Fiscal Cliff

Edge

Many are commenting about the problems we will have if Washington politicians don’t fix the increase in taxes and/or spending cuts that are automatically going to occur after December 31st.

Gregory Zuckerman in his Wall Street Journal article “Markets Brace for Washington’s “Fiscal Cliff,” does a good job going through the issues.

The only immediate effects would be from budget cuts and Social Security payroll tax increase. All the others take effect over time during 2013 … time Congress obviously needs to get its act together next year.

Y2K was also in the news in 1999 … that turned out to be mostly more worry than problem (although it is still controversial as to whether preparation avoided the problem or not).

In my humble opinion, keeping taxes low (more money in people’s pockets for them to decide how to spend it) combined with lower government spending (this is how you reduce deficits and debt). In other words, austerity* … I am in the middle of reading the book Endgame. The End of the Debt Supercycle and How it Changes Everything and will have more on this later.

 

*page 154 from Endgame (link in paragraph above … as well as more in my blog posted today about the book): “Thus, the QE [Quantitative Easing] buys the economy some additional growth but only for a limited time. Why limited? The additional leverage leads to economic deterioration and increased systemic risk. Thus, the only fundamental fix for an economy plagued by extreme overindebtedness is time and austerity. There is no lasting monetary policy fix.”
[i.e., austerity requires a Fiscal policy fix]. (Bold and [ ] are my emphasis and additions to complete the thought).

 

We don’t need to over think this. It is simple really. First, governments assume they are different from people in that they assume somebody will always buy their debt. This assumption is proving wrong in Europe. Second, if the problem comes from over spending, then the solution is to cut back spending. Third, over spending means debt has grown – this means cutting spending even further to pay down the debt (in other words, you need to cut spending even more today to repay yesterday’s over spending … and nobody is even close to discussing this point nationally).

Here’s the fear economists and politicians have … if everyone does this (and they are), then the economy slows which means even less money for the government (politicians fear this). It also means recession and possibly deflation (prices fall due to reduced demand); economists fear these. But an over leveraged economy means the growth that politicians and economists are trying to sustain wasn’t real in the first place … it was borrowed growth.

Business as usual got the world into trouble. Business as usual will not get the world out of it. Many countries in Europe are already grappling with Fiscal (budget) issues. We live in interesting times.

 

 

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One Response to Fiscal Cliff

  1. Larry Frank, Sr. August 19, 2012 at 3:21 pm #

    Here is an article that discusses the issues facing cities that spend more than their revenues can support … 42 cities have filed for bankruptcy since 1981, but the pace has picked up with 10 in the last 4 years.

    http://www.advisorone.com/2012/08/14/6-us-cities-on-the-edge-of-a-fiscal-cliff?utm_source=topstories81912&utm_medium=enewsletter&utm_campaign=topstories

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