E!! The True Conservative Story™

Jim Manzi @ The Corner tells us what we all should have been talking about yesterday:

Konichiwa!   [Jim Manzi]

Yesterday, while Congress and the media were obsessed with the $165 million AIG bonus outrage, the Fed decided to create another $1.2 trillion of U.S. currency. Numbers like this can seem absurd. How much bigger is $1.2 trillion than $165 million? Think about what gaining or losing $1,000 would mean to you. $1.2 trillion is to $165 million as $7 million is to $1,000. That’s how much more important the Fed’s action was.

Financiers have a fancy name for what the Fed did — “quantitative easing”. When you hear some kind of gee-whiz phrase in the finance industry that sounds kind of like something you understand, but somehow isn’t really clear, then it’s a lead pipe cinch that that you’re being had. Quantitative easing means that the Fed creates new currency out of thin air, and then uses it to buy assets. The moment after this happens nothing has changed about the real economy except that there is more currency. What do you think happens then? More dollars + the same assets = more dollars per asset = inflation.

If you’re in a deflationary period, the idea is that this is good because you head off some of the deflation. The hope is that this makes banks more likely to lend, “gets the economy moving again”, etc. Does this sound at all familiar to you?

Welcome to Japan.

03/19 04:26 PMShare

The following letter was sent yesterday to Treasury Secretary Henry Paulson:

September 24, 2008

The Honorable Henry Paulson
Department of the Treasury
1500 Pennsylvania Ave., NW
Washington, DC 20220

Dear Secretary Paulson:

As you continue to craft a financial stabilization plan with Congressional policymakers, I wanted to once again urge you to consider a move that could be executed unilaterally by the Treasury Department: indexing the basis of capital assets to inflation for purposes of calculating gain or loss.

There is a body of legal opinion which holds that the Treasury Department has the power to define “cost basis” when taxpayers calculate capital gain or loss. To date, Treasury secretaries of both parties have chosen to define “cost” as nominal purchase price.

This creates a situation whereby an asset held for many years and later sold may generate a capital gains tax liability when much or all of that gain is purely from inflation. For example, a stock purchased in 1990 for $1000 and sold today for $1676 would face a capital gains tax liability on the $676 “profit.” But in reality, 100% of that “gain” is attributable to inflation.

If the Treasury Department were to re-define “basis” to discount the effects of inflation, it would have a timely and pertinent effect on the current financial challenges. Households and businesses would be able to sell assets, unlock liquidity, and pay a much lower level of taxes. This liquidity is badly needed by capital markets. Best of all, this can be done by you unilaterally, substituting Congressional permission in favor of mere consultation.

Sincerely,
Grover Norquist

– E!! says:  This is better than nothing, but I’d like it much more if we eliminated the capital gains tax altogether.  (Yes, I realize that is probably a pipe dream.  That being the case, Grover’s suggestion is excellent.)