The label "the fiscal cliff" evoked the fear that something
terrible was about to happen if the previously legislated spending cuts and
tax increases came into effect. From my point of view, our nation's deficits
and debt are growing at an alarming rate and need to be cut back. The reason
these laws were enacted was to offer markets some hope that we would
eventually work toward eliminating our serious deficits. But the prevailing
opinion that such drastic decreases in our deficit would slow our economy and
bring recession created the impression that this "cliff" must be
avoided.
The chart below indicates the size of our federal government's budget
deficit. The blue bars reflect what would have happened if there were no
legislative changes, and the harsh measures of tax increases and spending
cuts occurred. The red bars reflects potential tax increases, the green
spending cuts, and the purple is additional interest paid on the expanded
debt as a result of bigger deficits. The cliff is seen in the rapid drop of
the deficit in the first few years of the blue bars.
The result so far is that tax cuts have been extended for families
making less than $450,000 per year (for individuals, it's $400,000). Spending
cuts have been delayed for two months, and the debt ceiling will have to be
raised at that time. Compared
to last year's structure, the main result is a relatively modest increase of
$650 billion in taxes on the rich. Spreading this over 10 years means that
the budget is roughly $65 billion less per year because of the higher taxes.
In essence, after all the political discussion and finger-pointing, the
politicians did what I expected: they kicked the can down the road and made
very little change compared to last year.
The next chart shows the same
baseline blue bars with the rather large extension of Bush-era tax cuts to
the lower-income households, plus some small additional spending items. Since
the blue baseline includes the expectation of sequestering of spending, it is
my expectation that the actual deficits could be higher when no cuts are made
with some future exercise of government can-kicking. While this chart appears
to have lower deficits than shown in the previous range of possible outcomes,
the more accurate conclusion is that we are still facing huge deficits, and
the politicians really achieved very little in managing our long-term deficit
problem. When they get back to meddling, the final deficits could be a lot worse
than this analysis.
After the markets closed on
Friday, January 3 (when we were less likely to be watching), the
Congressional Budget Office released an updated calculation on the size of
the cost of the new legislation: it is now $600 billion worse than discussed.
They left out the accounting for paying interest on the increased debt for
the period of the calculation. I've included the interest-rate cost in the
chart below where I estimated it as being larger in the later years of the
chart. $600 billion turns out to be only a modest addition. It will turn out
to be higher when rates rise.
Here are a few more details on
what was decided:
- Employees
will have up to $2,000 more taken out of their paychecks annually due to
the expiration of the temporary payroll tax cut
- The
estate tax will increase from 35% to 40%, with the first $5 million
worth of property exempt from being taxed
- Capital
gains and dividend tax rates will increase from 15% to 20% for
higher-income earners
- Alternative
Minimum Tax will be raised to affect only higher-income households
- Doctors
will not see big cuts for treating Medicare patients
- Unemployed
workers will receive extended benefits
It is also sad to report that
Washington has been operating as business as usual, including extending many
strange programs like support for NASCAR racetracks, rum import duties, and
even special support for buildings in New York City near the World Trade
Center. While deplorable, these items are small in the macro picture. One new
emergency-spending measure that was not included is $60 billion for hurricane
Sandy relief, which will surely be added to the deficit soon. The beat goes
on, with the inevitable result that the deficit continues. Fiat currency
systems have no built-in limit.
World markets applauded this
relatively modest package, because it confirms the short-term positive
results of government deficit spending. The Dow Jones Industrial Average was
up 300 points the day after the crisis was "eliminated." That means
that the Federal Reserve will back up the federal government with more QE to
keep the government rolling for the time being. Another result should be
further downgrading of the US government debt by the rating agencies. Can you
see a progression over another cliff? Downgrading raises the interest rate
required by investors on US Treasuries; that increases the cost and the
deficit. See the purple in the above chart? It will get worse than the CBO is
letting on when rates rise.
I had been trying to ignore
the massive, blanketed coverage by our media of this political circus. I knew
ahead of time what the result would be from this deficit-cliff exercise. When
it comes to holding the line against more government deficits, spending, and
taxing, our government is dysfunctional. This event is more seminal than the
results indicate: we can expect the politicians to repeat this process in a
couple of months, and so on until there is a major loss of confidence in the
dollar. There will be no return to fiscal responsibility. My point is simply
this: we are already
beyond the point of ever returning to a sensible, balanced-budget system.
We may be distracted by wars, some crazy or false-flag terrorist event, or by
even a natural disaster, but the conclusion is already inevitable: The US
dollar will be toast; Treasuries are a dangerous investment; interest rates
will start rising; and even the massive Federal Reserve manipulation
supported by the banking cartels will be unable to overcome that. We will
likely start in a slow fashion this year and will escalate out of control in
the decade ahead.
We need to understand the
implications of this recent event, and – as this small step confirms – that
promises of future fixes will be complete shams. Remember when President
Johnson said that there would be no repercussions from removing silver coins
from our currency? A silver quarter alone is now worth around $5.50. And
that's not because silver is different; it's because dollars are heading into
the toilet. Protect yourself!
In the long run, the
fiscal-cliff deal should not be celebrated as if it were a positive event. It
is far from balanced, considering the much bigger government-debt problems
that we face as a nation. In essence, this action was an opportunity to take
real measures to curb our deficits, but the action taken has drifted us
further along the path of fiscal irresponsibility.
The American debt crisis has been generations in the making, and so
won't be quickly turned around. But that doesn't mean that profit
opportunities don't exist – quite the contrary. New regulations and laws
always create dislocations that early actors can take advantage of.
