There are a number of limitations on the deductions that may be claimed on investment-interest expenditures. The deduction might not be stated if the proceeds from the loan went towards a property that creates nontaxable income, such as tax-exempt bonds. The deduction on investment interest also cannot be larger than the investment income that was gained that year. It is possible for such surplus to be carried forward into the next calendar year’s tax processing.
The hard money advocates warned that this bailout of the banking system would make so much money designed for loans that the world would experience a bout of high inflation if not hyperinflation. Credit would once again flow so openly that money would overflow the economy without a corresponding upsurge in goods and service.
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But it has not happened. Instead, the banks, at least in the United States, have chosen to park their substantial liquidity shots at the Federal Reserve or in government bonds where they earn essentially risk-free earnings. This has turned out to be a backdoor way for transferring public funds to ailing banks through government expenses on relationship interest. Therefore, by any sensible measure, private credit is constantly on the reduce worldwide as public credit (i.e. Federal government borrowing) expands. So far this has allowed a more orderly deleveraging on the part of companies and households than would otherwise have been the situation.
This is basically because you can deleverage in two ways; either you pays your loans or you can merely default on them back again. So far defaults have been kept in balance. But government support of the economy has led to neither a considerable financial recovery nor an inflationary spiral. By “public” we can believe that the commentator cited above is discussing people who make significantly less money than he does. Yet, we already know that more than 80 percent of most equities in America are possessed by people in the very best 10 percent measured by possessions.
These people are unlikely to spend on consumer goods a considerable part of the proceeds from any stock sale since their basic needs have been completely met. They are more likely to reinvest the money they get in something else. As for the other 20 percent of equities, which are kept by “the public,” many of those are held in pension money, 401K programs, and IRAs, hardly sources of ready-spending money. There’s very little fodder for an unstoppable inflationary spiral here.
But think about direct, real property investments? Here the Federal Reserve would have to distinguish between rich homeowners seeking to dump mansions or second homes and middle or working class homeowners who might spend more freely the money that they’d obtained from any sales of their homes. But typically folks of average means who must sell their homes are selling them because they can’t pay the home loan.
So, even in the very improbable circumstance that the Government Reserve embarks on such a scheduled program, I am doubtful it could do much good. Instead, I consider the most likely course for the world overall economy as continuing deleveraging by businesses and households for quite a while. And, I expect government authorities and central banks to continue to attempt to stimulate the overall economy. Where will this leave us? While central banking institutions seem not capable of preserving the absolute prosperity of the wealthy, they are supremely accomplished at employed in concert with central government authorities to protect and even improve the relative position of the rich.
That is, wealth is now even more concentrated in fewer hands than it was prior to the 2008 crash despite the large percentage loss that the rich experienced along with everyone else. This is, of course, the consequence of failures of banking institutions and other businesses beyond your world’s main financial centers, failures which have reduced competition for the businesses and banks controlled by the superwealthy. These people might not be quite as wealthy as they were before the crash. But relatively speaking they have gained against the rest of the population in their wealth and power. However, the wealth of the rich depends upon other people, middle-income people, and the governments they usually fund, paying back their loans.
Much of the Federal government bailout effort has been centered on shoring up the value of the bonds of authorities and government-sponsored entities such as Fannie Mae and Freddie Mac, the home mortgage giants. Of course, central bankers are right to worry about systemic financial collapse. However, they always seem to believe that the response to such a risk should be to guarantee the investments of the rich using the public’s money. The risk of inflation then comes not from any mindful policy on the part of central bankers or even most central government authorities who have already made their iron-clad allegiance to the rich classes abundantly clear.
Rather the risk of inflation originates from the eventual exhaustion of government credit when confronted with an intractable and unstoppable deflation brought on by constant deleveraging of companies and households. When the governments of the world can longer entice lenders to give them money no, they will be pressured to print their own. At that time the inflation worriers risk turning out to be right, in spades.