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One of the really bad
things about a period of crisis, especially when there is a vacuum in terms
of real convictions, is that the void tends to be filled with anything and everything.
I’m going to devote this week to some of the more absurd comments and
theories that have emerged as they pertain to the whole idea of a fiscal
cliff, and yet another debt ceiling battle in Washington. However, before we
cover the absurdities and get to the ‘fun’ stuff, we need
properly arrange the facts.
Background and
Preamble
As of yesterday afternoon, the precise debt of ‘We the People’ is roughly $30.821
Trillion. You’ll notice that this number is considerably higher than
the $16.306+ Trillion reported yesterday by the Treasury. This number
represents the debt that your government has committed you to, plus
outstanding consumer debt, plus outstanding mortgage debt, plus outstanding
student loan debt. Some of these numbers are a month or two old because of
reporting timeframes, so the actual number is a tad higher.
Since the government has no money, it is only
logical that it can pay its bills exclusively by further extractions from the
USTaxpayer – a creature who ought to be on
the endangered species list because there are so few of us it would seem.
The number above represents what we actually owe
today. Now, there are several much larger numbers that float around and
basically they represent what we’ll owe over the next two generations
should we not alter our course and continue to kick the can down the road.
Many folks have poked fun at the idea of ‘unfunded liabilities’;
however, it is the unfunded part that should be emphasized. These huge
numbers are, for lack of a better description, bills that will come due based
on our current policy, for which we have no matching revenues to pay.
Let’s turn this around to help everyone get a
better grasp. If, for example, we had $211 Trillion in liabilities over the
next two generations based on current policy, but had $250 Trillion in
expected revenues, there would be no problem. If it all played out as
forecast (a rather weighty assumption), we’d actually end up with a
surplus. So it is not the scope of the numbers that should scare readers, it
is the fact there is, as of right now, no way to pay any of these bills. That
is the essence of the problem. The same is the case with the current debt.
Since our leaders insist on spending more than the government takes in, the
debt only gets bigger.
Secondly, and perhaps most importantly, there is
absolutely no political will to change any of this. This is evidenced by the
fact that during the ‘crisis’ in late July and early August of
2011, our leaders chose to adopt a totally ridiculous solution that would
kick the can down the road just far enough to get them past the recent
elections. What a pity if they’d actually have to suspend campaigning
and fundraising to tend to the work of the people.
Columbus Was
Crazy!
Which brings us to the discussion
of the vacuum. Since we have no real leadership on either side of
the aisle or elsewhere, this lends itself to give audience to the sort of
people who, economically speaking, think the world is flat. Our first exhibit
is NYU adjunct professor Daniel Altman.
"Wealth inequality is making the pie smaller
for all of us," Altman tells The Daily Ticker. It limits opportunities,
which reduces productivity, and ultimately lowers "living standards for
all of us in the long term."
On the surface this sounds pretty good, and there is
actually a good deal of truth to it. There has been a massive shift in wealth
going on here in the US and it’s been going on for quite a long time
now, over a century at a minimum. The Great Depression, and the ongoing
period of malaise have caused massive consolidations in wealth, which is one
of the reason so many of us have tried to inject the likelihood that these
events were manmade into the mainstream discussion. Any time there is that
much money involved, it breeds corruption. This is not a conspiracy theory,
but rather simply a by-product of man’s fallen nature.
Getting back to Altman, he continues…
He proposes to replace income, capital gains, estate
and gift taxes with a progressive wealth tax that "would do much more to
reduce [wealth inequality] than any other tax plan being considered in
Washington."
So basically, he’s proposing the government
act as Robin Hood, stealing from the rich and giving to the poor. In concept
this sounds like a pretty good idea, especially considering the fact that
this is basically what is going on now. The only real difference is that
Altman is claiming to exclude more people from paying taxes than exists under
the current structure of our tax code. He and many others are totally
disregarding Jefferson’s warning regarding the populace and its ability
to vote itself disbursements from the public Treasury. Instead of finding
ways to make more people stakeholders in the future of this country by having
them get some skin in the game, Altman et al are trying to create an even
bigger dependent class.
The real danger here is not limited to the idea of
wealth redistribution, socialism, or even the ridiculous assumption that the
government is an efficient economic agent. Talk about thinking the world is
flat! No, the real danger in this type of proposal is that it completely
fails to recognize how that would further engender class warfare. We already
have the diet version of class warfare going on now as the ‘gimme gang’ as they’ve been so eloquently
named is getting bigger and bigger and their demands are
growing comparably. They want. Someone has to pay to give it to them. Altman,
and unfortunately, the overwhelming majority of Congress feel it is their
duty to give it to them.
What’s
Behind Door #2, Johnny?
For the second example of ‘flat world’
thinking, we need to go all the way back to 2011 and look at the last attempt
to ‘solve’ the fiscal/debt crisis. The first atrocity was the
idea of a ‘super-CONgress’ and giving
them a few months to agree on a series of budget cuts. Did anyone actually
believe they’d be able to agree on anything? I hope not. Because they
didn’t and now we get the ‘mandatory’ cuts or what is
basically the equivalent of an economic kill switch to an economy hooked on
debt and deficit spending.
But is it really that simple? Not quite. A closer
look into the automatic deficit reduction plan as it currently exists shows
that nearly all of the ‘cuts’ come from tax increases: roughly 85%
or so, depending on which numbers you want to use. Approximately $100 Billion
comes from ‘cuts’ in spending. But they’re not even actual cuts, they are just cuts in the levels of increases in
spending. Say program Y was supposed to get a 10% increase in its budget.
This plan cuts that increase to 5% and claims the budget is being cut. Talk
about a sleight of hand. What a two-bit, three-card Monte being played out on
the American people. To sum this ‘plan’ up, spending will stay
pretty much the same, but the deficit will be lower because nearly a half
trillion dollars will be taxed away from Americans. Money that would have
otherwise been available to be deployed in the economy, invested, or even
spent. Now it will be in the hands of government, which is the LEAST efficient of all economic
agents possible. Sounds like a winner huh?
If this plan goes through unaltered, what is more
likely to happen is that the taxes will be taken
from workers and investors and we’ll still end up with a deficit that
is similarly sized anyway because our government, and unfortunately most of
the country, are spending addicts. Instead of being treated as a down payment
on the future and as evidence of a commitment to reducing government in size
and back to its proper role, the half trillion will be treated as a windfall
and the drunken sailors in Washington will go shopping.
It’ll be the biggest Powerball jackpot in
history, and we know what happens to most of those big lottery winners. They
end up broke. No, the world isn’t flat. Columbus wasn’t crazy,
and you don’t spend your way to prosperity. Nor do you beg, borrow, or
steal your way there either.
The Moral
Dilemma
Altman and others fail to recognize the moral decay
in America that has given rise to this type of thinking. Think about the
moral bankruptcy that would lead someone to believe that they’re
entitled to reap the benefits of someone else’s work or gain their
daily bread from the sweat of another’s brow.
This, along with the idea that the government should
be the ultimate master of everyone’s fortunes, economic and otherwise,
is also the kind of thinking that develops when there is a failure of
leadership. When our leaders are on late night two-bit, cheap funny shows
trying to one-up each other and using press conferences as a license to
launch personal attacks on each other rather than discuss the important
business of the country, you have a vacuum of leadership.
This is indeed a very dangerous period in American
history and it has almost nothing to do with dollars and cents, but rather a
lack of morals, leadership, and common sense.
Andrew W.
Sutton, MBA
Chief Market
Strategist
Sutton &
Associates, LLC
http://www.sutton-associates.net
andy@suttonfinance.net
Sutton &
Associates, LLC is a Registered Investment Adviser in the Commonwealth of
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