What if the US economy falls off the fiscal cliff? - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 31 August 2012
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Ouzilly, France

Go ahead...jump!

The US economy is out on a ledge...dangerously teetering over the 'fiscal cliff'... If the politicians don't get their act together before the end of the year, it will fall off... Federal spending will plummet. Taxes will go up. The economy will go into recession.

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It's a 'doomsday machine,' say some of the most panicky voices.

Oh disaster! Oh calamity! Mommie! Bernanke! Oh...

...what's the big deal?

Yesterday produced little in the way of valuable information or insight. Gold went down $5. The Dow fell more than 100 points.

And today, Ben Bernanke - yes, the Hero of '08 - is in the spotlight. The Fed meets in Jackson Hold, Wyoming. Economists, reporters, drifters and speculators lean toward the Tetons...waiting to find out what comes next.

Will the Fed announce a sweeping program of 'open ended' QE - buying bonds whenever it wants? Will it thereby help the US jump over the 'fiscal cliff,' like Evel Knievel over the Snake River (poor Evel didn't make it; he ended up in the river and almost drowned)? Or will the Fed hold its tongue...and its fire?

Most likely, it will do nothing. Because there is not much it can do. And because - with stocks still up...and the economy growing at a 1.7% rate - there is no need for daredevil stunts by the US central bank.

Besides...so what if the US economy falls off the fiscal cliff

The federal government spends nearly $3 for every $2 it collects in taxes. It added $5 trillion to the national debt over the last 4 years...bringing the total to $16 trillion, a figure passed just last week.

If you look at the figures the way a public corporation would have to - that is, according to Generally Accepted Accounting Principles - the real debt of the federal government is much higher. In fact, it reaches up to $211 trillion.

Put that money in a stack of $1 bills. How high would it reach? We have no idea...and we're not going to waste our time figuring it out. But it's a lot of money.

And get this: officially, the feds are now adding new debt at about 4 times as fast as the economy grows. Include the 'unfunded obligations' and it is about 20 times as fast.

So....sooner or later...the feds will have no choice. They will have to cut spending and/or raise taxes - probably both. And the longer they put it off...the worse the figures get...and the more painful the eventual reckoning will be.

And here's a Bloomberg report. It tells us that the CBO (Congressional Budget Office) confirms our analysis: it's better to jump now!

Just when you thought you could forget about the fiscal cliff and focus on the Republican and Democratic conventions instead, along comes the Congressional Budget Office to remind us of the impending threat.

In its midyear budget and economic outlook last week, the CBO tweaked its forecast in the event Congress fails to prevent an array of tax increases and automatic spending cuts -- $1.2 trillion over 10 years -- from kicking in at the start of 2013. Such "fiscal tightening" would cut gross domestic product by 0.5 percent next year, with the hit concentrated in the first half, and increase the unemployment rate to 9 percent.

It will also provide a short-term budget fix. If Congress does nothing -- that's what a do-nothing Congress does, right? -- the 2013 federal deficit, under the CBO's baseline scenario (the policies dictated by current law), will be $641 billion, or 4 percent of GDP, following four years of annual deficits in excess of $1 trillion.

Yes, there will be pain. But there's plenty of that already. At the current pace of job growth, it will take as long -- seven years -- to return to the pre-recession employment peak as it did following the Great Depression, according to Steven Wieting, head of economic and market analysis at Citigroup Inc. in New York. Viewed in that context, the Federal Reserve's pledge to hold interest rates near zero until late 2014 doesn't seem so odd, he says.

Beyond the headlines in the CBO report, there are good arguments for letting the fiscal cliff pass without creating an escape hatch.

"The CBO report says that in 2022 we will be better off if we go over the fiscal cliff," says James Kwak, associate professor of law at the University of Connecticut School of Law in Hartford. Things will get worse in the short term, but 10 years from now GDP will be higher, and interest rates, the budget deficit and government debt will be much lower. The unemployment rate is projected to be the same.

So, dear politicians...dear policymakers...dear Fed governors and wonks who are enjoying the cool mountain air...

relax. Give the economy a chance. Let it jump off the fiscal cliff now rather than fall off it later. Better yet, give it a shove.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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1 Responses to "What if the US economy falls off the fiscal cliff?"

Hasit Hemani

Sep 4, 2012

You are absolutely right. An alternative is definitely due for democracy as a political system. Even in enlightened society it has not worked well. In backward countries it has just breed-ed corrupts and crooks. The search for an ideal political system has not advanced an inch since Plato. I feel the whole humanity should live together without border.So that the huge resources spent on defense can be diverted for humane and positive aspirations.

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