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Sunday, August 21, 2011

Drifting away from the Reaganomics

Reaganomics refers to the economic policies advocated and promoted by then US President Ronald Reagan (1981-1989)  in early eighties.
The main 4 tenets of Reaganomics were-
1.       Reduction of government spending
2.       Reduction in Income tax & capital gain tax. (Lesser taxes on the income generated from labor and capital)
3.       Lesser government’s regulation on overall market
4.       Implementing the control over the money supply to reduce the inflation
Tax cuts imposed under Reaganomics initially resulted in increased fiscal deficit but ultimately led to surplus budget accompanied by a dramatic fall in the interest rates.
The only reason for discussing this old topic is to compare this theme with the current one, Reaganomics emphasized on reducing money supply in the economy while present US government is boosting the money supply by implementing bouts of quantitative easing programs; this is not only raising inflation in US but all over the world.
Credit rating downgrade was the right step taken by the S&P, to make US realize that it can’t print money incessantly. Though Fitch and Moody’s have not downgraded US credit rating and most of the financial institutions only considers the average rating which is still AAA for the USA.
US government should learn by the example of the Zimbabwe, where local currency is depreciated to such an extent that it is nearly impossible to calculate.

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