Cut Taxes

Stock markets around the world have risen a good 5% in the last three days. Is this the end of the recession? Not according to reports of record sums using the rally to sell off, and raise cash. The rise is mostly caused by people who have shorted the markets having to cover their positions, take profits and avoid short term losses.

Funds selling shares are already into cash in a big way with 40% now the typical figure. Governments have an embarrassment of riches, as this money is tending to find its way into government bonds. As inflation falls, and costs tumble, money is pouring into Gilts, Treasuries and other advanced country Government Bonds, and overall rates needed to be paid by governments are falling too (although not this week when they rose slightly in the US as the market rallied).

With a few more months of this, bonds will be higher in value and long-term interest rates will be at record lows. There is no need to raise taxes. There will be plenty of liquidity available to governments to borrow if their spending is under control.

Their problem will be slow growth in the economies. Cutting taxes is the only cure, raising incentives to invest and to spend money. That is what governments should be doing, not raising taxes as in Britain. 10 Year Bonds in Britain are 3.3% and falling, only .3% higher than the USA. This will both be under 2% within six months, as billions cascade into government coffers to feel safe from the coming storm.

FT today –

Investors have poured tens of billions of dollars this week into money market funds – considered to be among the safest assets – amid fears that a double-dip recession in the developed world could send financial markets tumbling.

The global funds, which are seen as a proxy for cash, enjoyed their biggest weekly inflows in 18 months, absorbing $33.5bn, research group EPFR Global said on Friday.

Some of the world’s biggest fund managers are now holding up to 40 per cent of cash in their portfolios. Before the financial crisis, they held as little as 5 per cent.

In spite of this week’s powerful rally in equities, driven by hopes the eurozone debt crisis may be past its worst, the large volumes heading into money market funds suggest investors are worried about the risk of another slide in share prices.

The message is that within months, government should be cutting taxes, and trying to bring markets back to life. Cutting spending is deflationary but necessary. Cutting taxes is what must be done to keep growth alive. And launching large infrastructure projects will be necessary too.

The Tap Blog is a collective of like-minded researchers and writers who’ve joined forces to distribute information and voice opinions avoided by the world’s media.

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