Fear
Mongering And Hysteria About The Fiscal Cliff
Wolf
Richter
12
October, 2012
It’s
been a phenomenal circus, the screaming and hollering on all sides
about the “fiscal cliff,” in the media, from lawmakers, from
chieftains of our industries, particularly those that feed at the
government’s big trough, such as defense contractors, which include
some of the largest global corporations. Even NPR this morning
postulated that it would cause a million job losses. Hysteria comes
to mind.
The
fiscal cliff is to the US what the Troika is to Greece: an unwelcome
dose of self-imposed half-assed discipline. Self-imposed in Greece
because they could send the Troika packing, default on the rest of
their euro debt, revert to the drachma, and print themselves into
poverty [Greece,
Tell Brussels “To Take A Hike” And Let The Troika Bail Out The
ECB Instead].
Self-imposed in the US because Congress passed, and the President
signed, the laws that make up the fiscal cliff. And half-assed
because it doesn’t mean that either country will ever live within
its means.
According
to the fear mongers out there, the US would fall off that fiscal
cliff if (most notably):
-
the Bush tax cuts are allowed to expire, sending us back to where we
were before.
-
the 2% Social Security tax cut is allowed to expire, sending us back
to where we’d been all along.
-
the beautifully named “sequestration” is allowed to trim
discretionary spending a bit, including defense, whose expensive
though cool and often deadly toys amount to a fat corporate welfare
program.
To
add some spice to the mix, there is the “debt ceiling” that
Congress imposed. US Treasury debt might bump into it by the end of
the year. If a fight breaks out over it, the world will scratch its
head, having watched that silly farce during the spring and summer
last year.
So,
how dreadful is this cliff? According to the Congressional Budget
Office, it would cut the budget deficit in fiscal 2013 by about $560
billion. That sounds like a lot, but during fiscal 2012, which just
ended, US gross national debt jumped by $1.322 trillion—to end up
at $16.159 trillion. So, if 2013 looks like 2012, the fiscal cliff
would cut the deficit by 42%. But it would still leave a huge
$762-billion hole. And gross national debt would break the $17
trillion mark.
The
graph above depicts the skyrocketing US gross national debt from 1972
to 2012. Note the exponential increase since 2001. However, between
1998 and 2000, the trajectory flattened out; the debt still grew but
at a slower pace. If Congress and the President want to, they can.
By
jumping off that fiscal cliff—more of a mogul, actually—the US
would see the trajectory of its debt flatten out similarly. The
deficit might drop to 1.2% of GDP by 2021, according to CBO
estimates. Still miles away from a balanced budget, a total
non-starter in our free-lunch QE culture. The mountain of debt would
be much higher still. But it would be a start. On the other hand, if
the fiscal cliff is not allowed to work its magic, the exponential
growth of debt will simply continue to its bitter end.
So
just how much havoc does living within one’s means wreak?
Households have gone through that. They had to stop living off their
HELOCs and their credit cards, and they had to squeeze their budgets
to match their incomes. It’s painful. But it’s prudent. Cities
and states had to do it, too. It’s the only way to avoid financial
disaster [if not... Next
in a Tidal Wave of California Municipal Bankruptcies].
So why is it that Washington thinks it
can’t?
The
screams that it would cause a recession are deafening. But over the
decades that the US has lived far beyond its means, it has lumbered
from one recession to the next. Clearly, running up deficits does not
prevent recessions.
And
there will be recessions! They’re painful, but less painful than
blowing up the system. Yet lawmakers, US Presidents, and CEOs—those
who’re handicapped by a field of vision that doesn’t extend past
the next election or reporting period—arehoping that
the moment of reckoning can be pushed out of sight. For them,
deficits and debt don’t matter as long as they can feed on that big
trough.
Jim
McNerney, CEO of Boeing, one of the top defense contractors, laid out
numbers that he and other CEOs have come up with, evoking the dark
days of 2009. CEOs are planning to slash capital expenditures and
jobs. These ugly trends “reflect global demand flattening out,
particularly in Europe and China,” and of course “the fiscal
cliff,” said McNerney. But these CEOs have been ridiculously wrong
before, for example just before Lehman. Read.... The
Miraculous Decoupling Of Reality, For Now.
“Bullshit,”
said Ferronickel, the general sales manager at the Ford Superstore,
as he was penciling a deal. “The give-away capital is Washington.
Here, we make money.” He is the anti-hero in TESTOSTERONE
PIT ,
an edgy, cynical, and funny kiss-and-tell novel that will forever
change the way you think about buying a car. Read the first few
chapters for free on AMAZON .
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