Federal Reserve and Monetary Policy: Global Inflation Target

Morgan Stanley chief economist Stephen Roach is right in his view that Bernanke is going to have a problem with housing, however, he has missed his own solution. The basic problem with globalism is one of GDP equalization. It has been my opinion that there is a link between the trade deficit on government debt. Part of that link is the lack of income/tax revenue due to exporting raw materials to the US's factory floor in China and the increased in energy usage because India has become the back office for the US (the cost of the income/tax revenue gap is, to the first order, the trade deficit). India is not an economic crises. China is an economic crises.
The problem is Wall Street, which is the source Roach needs to acknowledge. He also has to acknowledge the problem also lies with Washington DC. One must recognize the fact that the US is playing the globalism game one way and other countries are playing the game another. The “Beltway” has to come to grips with the fact that the EU may shatter, Russia will not reduced its oil tax and China is pushing its sphere of influence into the oil rich Middle East (Iran and a sea port in Syria).

Only in America do the oil companies and other natural resource companies, own that resource. Countries like Russia own the oil and the oil company just acts as a “distribution” for that resource. The “Beltway” has to recognize that it is unlikely the “Globalism” will change this. Once the “Beltway” recognizes the nonequivalents of the application of “Globalism” rules then the solution to a housing bubble crises becomes apparent: remove Wall Street from the distribution of US tax dollars. In other words remove the repatriation of over seas profits (GE's TAX bill) and other tax breaks that has the same effect (tax breaks on mortgages interest payed, etc...). Not all tax breaks are equal. Take those taxes and push it into the local economy. Give multi-nations a tax break on overseas profits if and only if they reinvest it into creating US jobs. They do not get these tax breaks if they use it for stock buy backs and dividends. This will have the following effect; the US “Land Bank” retains its value because people can continue to pay their debts if these profits are plowed directly into the local economy of the US. If the multi-nations choose to keep their overseas profits overseas, then there is a probability that it will be invested in some of the cheap labor markets. This in turn will help these developing nations' GDP and hence accelerate the equalization of global GDP. If one looks at Scalar Multiplication of a Convolution in The Intensive Production Function and the Producer's matrix of Transition Probabilities section of my Neoclassical Theory of Production blog then one can gain an understanding how this is possible.

I know there are some who will differer on this, but Wall Street has become part of the global market. It is no longer the “center” of the universe. US multi-nationals created a monster when they decided it was ok to off-shore their back offices and move their manufacturing floor to China. They can no longer control their creation (you know the story of Frankenstein's Monster). Wall Street is in the way of globalization. Companies has merged, taken over, increased dividends and bought back stock, yet the equity market has not gained. This is their child's way of saying that they what their cash hoard to be invested to maintain global economic growth.

The only thing the Federal Reserve has to do is to try to make US interest rates competitive with respect to the rest of the globe. It is unlikely that they can make the flow of investments reverse from China and back into the US. In other words, the dollar will signal a neutral stance and the global financial markets will not place the dollar into crises because of a housing bubble popping. The global market has sent a clear signal due to the information of increased government spending after Katrina. Not all government spending is “evil”.

China is a black hole for investments and it is impossible to change this unless China changes its command economy. I know this and through the process of “greed and fear” the global market will come to the same strategy. If there is a current account deficit melt down it will be due to the current tax policy.

I believe that there is a GDP equalization in progress. It therefore makes Bernanke's theory to have a target for inflation, but this target is for the global markets. (Inflation Target => Increase in Global GDP).