America's approaching the 'fiscal cliff' - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 31 October 2012
America's approaching the 'fiscal cliff' A  A  A

    A government with the policy to rob Peter to pay Paul can be assured of the support of Paul
"Breaking Bad," says Bill Gross, is an appropriate analogy to America's approaching 'fiscal cliff.' The story is about a high school chemistry teacher who gets lured into making crystal meth. Once started, it was hard to stop:

    "Hooked on the temporary high of tax cuts and increased entitlements over the past several decades, the nation's capital is approaching the end of the line traveled by most addicts: Reform, or suffer the consequences.

    At first blush, the comparison to a methhead might seem a bit of a stretch. Despite approaching the edge of the fiscal cliff with a deficit equivalent to 8 percent of gross domestic product, the United States is still considered the "cleanest dirty shirt" in global financial markets. Whenever an authentic crisis (Lehman Brothers in 2008) or a minor aftershock occurs, investors buy U.S. Treasury bonds, the dollar rises and this country's reserve-currency status is reaffirmed. The United States still seems to be the first destination of global capital in search of safe (although historically low) prospective returns.

    Our fiscal chemistry lab, however, may be conducting more destructive experiments than investors acknowledge. Warning signs and distress flares are being sent out by more than the credit rating agencies. Recent annual reports issued by the International Monetary Fund, the Bank for International Settlements and our own Congressional Budget Office speak to what economists term a fiscal gap - a deficit that must be closed if a country is to stabilize its debt as a percentage of GDP. It is not necessary, these reports say, to be totally drug-free; a small deficit, after all, has been a trademark of the United States for decades. But a fiscal gap that exceeds minor levels - 2 to 3 percent of GDP - must be closed, or a country's financial foundation and, ultimately, its economy may unravel. Its growth rate will almost surely slow down and fail to lower high levels of unemployment.

    The United States, it turns out, is a fiscal-gap serial offender by the standards of all three of these respected independent authorities, approximating an average gap of 8 percent of GDP. Compared with Germany and Canada, the United States is addicted to deficits and committed to future spending far beyond reasonable comparison. In fact, the company we keep includes Greece, Spain, Britain and Japan - a rogues' gallery of debtor nations that have abused deficit financing for decades.
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Wall Street was closed yesterday on account of the big storm. Many investors and homeowners were reported underwater.

Here in Baltimore, the howling wind and sheets of rain produced little real damage. Still, public officials used the opportunity to train the population to follow orders. The streets were clear this morning. Residents were told they were not allowed on them. Only a few people defied the order. Docility is encouraged; initiative is punished.

That is what happens when a society reaches an advanced stage of decadence. It pays to know someone...have an inside angle...and get in on some scam.

And now, with the election a week away, and with the storm damage on every TV, many people are pleased to know that Barack Obama, the President of All the Americans has magnanimously offered to pick up the tab.

Yes, it's a national emergency. We will all pay for it...

But how? Already, the feds borrow 50 cents for ever dollar they collect in taxes. How can they do more?

But don't worry, we're headed for the cliff. The law, as it stands, says that spending will automatically be cut on January first. Trouble is, it's not nearly enough. Bill Gross continues:

    The CBO's fiscal gap of nearly 8 percent, for instance, suggests we need to raise taxes or cut spending by an amount equal to $1.6 trillion per year. Yet the expiration of the Bush tax cuts and other provisions included in the congressional supercommittee's "grand bargain" was a $4 trillion battle plan over 10 years, or $400 billion per year.
A little short. And, most likely, it will get even shorter, after the pols in Washington have their say.

To repeat: the fiscal cliff is turning into a 'fiscal water slide.' It will be exciting...and we'll all get soaked.

But at least the water slide takes us in the right direction. Sort of. The democrats don't like it because it cuts out some of the zombies from social spending. The conservatives don't like it because it "sequesters" the money that would have gone to the military zombies.

Our old friend Grover Norquist explains that sequestration isn't so bad,

    "Sequestration is not the worst thing," said Grover Norquist, the influential head of Americans for Tax Reform. "There are better ways to reduce government spending," he told POLITICO, "but Congress didn't get there. ... We've got to get away from this idea that, if the defense sequester got put off, or cut in half, or redirected, then somehow they've dodged a bullet and we don't have to do anything on defense."

    "Sequestration isn't ideal, but on the whole, sequestration is fine. ... I think it's been a relatively positive exercise [because] it forces people to address defense spending," said Andrew Moylan, the outreach director for the conservative R Street organization. "We've learned Congress won't reduce spending unless it is forced."

    "The automatic sequester, while not perfect for a number of reasons, is going to be a lot better than any sort of deal they come up with in the lame duck," argued David Williams of the Taxpayers Protection Alliance.

    As for Norquist, he said that even if Republicans could control all the levers of government, they shouldn't drop the defense cuts to zero.

    "We have to dramatically reduce the cost of defense, whether there is a sequester or not. Maybe the sequester focuses their attention, and to the extent it does, that's a helpful thing," he said. "We need to look at defense the way we look at welfare and education - just because somebody calls something by a good name doesn't mean that every dollar is spent wisely or constructively."

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

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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