-year low, leaving the federal funds rate at 1 per cent. This has lowered the commercial banks’ prime rate for many short-term consumer and business loans to 4 percent, the lowest rate since the early sixties.

Therefore I would have expected these low rates to encourage mines to increase their output and factory production to expand. Last Monday’s Fed report seems to indicate that this is happening.

The Bush tax cuts complemented the effects of the Fed’s monetary policy. Cutting the tax rate on dividends to 15 per cent boosted investors’ savings. Now these cuts provided a clear demonstration that changes in taxes change behaviour; businesses that hoarded cash are now paying it out to their shareholders, some of them for the first time.

High corporate tax rates combined with the destructive effects of the double taxation of dividends distorted investment decisions by encouraging firms to hold on to their returns. Freeing up this cash will provide additional saving for new ventures and so add to the economy’s flexibility.

Current stock yields are a conundrum for some commentators. Although yields are particularly low historically, analysts emphasise that the rise in share prices during the boom the artificially lowered the yield. This is true, as far as it goes. However, though overall yields are pretty low Dow stock yields appear comparatively high.

Business Week recently observed that "earnings from continuing operations at S&P 500 companies . . . leaped 28 percent, compared with the year-earlier period." That firms are paying out dividends indicates that they are increasingly confident that profits will continue to rise.

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What this comes down to is that share prices could continue to rise right into 2005 as excess capacity falls, investment rises and output and productivity continue to increase. Barring unforeseen events, such as a savage increase in energy prices, I think current indicators suggest that a severe drop in share prices later this year is highly unlikely.

The downside is that loose monetary policies eventually result in a bust. One only has to think of the consequences of the Johnson administration’s monetary policy to get a good idea of where the US economy is heading.

On a final note: some supply-siders argue that even though cutting taxes stimulates economic growth the economy still needs an accommodative money supply to create enough liquidity to fund new projects and generate investment incentives.

This is dangerous economic nonsense: the same nonsense that brought on the Great Depression and gave us the Clinton boom and bust. This fallacy that the classical economists disposed off so long ago is now paving the way for another recession.