Not a good time to raise taxes

Posted by: Paul Donovan

03 Mar 2020
  • The recent extreme nature of market moves may raise questions about the rational market hypothesis. Investors yesterday cheered the idea of a G7 finance minister and central bank conference call on the coronavirus. Australia and Malaysia both cut interest rates overnight. Policy support is a good idea. Taking rates more negative (i.e. raising taxes on banks and savers) may not be.
  • Fear is the economic problem. (Twitter is a super-spreader). We know central banks cannot directly reverse fear. Fear of US President Trump's trade taxes led to a collapse in investment growth in 2019. Central banks could not stop that. Central banks cannot force people into shopping malls or onto planes.
  • Central banks can limit the damage from reduced demand and help with corporate cash-flow. Companies that have a good business model should not fail because of a temporary external shock. More negative rates (taxing banks and savers) are unlikely to help. Targeted measures aimed at small businesses should help.
  • The Eurozone offers inflation data in the form of consumer and producer prices. The effect of the coronavirus is probably mildly deflationary (travel and commodity prices weakening, but companies not likely to pass on the effects of supply chain disruption).

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