The Fiscal Cliff and the Whole Context

These days we are swamped with TV and internet coverage of the fiscal cliff scheduled to occur on January 1st. What the cliff amounts to is a reduction in government deficit spending, which in itself is a good thing. But, since the deficit would still be astoundingly and disastrously large, the cliff isn’t as big a deal as one would wish. That the “cuts” are in fact just reductions in the rate of spending increases and not reductions in spending, it is clear that the whole thing is mostly a sham (e.g., see).

On the other hand, since the reduction in the deficit would be mostly tax hikes, the pain would fall on the productive population. In the context of the economy, it is spending that needs to be reduced. An increase in taxes would be an additional drag on the economy, increase the rate of the decline of our standard of living, and enhance the movement toward destruction of rights and the importance of the individual in our society. What happens with the fiscal cliff could hasten the slide toward a fate like Greece or Spain. We really don’t want that to happen. Of the options that Obama seems to accept, i.e., no deal or higher tax on high incomes levels and no spending cuts, I find it hard to choose. There is some indication that BO wants a limited increase in taxes and increases in spending, which could be worse.

But the fiscal cliff is just part of the problem: the hoopla over the “fiscal cliff” provides a smoke screen covering additional pending disasters for our economy, namely, the beginning of the implementing of ObamaCare taxes and regulations, and the coming tidal wave of Dodd-Frank and other anti-business regulations.

Quite possibly the impact of Dodd-Frank will dwarf the fiscal-cliff. It has already drastically restructured parts of the financial community. There are many regulations still to be issued from Dodd-Frank (many are already late) and they all are intended on reducing the range of options of a financial institution, which will lower its profitability, more tightly limit its decision making capability, and reduce its ability to fund American production.

ObamaCare has many elements (some still little known) that will be instituted in 2013 that will raise business costs, lower employment, and cause further problems with health insurance and medical costs. All of these together, including whatever nonsense ends up as the “solution” to the fiscal cliff, will mean slower growth, or possibly recession for the US economy (which won’t be good for the world economy either).

Think what that will mean for the federal deficit and budget.

We have seen many projections as to when the federal revenue will equal the sum of interest payments on debt, Social Security, and Medicare, in other words, severe problems with funding the government and retaining the appearance of the safety of government debt. If you look closely at each, I expect that you will see that the assumptions include some growth in the US economy and that there will be a significant number of people paying the Social Security and Medicare taxes. But, with four more years of BO and the total number of people employed remaining low (as opposed to actually producing; and as opposed to the unemployment figures that are meaningless), tax revenue, including FICA, is not going to grow while the interest on federal debt, even at today’s absurdly low levels, Social Security and Medicare demands will grow rapidly. The only way to pay for defense and the astounding number of programs the federal government supports, is to constantly grow the deficit. It is also possible that Obama will try to raise taxes, but that may be too obviously destructive for today’s population.

The federal deficit will be the tipping point, but the real cause of death for our economy is the restrictions on doing business and producing. The arguments about spending and deficits need to begin including emphatic emphasis on the disaster of regulation.

For us, the unwilling and resisting passengers on this train into the tunnel of death, it means that we need to arrange our thinking to prepare personally and philosophically. I will leave to you the personal preparations (I am thinking about a potential blog post on this topic.)

Philosophically, we need to emphatically tell anyone we can that the coming mess is not the result of capitalism or selfishness (maybe we can equate blaming the Jews in Germany after WW1 with blaming capitalists). That is in addition to the stuff we are already doing, e.g., focusing on helping ARI and other similar activities and aiming at the destructive educational system we have.

And now for a final comment that is going to be a theme for me:

Understanding the Objectivist philosophical method is vital to anyone concerned about his freedom, as well as his life in general, of course. Recently I have been getting my own intense reminder. I have been reading Understanding Objectivism and The DIM Hypothesis. I want to emphatically recommend these books. If you want to understand an individual’s mental functioning, UO is the book to read. It is also helpful in leading up to the other one. To better understand the trends and conflicts in our own situation here in the US, The DIM Hypothesis is absolutely necessary. It is very philosophical. But philosophy matters, and our conflicts today are philosophical. For your own sake, read them.

Debt, Ceiling, and The Issue

So many people are reacting to the recent bill to raise the debt ceiling as if it meant anything. It did mean something, but not what people are whining about and not what the Dems or the Republicans are suggesting.

You should have expected that the debt ceiling would be raised, and probably by the arbitrary date that had been set. If anyone in Congress had suggested that the US go into even partial default, they weren’t being taken seriously. When the government has been shut down before, the Republicans have taken the blame and felt the pain on election-day. They weren’t going to do that again. No, they were going to raise the debt ceiling.

I am a little surprised that they raised it as much as they did, although the actual number was rarely mentioned in the press. No wonder, since the increase was about the same amount as the announced reduction in spending – that is suppose to occur over ten years.

Add in the fact that actually less than a trillion dollars of spending reduction was identified in the bill that was passed and the remainder is suppose to be selected in a special legislative committee, we have a bill that doesn’t mean much. Nor are the effects to begin for the next two years, except to raise the debt ceiling by over $2T.

The “reasoning” behind not having any cuts in the next two years is strictly Keynesian economics. It is accepted by both sides that government spending is a good thing for an economy that is not growing sufficiently (if at all). No one questioned this claim. The Republicans went right along with it. If you think about it, it makes even less sense in this case. I mean they are accepting the idea that not reducing the spending that BO wants in 2012 means that the economy then will do better than if his budget was reduced. This is just amazing. It this thinking is correct, the correct thing for Republicans to do would be to push for more spending, regardless of the deficit, to have even better economic performance. Well, of course, we are now talking Ben Bernanke’s language.

Many people are claiming that the loser was BO. They say that he didn’t get the increased taxes on the wealthy that he insisted upon. Maybe. There is always tomorrow, of course, or after the next election. The way the Republicans are going, BO will look great. I am sure that he hasn’t given up on raising taxes on the most productive members of our nation, he will find another time to push this through.

The bill hasn’t made our immediate situation any worse. If you understand that the debt limit was going to be increased and the whole thing was a game (a game that was taken very seriously by all participants), then you just hoped they didn’t do anything more stupid than normal. There are no new immediate taxes, no new spending, no explicit attacks on our freedom.

There is one bright spot, I think. It is that the very issue of the debt was brought forward and made a big deal. It gained the attention of the media and many people in the country for a couple weeks. It also seems that the Republicans did latch on to this issue and maybe they will try to keep it in the forefront of their public comments. That is a good thing.

Yet, as I say that I also remind myself that they did not make clear to the American public that Social Security and Medicare are doomed, no matter what the Dems do about it. Those programs have a cost that no nation could pay, and certainly not one as encumbered and regulated as this one.

The Republicans also undercut their case when they fought for such small potatoes. Cuts of $2.7T (or whatever the final advertised number was) spread over ten years do very little to impact annual deficits of over $1T a year. It was such a big fight over so little.

But actually, it is even worse because what they were fighting over weren’t cuts at all. The Congress uses terms differently than us common folk, and the “Tea Partiers” fell right into it. The budget projection process assumes that most programs will continue to expand over the years. What Congress fought over was the rate of increase of those programs. They weren’t cutting anything at all.

The expectation that reducing the increase will make a difference assumes that the income side of the budget would grow at a certain rate, meaning that if income continues to climb, and we reduce the increase in spending, we will see a reduction in the deficit and we will borrow less. But, where is this increase of revenue coming from? Well, two options: price inflation or actual growth. Along with price inflation often means increases in income as well and thus increases in tax revenue. Historically, however, income lags, meaning that our standard of living lags, and tax revenue lags. So, price inflation would only partially support a decrease in the growth of the debt.

Really, Congress is assuming that the economy will grow. I do not know what growth rate was used to figure out that their numbers would work and the deficit would not grow as fast as it has. I expect that it had some relation to our history since WW2. The growth rate over the last ten years has been much lower, however. We may not expect our growth rate to achieve the historical average any time soon, since we really haven’t recovered from the last recession. There are lots of reasons to think that the last recession is continuing and tending downward. You can be certain that the framework of this “Deal” didn’t assume a recession in the ten-year timeframe. The entire underpinning of the “Deal” is flawed.

The bottom line is that the “Deal” that was suppose to cut spending will have little effect on what will happen in the economy over the next ten years. It is a nothing. It has many fraudulent characteristics. Worse, it may make some people relax and think that things are in better shape.

That is one reason why I don’t understand the people who were so disappointed that the “Deal” was done. The bottom line was that the Republicans were fighting for show, not for real results, and not passing the debt ceiling was just too real for them (as a group, anyway).

And now (have to write more cuz stuff is happin’), S&P has actually shown up. I think that their explanation is pretty good, except that they should have mentioned that the politicians got us into this fix in the first place. I have seen two different kinds of responses, well, three, but the third, “It’s about time!”, is a very small minority.

One response is surprise that the downgrade is occurring now since the US government can meet its obligations of paying interest and paying back bonds. This is as short-sighted a view as we see from the Congress. The issue isn’t about today’s payments, but the payments during the life of the bond, which is in doubt, really.

The other response is from the Administration and the Democratic members of Congress. They apparently believe that anyone who disagrees with their view, their very subjective view that whatever they want to do is good, is at best mistaken and probably evil. Don’t be surprised to see the FBI visit S&P headquarters. If Obama actually realizes what the meaning of the downgrade means, he will look for ways to use the power of the government to change the rating of his debt.

Many of the supposed financial experts interviewed that I have seen have been unwilling to predict what we will see tomorrow when trading restarts around the world. I certainly don’t know. We may see some pause as people try to come to grips with the revised situation. Many of the organizations that currently hold Treasuries as assets that must be AAA rated may be calling their attorneys to find out what they must do. Prudence would require that they change their assets in an orderly manner and not wildly sell. But then, we could see some panic selling. Either way, a lowering of the rating of US government bonds should see an increase in the interest rate being demanded in the market. How much is very much open to question. The Treasuries will still be a major holding by many different international and domestic organizations.

But think what the downgrade does for the “Deal”. The whole plan did assume a certain cost of borrowing. That is, paying the interest on the debt is a large portion of the federal budget. That portion has just gotten larger. I bet that the projection of future spending used in shaping the “Deal” assumed pretty much the same interest rate on bonds for the entire 10 years. It certainly assumed a continued AAA rating. Now that rating is gone at the very beginning of the 10 year timeframe, and it is unlikely that the Administration or the Democratic members of Congress will do anything that will provide reasons to change the downgrade. The supposed cuts will be off set by the higher cost of paying the interest on the debt. So much for the entire hoopla and the “Deal”.

We need to focus on the primary thing, which is the education of the American people. If a sufficient number (say 20%) understand the situation, their voice concern will cause Congress to move in the correct direction. As long as the American people believe that, for example, Social Security and Medicare can be viable over the long term, nothing will be done.

As we move into the forth year since the bust of 2008 and there is no real recovery, we do have an opportunity to point out the reality of the Keynesian policies of the government. The American people do not want to live this way. I think that even the ones receiving government payouts may be willing to listen more than their counterparts in other countries because they are still Americans. In any event, we have our opportunity. Let’s make the most of it.