I may have mentioned this before, but I like to point out that at the very time John F. Kennedy was asking the Congress to cut tax rates in order to expand the economy, his foreign policy team was telling President Diem of South Vietnam that unless he sharply raised taxes, we would withdraw military support. In order to help the rest of the world climb down from the top of the Laffer Curve, it will take something like Kemp winning the presidency in 2000 and making sure his people occupy the key posts where decisions like this are made. In other words, it is nice to think about setting an example, but the forces of darkness are forever at work, trying to obstruct peace and prosperity for all. I was hardly wringing my hands in the first letter, December 4, but the letters did become more sanguine as the weeks rolled by and we could observe the situation being brought under control. Even at the early date, I noted the dollar deflation would have positive effects because of the progressivity of the income-tax.
Inflation causes tax rates to rise automatically.
Deflation causes tax rates to fall automatically. On the minus side, deflation rewards creditors at the expense of debtors, and this is having its effects as predicted. Debtors who rely on commodities as collateral are discovering their nominal wealth is in decline. They have to produce more in order to meet their obligations. We are benefitting from the deflation because more people outside the U.S. use commodities as collateral.