Cut taxes and shrink the size of government, win win.

As we approach the month of May, the month that investors are supposed to sell and go away, to paraphrase the old market adage. The rally that started in the month of February appears to be pausing for breath. The S&P 500 has risen almost 300 points or close to 15%, the FTSE 100 close to 900 points, likewise about 15% from the lows of mid February. A further 5% and we will be back in what is defined as a bull market. The IMF, possibly unknowingly seemed to spur on the latest leg of this rally post their calls for governments to add to the efforts of central banks to stimulate growth. Central banks have made 629 global rate cuts, purchased of $11 trillion of financial assets, and $9 trillion of global government bond currently yield less than 0%.

The FTSE 100 is now up circa 2% in absolute terms year to date, the next layer of companies down the FTSE 250, has yet to make back its opening level from the start of the year. If the S&P 500 closes above 2135, according to the Bank of America, it would mean new highs that extend the cyclical bull market from 2009, which could become the second longest cyclical bull  run since the December 1987 to March 2000.

The monthly ECB rate decision and following press conference allowed Mario Draghi to reinforce the IMF’s comments last week. In defending the use of zero interest rates policy, Mr. Draghi believes that “ with rare exceptions, monetary policy has been the only policy in the past four years to support growth”. It is hard to argue against this point. It may be worth also pointing out that tighter fiscal policy and loser monetary policies have rewarded the profligate, of a few years back, and penalized the prudent.

In an article in Forbes written last year by John Tanny, he quoted the works of Jude Wanniski. Mr Wanniski was an American political economist who believed that politicians should focus on tax reduction. Taxes, Mr. Wanniski reflected, were a penalty placed on work with an eye toward stimulating more of it. Taxes are therefore a work deterrent and Wanniski felt that the prosperity wrought by tax cuts would reduce the reliance on government, and for that reason shrink the size of government.

Economies grow by incentivising the private sector; this can be partly done by lowering the cost of capital, but also by lowering the tax burden. It is a fact that governments often see a pick up in tax revenue after cutting tax rates. Government is about balancing monetary policy and fiscal policy, it would appear that we have gone too far the wrong way, maybe this balance needs to be redressed, to the IMF’s and ECB’s point. 

Posted on April 21, 2016 .