What is the Fiscal Cliff? Are we all going to Die?

Although the term “fiscal cliff” might be a bit misleading, there is little doubt that should the combination of tax increases and spending cuts scheduled to go into effect on January 1 become a reality the consequences on the economy would be extremely negative.  The real problem, which tends to be buried beneath all the rhetoric and political posturing, is that there are no really good solutions.  The farce that we see being played out before us is nothing but an attempt to hide the fact that members of both parties are responsible for the present financial crisis.

In order to understand that it really doesn’t matter whether one favors tax increases, spending cuts, or a combination of the two, one must first understand that the only two choices available are to go over the cliff in 2013 or stand on the precipice of the cliff and continue to threaten to jump off until we have no other choice.  Obviously no elected official wants to be the one held responsible for pushing us off the cliff which can only suggest that we will see some kind of agreement in the very near future.  The President has returned to Washington and we can look forward to breathless reports of how Congressional leaders and the President are working diligently to avert this newest fiscal crisis.

The problem is that few seem to wonder why it is that we are in this emergency mode in the first place.  As I alluded to earlier, this is because the leadership of both parties wish to draw the attention of the American People away from the fact that from a long term perspective we should be holding both parties equally culpable.  On the other hand, the attempt by the President to hold the Republican (read Tea Party) members of the House responsible for the present crisis is truly obscene

The first thing we must realize is that it is the President who is choosing to push us off the cliff at this particular moment in time.  Even if we ignore every other action on the part of the President, whether they be related to economic or other matters, the fact remains that it is he that has yet to approve a budget and it is he that refuses to agree to avert the “so-called” fiscal cliff by simply agreeing to leave the very same tax rates in place which he ended up supporting back in 2010.  Certainly there were those in both parties who disagreed with him at the time, but it seems to me that the following quote is as relevant today as it was two years ago:

“But I’m not willing to let working families across this country become collateral damage for political warfare here in Washington. I’m not letting to let our economy slip backwards just as we’re pulling ourselves out of this devastating recession.”
Read more: http://www.politico.com/news/stories/1210/46048.html#ixzz2GKXurhJB

Of course “we (didn’t) pull ourselves out of this devastating recession”, but that is a completely different discussion.  The fact remains that it is his choice as to whether we go off the fiscal cliff in 2013.

All that being said, I am not willing to hold President Obama solely responsible for the events which are now taking place.  In order to understand the totality of the situation it is important to understand that while the fundamental principles of economic activity remain inviolate, those in government often attempt to obfuscate those laws by using disingenuous verbiage.  Most of us know that “budget cuts” don’t really mean a reduction in spending from the previous year, but rather that the amount budgeted for the year has been reduced from what was originally budgeted.  Got that?

The problem is that the “budget cut” verbiage is only the tip of the iceberg.  Let’s take a look at the use of the term “revenue”.  Seems pretty simple and what could be more accurate than terming the money received by the government as revenue?  Well, take a nuclear family, for example, comprised of two parents and two children, and let’s further assume that both parents work.  If Dad needs to make the car payment and writes a check from an account Mom and Dad share in common, is there any way to claim that the family experienced an increase in “revenue”?  Similarly, any tax “revenue” is not really revenue in the sense that additional money is available to be spent or saved, rather it is money which is already in existence and which has simply been transferred from one family member to another.

It is of the utmost importance to understand that “revenue” in governmentspeak is not really revenue as you and I would define it if we really want to understand the bind that we now find ourselves in.  In fact, this was the point which Mitt Romney was attempting to make during the latter part of his campaign.  Real revenue is additional money which is generated by an increase in economic activity.  For example, when American businesses sell more goods and services overseas they are generating additional revenue which, assuming the right policies, should improve the economic conditions right here at home.  Any increase in taxes simply serves the state and literally does not represent a single penny in additional revenue.

Does this not than suggest that the problem is in the spending?  Yes…and no.  Yes, the problem is spending, but that doesn’t mean that all of our problems will be solved by simply slashing the budget.  We can’t simply stop the government from spending as that too will send the economy into a deep depression.  The reason for this is that we have been spending more than we have been making for quite some time now and have insisted that the government cover the deficit by borrowing the rest.  In other words, we are now seeing the downside of running an economy based on what is generally known as Keynesian Economic Theory.

Any economy which is stimulated by “Keynesian” money becomes dependent on that money.  This is because nothing should be more obvious than the fact that “Keynesian” money policy affects the economy to the same degree regardless of  its’ direction.  It does not matter when “the experts” decide to “unstimulate” the economy because whenever the money supply is reduced the economy will fall into a recession or depression.  Newton’s Third Law unfortunately applies to economics just as well as it does to physics.  If that isn’t enough for you, perhaps the next paragraph will prove to be even more depressing.

If we assume that “the government spends $1.40 for every $1.00 it receives in taxes“, which seems to be the commonly accepted figure, the most obvious conclusion to be drawn is that we borrow the other forty cents.  Let me state it another way, if we were to slash government spending by a little over one third the only real result would be to put the economy, you guessed it, into a deep recession or depression.  This is because, and yes I realize that some of the money loaned to “the government” comes from domestic sources, the borrowed money is, in reality, the only “additional revenue” that really counts.  Long term, the consequences of that kind of borrowing will most assuredly be disastrous, but the problem is, as I pointed out earlier, massive tax increases do not result in additional “revenues”.  Add that understanding to the fact that any minuscule benefit one might suggest would come from any tax increase can only become available after the forty cent deficit is completely erased.  Is it any wonder that Ben Bernanke threw up his hands and suggested that our political leadership should “something” or that the President’s Secretary of the Treasury is out the door having saved his buddies in the financial sector?

Now, there are some things we might be able to do, but suggestions along those lines will have to wait for another article should I have the time and inclination.  The final point I would like to make here is why the Tea Party is being made the scapegoat.  Remember how I mentioned that both parties are responsible for getting us into the mess we are in?  Draw your own conclusions.

Thanks.

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