(Extra) March Rate Cut

March has been troublesome month in an unstable time. Several negative economic indicators, the fall of Bear Stern, and 74% American believe the nation is now in recession. Many have expected at least a 75 basis points cut from the Federal Reserve to boost the economy. Nonetheless, the previous Uncle Sam $200billion package only stimulates the market for a day. So what can 75 basis points really do?

The internal dispute news from the Fed leads me to guess the possibility of the two contrary options in today’s meetings: 1) catching the knife with their bare hands, 2) letting go of the falling knife. For option one a huge rate cut is a must, but for option two the Fed may only cut 50 basis points or less. It will be interesting if the Fed take a bolder move and increase rate. Of course the former option is much more possible than the latter. Either way the Fed is trying to catch falling knives. However, a huge rate cut leaves less wiggle room for the Fed and creates more inflation which might lead US towards the same track of Japan in the early 90s.

Inflation and tax

On the other day, I was having one of those small talk moments with my landlord. He complained that he should have a tax break because he has no kids. It should not be his responsibility to fund the local school system through his tax dollars. And somehow, his extra dollars saved in tax can help lower the inflation.

As interesting as his claims sound, nothing will change in the big picture. Giving tax breaks to taxpayers with no child is as same as taking $5 from your left pocket (government spending) and putting it in your right one (consumption and investment). Overall nothing did change in GDP.
GDP = Consumption + Investment + Government Spending + (Exports – Imports), or
GDP = C + I + G + (X-M)

If you assume the government spending remains the same then my landlord is also wrong. There's an increase in GDP, hence inflation and increase in money supply.
velocity * money supply=real GDP * GDP deflator
velocity: stays stable in the long run

However, his tax dollars did not went to waste up to some extend. Better funded schools tend to be better schools, therefore increases the housing prices in that district.

ps. I will leave the US school system for a further discussion.