Everyone is talking about “the fiscal cliff” where the U.S. will have to cut spending and raise taxes. This, is supposedly what our Congress will try to tackle “next year” (it’s always next year isn’t it?). Does anyone really believe that a Congress (and President) who have not even passed a budget for the last 3 years will do this? Assuming that they do pass a budget and address the fiscal cliff (I don’t), this would be tantamount to outright admission of bankruptcy. Don’t get me wrong, this issue will be addressed but not because Congress drinks “austerity Kool Aid”, no, the markets and Mother Nature will FORCE this action.
There are several angles to look at this from but it doesn’t even matter from which because they all end up the same, we have already bankrupted ourselves, period. One angle from a “sustainability” standpoint was addressed this morning at ZeroHedge (The Problem In A Nutshell: Annualized GDP Growth Of 1%; Annualized US Debt Growth of 21%) , total U.S. marketable debt has grown at a 21% ANNUALIZED pace since 2008 while the economy has grown at less than 2%. Basically, debt has doubled while the economy hasn’t gotten only 10% larger, in other words, the ability to pay the debt is roughly 50% of what it was in 2008. THIS concept is important so let me state it a couple of ways in “street language”. The debt is twice as difficult to pay now than in 2008. Or… the U.S. is twice as risky now as it was in 2008. Or… if you believe as I do that the U.S. was technically insolvent back in 2008, you could say that we are now “twice as broke”! The ONLY reason that this has not “bitten us” yet is because interest rates have been forced downward and made paying the vig easier but we have now reached the point where rates cannot go any lower so this “magic trick” cannot be used again.
Another angle to look at this fiscal cliff from (other than looking up while plummeting or looking down like The Roadrunner) is from a “what will it look like” standpoint. Or better yet, what “would” it have looked like. Correcting (the uncorrectable) the fiscal budget means raising taxes or cutting spending or both in some combination. Had we done this years ago, “growth” would have been less by whatever the amount of higher taxes or lower spending. The “deficit” spending that we had “added” to GDP numbers would not have been there, thus since 2008 the economy would still be contracting. The deficit has run roughly $1.3-1.5 Trillion per year or roughly 9-10% of the economy. Subtract this amount and the best year of GDP would still have been a negative 5%++ year and the admitted “recession” year itself would have been some 12%+ decline. Time wise AND size wise, this is already DEPRESSION territory!
That, is what it “would” have looked like, but what “will” it look like? Any amount of higher taxes or lower spending will come directly out of GDP. This will kick start a vicious cycle of less “money on the street”. People and corporations will have less money to “spend” if they pay higher taxes. If the government spends less, there will be less government employees (a good thing), less subsidies (a good thing), certainly less waste (another good thing) and thus again, less money on the streets. What I am trying to describe to you is that the standard of living HAS been far above where it should have been and now, because we have ruined ourselves fiscally, WILL be lower than it would have naturally been. In other words, the day is coming where our standard of living takes a double hit, first to get to where it should have been but again because we have to pay back past “over living”.
This “fiscal cliff” is like the dreaded Tuesday for Whimpy, tomorrow has finally come and our puppeteers know it. They know it because like I said above, interest rates cannot go lower to make the interest payments comfortable. This has already been used and factored in, now as the total debt numbers rises, so will interest payments in a direct one to one relationship. This is exactly like a credit card where one only pays the monthly “minimum”, as long as you can obtain more credit and higher limits…it’s all good! As long as you can get promo rates or deals where your interest rate gets lower and lower until you reach “zero”…it’s all good! That was then… this is now. Rates cannot go lower and our creditors have backed away from advancing further credit so the Fed has stepped in and is now buying over 2/3rd’s of the Federal debt. There is now only one option left and that is the one that has been used by failing empires time and again…make the money cheaper! Devalue! It’s over. It has been over for a long time. We have a “roadrunner moment” in our immediate future. Protect your personal wealth.