A Commentary on Current Events
edited: Sunday, January 25, 2004
By Robert M. Liu
Posted: Monday, April 21, 2003
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Originally posted on January 21, 2003, at the Roundtable as a reply to a Lawrance G. Lux message there, this piece reads like a commentary on current events.
A Commentary on Current Affairs
--- Robert M. Liu
(1) Maximilien Robespierre (1758-94):
I see historical parallels between Joseph Stalin and Saddam Hussein, between China's late dictator Mao Zedong and North Korea's current dictator Kim Jong-il. And there seems to be an interval of about 60 years between these tyrants' emergences. I have no scientific explanation of why history repeats itself in this manner, except that more than 2000 years ago, the ancestors of the Chinese observed that certain similar events (like wars and disasters) might recur at 60-year intervals.
However, these tyrants' ambitions and atrocities against humanity do look similar. Saddam Hussein's ruthlessness in crushing opposition was similar to Joseph Stalin's ruthlessness in purging his own party. Kim Jong-il's concentration labor camps are similar to Mao Zedong's concentration labor camps.
I guess most people in the West don't understand why Stalin was Stalin, why Mao was Mao, and why Pol Pot of Cambodia was Pol Pot. They would ask: Why were they so cruel and inhuman? Based on what I learned during my long years in Shanghai, China, I think I know part of the reason.
Charles Dickens' "A Tale of Two Cities" is a great classical novel depicting the causes of the French Revolution and Maximilien Robespierre's Reign of Terror. Robespierre (and his Jacobin followers) regarded Terror as a required expedient for ruling in extraordinary circumstances. The Bolsheviks in Russia, in China, in Cambodia, and perhaps many other radical left-wing groups around the world inspired by Jacobinism saw Robespierre as an icon.
Reign of Terror has long since been a tradition among the world's various left-wing movements. Tyrants like Stalin, Mao, Saddam Hussein and Kim Jong-il must have regarded Reign of Terror as a necessary expedient for ruling in all times. They were or are true believers in Robespierre's Reign of Terror.
What's more, because Robespierre eventually failed and was guillotined, history textbooks printed in the Mao era taught students one more thing: "Robespierre should have been more ruthless in suppressing counter-revolution. He failed because he was not ruthless enough."
Such are the "history lessons" the Bolsheviks were learning. How could Stalin not be Stalin? How could Mao not be Mao? How could Saddam Hussein not be Saddam Hussein since he had imitated Stalin's every method of governance? And how can Kim Jong-il not be Kim Jong-il since he has learned from childhood what it would mean to him if "Revolution" fails?
Are there differences between Joseph Stalin and Saddam Hussein, between Mao Zedong and Kim Jong-il? Yes, but only in scale. Joseph Stalin controlled a large empire, whereas Saddam Hussein controlled a much smaller region. (Sixty years ago) Mao Zedong controlled a large area in North China, whereas Kim Jong-il controls only the northern half of the small Korean Peninsula. So I would call Saddam Hussein "Little Joseph Stalin" and Kim Jong-il "Little Mao Zedong".
But "Little Joseph Stalin" and "Little Mao Zedong" are not any less harmful and less dangerous, because they are as evil as their tyrant predecessors (Stalin and Mao), because if the Free World loses vigilance or becomes complacent, "Little Stalin" and "Little Mao" could expand and grow very big. They are "little" only because they haven't had the opportunities their tyrant predecessors had.
What's worse, it is easier for a tyrant to control a small country than a large country. For example, China is a very large country, and the ruling Chinese Communist Party is a very large political organization with different factions: the leftist faction, the moderate faction, and the liberal faction. In the early 1960s, China's late dictator Mao found it difficult to control the various factions of the party. The moderates and the liberals were critical of Mao's economic policies.
In 1966, Mao launched his infamous "Cultural Revolution" (which lasted ten years from 1966 to 1976) to purge the party. But he ran into strong resistance from the moderates. By the time he died in September of 1976, the moderates were actually in control. Once Mao was dead, the moderates arrested his wife (Jiang Qing) and her leftist radical colleagues, the so-called "Gang of Four".
Soon, Mr. Deng Xiaoping (the leader of the moderates) took over and started his market-oriented economic reforms. Today, China is a different country with quite a bit of economic freedom. I'm not saying China is a great democracy with a great human rights record, but at least, it is run by well-educated politicians -- in line with China's traditional ruling philosophy of Confucian elitism. If we (in the Free World) have luck, we might see "people we can do business with" emerge from among China's leaders.
Unfortunately, I cannot say the same about North Korea, which is such a small country that Kim Jong-il is able to control everything there. We don't even know if there are different factions in the ruling "Workers' Party of Korea". Maybe, there were, but Kim Jong-il and his late father (Kim Il-Sung) have already eliminated all the dissenters. In this sense, "Little Mao Zedong" (Kim Jong- il) is even worse than the authentic Mao Zedong.
(2) North Korea's ambitions:
In 1950, North Korea under Kim Jong-il's late father Kim Il-Sung invaded South Korea, triggering the Korean War, which lasted three years (1950-53). The late Kim Il-Sung's ambition was to annex the South to "reunify the Fatherland". He launched his attack on the South, because he had received Stalin's and Mao's promises of support. Joseph Stalin provided material support, while Mao sent Chinese troops to North Korea to fight U.N. troops.
Kim Il-Sung died in 1994. Heir-apparent Kim Jong-il inherited the dictatorial regime and his father's ambition, that is, to annex the South to "reunify the Fatherland". To the North Korean dictator, the "reunification of the Fatherland" is a "holy cause", so the end justifies the means. What is viewed as a wrong-headed ambition by the Free World is nurtured as a "great ideal" in Kim Jong-il's heart, which he has inherited from his late father. That's where the danger lies.
All left-wing movements in the world have this "great ideal" nonsense in common, which convinces them that the end justifies the means. In order to realize their "great ideal" (whatever nonsense it may be), they are ready to use any of the dirty tricks in their play book.
For instance, in the 1980s, in order to realize its "great ideal", North Korea's intelligence establishment under Kim Jong-il's stewardship sent two secret agents (a man and a woman) to blow up a South Korean civilian airliner in mid air, killing all aboard.
But times have changes. Both Russia and China, today, are unlikely to help North Korea to annex the South. It's not in their interests. This fact gives the United States an advantage. China has already made clear that it wants to see a nuclear-free Korean Peninsula. I believe Chinese leaders are sincere on this issue. They have every reason to feel uncomfortable being surrounded by countries with nuclear weapons: Russia, India, Pakistan, and North Korea.
China itself has a large Muslim population in its northwestern province Xinjiang, where Islamic separatists have become a big headache to the government. According to media reports, some of the Xinjiang Islamic separatists received training in Afghanistan when Osama bin Laden was there.
America took the issue of Iraqi weapons of mass destruction to the U.N. Security Council. There is no reason why the issue of North Korean non-compliance with the nuclear non-proliferation treaty cannot be addressed by the U.N. Security Council. The International Atomic Energy Agency has already warned that if North Korea persists in non-compliance, the IAEA will refer the matter to the U.N.
There is no proof that North Korea will give up its ambitions, though it may retreat a step or two in the face of international pressures. Some experts say Kim Jong-il is concerned about the survival of his regime and could become desperate and dangerous if driven into a corner. In my opinion, because Kim Jong-il is in tight control of the North Korean population, he is not really concerned about his survival. That's the problem.
Only adequate international pressures that would affect his survival can make Kim Jong-il change his behavior. Tyrants are not suicidal. They want to survive, and they are afraid of defeat. During the Cultural Revolution, when China's tyrant Mao Zedong realized he couldn't beat the moderates, he backed off by sacrificing his close ally Marshal Lin Biao in the 1970-71 period, so as to preserve himself.
"Little Mao Zedong" Kim Jong-il should also know when to back off. He looks like a hard nut to crack, but under sufficient pressure, he will crack. Now he is just bluffing. There is only one language that tyrants understand, that is, the language of strength. If America has the cooperation of China and Russia in applying pressures on North Korea, Kim Jong-il will have to retreat for the sake of his own survival.
China is the key to resolving the North Korean nuclear standoff, because Kim Jong-il's survival depends on China. Last year, China voted in favor of the U.S.-sponsored U.N. resolution on Iraqi disarmament. Based on what I saw on TV, Secretary of State Colin Powell and China's former foreign minister Tang Jiaxuan appeared to have a good working relationship at the U.N. Also last year, China's former president (and current Central Military Commission chairman) Jiang Zemin appeared to be enjoying his visit with President Bush.
These signs indicate China may want to cooperate with America on the North Korea issue too. If Chinese leaders promise to help make the Korean Peninsula nuclear-free, they will have to deliver on their promises. Otherwise, they lose face. In China's traditional Confucian culture, well- educated people attach importance to "face". In order not to lose face, they want to maintain their credibility. That means if they promise something, they may try to make it happen, though it takes time.
In addition, China's trade surplus with the U.S. keeps growing. In 2002, its trade surplus with the U.S. exceeded US$100 billion. This is big money. The Chinese leadership certainly knows who its friend is. Who else would spend so much money on Chinese products? Who else would be as generous as America? I guess China's leaders understand: one good turn deserves another.
(3) Ambition and reality:
Reality is against Kim Jong-il's ambition or nonsensical "great ideal". I guess he knows that. He does not invade the South, because he knows he can't win. Both China and Russia wouldn't support him, and the United States is committed to South Korea's security. But if Kim Jong-il has large quantities of nuclear weapons, that would change the geopolitical picture, tilting the military balance far in his favor.
(4) Expenditures and taxes:
When the federal government's revenues are not enough to cover its expenditures, it has three options: (1) try to increase its revenue; (2) cut inefficient federal spending programs; and (3) borrow from the Federal Reserve without ever making repayment, which is actually a move to "print money".
The federal government can also borrow from the public by selling Treasury Securities. This in theory would drive interest rates upward. However, since the Fed can buy back Treasury Securities from the public, injecting money into the economy, interest rates may even fall despite government borrowing. In which case, the Federal Reserve is actually creating high-power money.
In order to have more tax revenues, the federal government has two options: (1) expand its tax revenue base by stimulating economic growth, i.e. by encouraging people to invest more, do more business and create more jobs, so that there will be more wage-earners paying taxes; and (2) raise tax rates, which is sure to increase tax revenues in the short term but will have negative consequences in the long run.
America's political left (and its think tank The Brookings Institution) want the public to believe that higher taxation means higher tax revenue and that tax cuts "are fiscally irresponsible and would only help the rich".
The problem with this argument is that as long as you are human (and not mentally retarded), you are unlikely to invest more, do more business, and create more jobs in the face of irrationally high taxes, which without exception cause the economy and the federal government's tax revenue base to shrink, decreasing rather than increasing tax revenues in the long run. That's a matter of simple deduction.
What is really "fiscally irresponsible" is the irrational tax philosophy of the political left that causes the economy and the tax revenue base to shrink, decreasing tax revenues in the long run -- not the Bush administration's effort to rationalize America's tax code, which will enable the economy and the tax revenue base to expand, thereby increasing tax revenues for the long term. That is what being fiscally responsible is all about!
If left-wing politicians really want to be "fiscally responsible", they should help cut inefficient spending programs and stop stuffing "pork barrels" into spending bills -- as fiscally responsible law-makers should.
Germany provides ample evidence of the negative consequences of excessive taxation and business-unfriendly regulations: large numbers of corporate bankruptcies; 10% unemployment; a meager 0.2% GDP growth rate; a budget deficit accounting for 3.8% of GDP -- above the European Union's deficit ceiling of 3% of GDP.
Another piece of left-wing economic nonsense is its so-called "targeted tax cut" theory, according to which, if you cut taxes for low-income people, you "stimulate economic growth immediately", because low-income people will spend more when they benefit from tax cuts, but if you cut taxes for high-income people, you don't stimulate economic growth at all, because high-income people don't need more money, because they don't spend more when they benefit from tax cuts, because they are all Scrooges who keep extra money under the mattress.
Is that how Mr. Bill Gates of Microsoft (the richest man on Earth) handle his money? Probably not. Most of his wealth is invested in his company which keeps many employees on its payroll and tries to create wealth for investors. If he sells his entire stake in Microsoft and invests the money elsewhere, the stock would fall and other Microsoft shareholders would see their holdings depreciate in value. In addition, much of his money has been donated to a fund which helps medical science research. Money under his mattress? Probably not much.
True, Mr. Bill Gates doesn't need more money for survival purposes, but it is certainly a good thing if he becomes even richer, because he knows how to use his wealth to promote scientific, technological, economic and social advances better than ordinary people. In brief, while rich people don't need more money for survival's sake, they always invest extra money in the economy. It is called capital formation, the very thing that stimulates economic growth and job creation.
Economic growth depends on three factors: (1) capital growth; (2) growth in the labor force; and (3) technological advances to boost productivity, which require costly Research & Development. Out of the above three factors, two [Factor (1) and Factor (3)] require capital formation -- capital to replace or upgrade old equipment and capital for Research & Development. Economic growth requires rich people's investments -- period. If you want to make the rich poorer, fine, but the economy would shrink (if the rich lost capital), leaving the poor (not the rich) to suffer. It's just that simple.
That said, I am not against cutting taxes for low-income people. I am just against irrational tax legislation which creates disincentives for business people and investors. If you operate a shop, you cannot charge your customers exorbitant prices, simply because your poor relatives need your financial assistance. You have a responsibility to cut the coat according to the cloth.
The same principle goes for America's "fiscally responsible law-makers". They too have a responsibility to cut the coat according to the cloth. They should not raise taxes or keep taxes irrationally high, simply because federal expenditures exceed tax revenues. They should rather ask if current tax legislation is rational enough to encourage people to invest more, do more business and create more jobs.
Business people and investors are the government's customers. They will run away, if the government robs them. But the political left wants to confuse the public by replacing economic common sense with left-wing class warfare ideology, trying to fool the public into believing that the best way to "stimulate the economy" is to rob investors!
Besides, it is absolutely untrue that rich people don't spend more when they become richer. They would buy fancy cars, fancy houses, expensive jewelry, expensive clothes etc. They would travel first-class and stay in five-star hotels. They would dine out in expensive restaurants and tip generously. Some rich people have more money than sense. They splash money like water. That's good to the economy and wage-earners. That's how wealth trickle down from the rich to the bottom of the food chain.
(5) Deficits and surpluses:
First, I agree that excessive deficit spending (which leads to excessive increases in the amount of high-power money in circulation) would cause inflation, which we don't have at present -- an indication that fiscal 2002's budget deficit of $159 billion which accounted for only 1.51% of GDP was not excessive at all.
Secondly, if you believe budget deficits could lead to inflation in the long run, then, you must agree that budget surpluses could lead to deflationary and recessionary pressures -- exactly what we are witnessing right now after a few years of budget surpluses.
This shows that although Clinton-era over-taxation helped create short-term budget surpluses, it left serious long-term consequences that the Bush administration now needs to handle, because like a vampire it sucked blood and vitality out of the economy. It should not be difficult to understand why over-taxation (though effective in creating short-term budget surpluses) is undesirable. I'd explain as follows:
If creating budget surpluses is the top priority, then, anybody can achieve this "top priority goal" by raising taxes to 40%, 50%, 60%, 70% or even 90%! I assure you that with such high tax rates, big surpluses would undoubtedly emerge in the short term. But what about the long-term prospects? Again, undoubtedly, such excessive taxation would kill the goose that lays golden eggs in the long run. Would you invest more, do more business, and create more jobs in such a hostile environment if you were an investor?
But America's left-wing politicians don't care. Their job is to fool the public. Instead of educating the public on economic basics, they encourage their supporters to see Big Business as "the enemy". They want to kill the economy and then blame the Bush administration -- a typical left- wing conspiracy designed to prevent George W. Bush from winning his second term in office.
By comparison, the GOP-controlled Congress during the Clinton era was far more rational. It always cooperated with Bill Clinton in ensuring economic growth and a stable stock market, though the Republicans knew a rising Dow would help get Bill Clinton re-elected. At the time, no Republican would say anything to spook the stock market. Thus both sides wanted the economy to perform well. No wonder the Dow kept rising under Clinton.
Now, it's a new ball game. One side (i.e. the GOP) wants the economy to recover quickly. But the other side (i.e. the left wing), despite its self-serving lip service, wants to see the economy and the stock market deteriorate so that it can stop Bush getting re-elected. Wall Street is not dumb. It knows left-wing politicians are sabotaging market psychology through their left-wing class warfare obstructionism.
Democratic politicians should watch "The One-Million Pound Banknote", a classical film featuring Gregory Peck (based on Mark Twain's story of the same title). Many investors are elderly people. They are not really as rich as the left-wing Democrats want the public to believe. Each time I see my neighbor Nina (a typical Grandma investor), she says she's worried about her mutual fund investments -- her life's savings.
Democrats should understand that such Grandma investors now see George W. Bush as "the Texas Ranger" who keeps the bad guys in check and who prevents robbers from robbing senior citizens. What's more, their sons and grandsons are listening and are becoming more and more angry at America's left-wing politicians.
Angry voters turned out in November of 2002 not just because of Rush Limbaugh's radio talk show. Democrats should start soul-searching. Class warfare has hurt too many innocent senior citizens.
(6) Inflation and deflation:
Thirdly, inflation is indeed a form of taxation. I came across a similar statement in one of my economics textbooks. But it is an option (though not a good one) that governments sometimes use to finance its deficits. The process is to create money to finance budget deficits. As increased paper currency flows into circulation, it becomes high-power money that banks use as reserves, upon which they can lend even more money to businesses and individuals.
If the amount of liquidity in circulation increases quickly, prices rise. As the government pays its bills with newly created paper currency, the purchasing power of citizens' savings diminishes. Soon, the currency loses its credibility, and people rush to buy tangible assets such as gold, real estate and stocks to preserve the value of their savings, driving up prices.
In 1934, the price of gold was US$35 per troy ounce. By the 1970s, gold traded above $320 per ounce. Something highly inflationary happened between 1934 and the 1970s. World War II plus two costly regional wars (the Korean War and the Vietnam War) took place between 1934 and the 1970s. Besides, the costly Cold War which started in 1945 continued throughout the 1970s.
I would guess that part of the U.S. federal government's expenditures in those years were paid through inflation. Inflation is not a good thing, but it is an option for the federal government if it becomes necessary. Besides, inflation gives people a reason to either spend or invest. It says, "If you don't spend or invest, you'll see the purchasing power of your savings vaporize."
On the other hand, if there is deflation and prices (including the price of gold) fall, it is a serious problem too. For instance, the price of gold fell below $320 per ounce in 1997. By 2001, gold was trading below $280 per ounce, whereas the cost of producing gold is about $320 per ounce. Gold is a rare metal. You can't find gold just by digging. Prospecting for gold is a costly process.
When gold trades below $320 per ounce, gold mine companies can't make money, so they lay off workers. Such circumstances should justify a reflating of the economy to enable prices to rise and businesses to turn a profit. I think the Fed's tight monetary policy in 1999 and 2000 was inappropriate. America's central bankers were seriously out of touch with reality because they didn't listen to the painful voices of the business community.
Maybe, some of the central bankers think it is not the Federal Reserve's business to smooth out every bump on the road for the economy. But according to "The Federal Reserve System: Purposes and Functions" published by the Federal Reserve Board, the Fed's acknowledged objectives include: "to help counteract inflationary and deflationary movements, and to share in creating conditions favorable to a sustained, high level of employment, a stable dollar, growth of the country, and a rising level of consumption." That sounds like "to smooth out every bump" to me.
Because of high productivity growth, an industrial capacity utilization rate of as low as 74%, and a growing labor force which is not fully employed, the economy's potential to produce goods and services continues to exceed aggregate demand by a big margin. Until this slack is absorbed, the likelihood of inflation re-emerging is close to zero.
If aggregate demand fails to increase quickly and if the industrial capacity utilization rate continues to fluctuate around 74%, deflationary (rather than inflationary) pressures should remain a cause for concern. High productivity growth + High demand growth = High GDP growth (with zero or low inflation). But, High productivity growth + Low or zero demand growth = Sluggish GDP growth (with deflationary pressures). Perhaps, that's what we are facing at present.
(7) The economy:
Based on what I have learned from economic textbooks, recession or economic sluggishness results from two major factors: (1) (according to John M. Keynes) the drying up of investment opportunities and a downward shift in investment demand (e.g. money-making opportunities disappear in a hostile environment of over-taxation, business-unfriendly regulation, geopolitical uncertainty, left-wing class warfare obstructionism, terrorist threats etc.); and (2) (according to Milton Friedman) liquidity shortage (that is to say, money is the most important factor to the economy).
So if the rich can't become richer because of "the drying up of investment opportunities", their "investment demand" will "shift downward" and the economy will plunge into a recession. Besides, if high interest rates lead to high corporate borrowing costs, rich people's "investment demand" will also "shift downward" to trigger a recession. Either way, if you don't allow the rich to become richer, the economy tanks, and the working class (not the rich) suffers the most.
In order to avoid the repetition of past policy mistakes, one of my textbooks gives the following advice: "Taxes should not be raised in the middle of a recession, nor should attempts be made to balance the budget. The central bank should seek actively to keep the money supply from falling."
Why do America's left-wing politicians (i.e. those well-known fiscally irresponsible big spenders) suddenly express their "deep concerns" about "the growing budget deficits"? Not because they really want to be "fiscally responsible", but because they don't want to see economic growth and job creation. Their selfish interests lie in a sluggish economy and a much higher jobless rate to help them seize power.
Only rational tax legislation and low interest rates can help revitalize the economy, because only rational tax legislation and low interest rates can make "investment opportunities and investment demand" re-emerge. This is not the time to make budgetary balance a top priority. Nor is it the time to worry about budget deficits leading to inflation. There is no inflation. Cheap imports from China keep the prices of manufactured goods low.
This doesn't mean budget deficits don't matter. They do if they become excessive. But irrationally high taxes are not going to eliminate budget deficits in the long run. As mentioned above, they can only create short-term revenue gains but have serious long-term consequences.
The right thing to do is to rationalize tax legislation to give corporate America an incentive to invest more, do more business and create more jobs, while reducing inefficient federal spending programs. If budget deficits emerge, borrow directly from the Fed (i.e. create money), which in theory is inflationary. But right now, we face deflationary pressures, not inflationary pressures.
If anything, a certain level of reflation (or even inflation) is exactly what we need in order to stimulate economic growth and job creation. To put it bluntly, a certain level of deficit spending is not only fiscally necessary but economically desirable in a time when America's top priority is not to balance the budget or create surpluses, but to revitalize the economy and win the war on terror.
As to the national debt, in the light of America's GDP of more than $10 trillion, the debt-GDP ratio is low. Besides, much of the national debt is "intra-governmental holdings" in the Federal Reserve's inventory. The federal government need not pay down such "national debt". If it is paid down with surpluses, the price of gold will fall sharply, and the U.S. dollar will surge like crazy, further damaging the export business of the U.S. manufacturing sector, which has already lost millions of jobs to China in recently years.
(8) "Actually not"?
If the double taxation of dividends is "actually not" double taxation, then, black is "actually not" black. Black is actually blue plus brown plus whatever. And what is double taxation? Double taxation is "actually not" double taxation. It is only something that happens when your income is taxed once and then once again by the government.
I agree the double taxation of dividends is "actually not" double taxation. It is ONLY broad daylight robbery in the name of tax legislation created by America's irrational and fiscally irresponsible law-makers. They are not much better than lawless bank robbers. Bank robbers don't rob Grandma investors. America's law-makers do. Thank God, finally, America has elected a president who loathes robbery.
Suppose Grandma owns 1000 shares in a telecom utility company and suppose the Company pays out $1000 so that Grandma can have some income. Let's see how much Grandma receives at the end of the day: $1000 - (1000 x 37% corporate income tax) = $630 - (630 x 30% individual income tax) = $441 (For details of corporate income tax rates, visit the web site of MSN to look up any big company's balance sheet or quarterly earnings reports.)
Please note: Grandma runs a risk by owning the shares of the Company, first because the Company's earnings may fall, triggering cuts in dividends and falls in its share prices, secondly because the Company may go bankrupt, causing Grandma to lose her life's savings. But she receives less than 50% of the money paid out by the Company. Whereas the government receives more than 50% of the money though it runs no risk. It's legalized broad daylight robbery -- period!
As to capital gains tax, it is a totally different thing. Stock prices fluctuate all the time. Suppose a stock opens at $20 per share, rises to $21.50 in mid session, and closes at $20.50. The fundamentals of the stock do not change because of the price fluctuations. Suppose a trader buys the stock at the start of the session for $20 and sells it at $21 before it falls back, thereby locking in a $1 profit. He has to pay a 20% capital gains tax.
It's like gambling in a casino. If he doesn't take profit, he doesn't have to pay the 20% capital gains tax. But that way, he may see his profit disappear by the end of the session. That's what the capital gains tax is all about. It has nothing to do with Grandma's dividend income tax.
(9) The Reagan years:
I hope the great prosperity of the Reagan years will repeat itself during the Bush administration. The U.S. economy experienced a period of stagflation in the 1970s. The Federal Reserve raised the Fed Funds rate to 14% in the early 1980s to fight inflation, and the economy plummeted into a recession with the Dow falling below 800.
But the economy began to recover in 1983, and the Dow kept rising. By summer of 1987, the Dow hit its all-time high of 2722 before it fell sharply in autumn. In 1989, the Dow recovered all its losses.
The early 1980s was a time when the Cold War was still raging. Things began to improve in 1985 when Mikhail Gorbachev became the leader of the Soviet Union and started his glasnost political reforms. Wall Street professionals would tell you the longest bull market in history started in the second half of 1982 and ended in spring of 2000 when the tech bubble burst.
If you believe what happened during the Reagan years will happen again under George W. Bush, I hope from the bottom of my heart that this will come true . Under President Ronald Reagan, the Dow tripled. If the same happens under President George W. Bush, we will see 24000 on the Dow.
Besides, despite the Reagan-era budget deficits, inflation was never a big problem. In the mid and late 1980s, gold basically traded between $350 and $380 per ounce. It is worth noting that in percentage terms, the budget deficits during the Reagan years were much higher than fiscal 2002's budget deficit of $159 billion which accounted for only 1.51% of GDP. In 1983, the federal government's budget deficit accounted for 6% of GDP. Even so, prosperity continued throughout the Reagan years with tax and regulatory rationalization.
January 21, 2003