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“If we right away say 98 percent of Americans are not going to see their taxes go up – 97 percent of small businesses are not going to see their taxes go up,” said President Obama on Wednesday.  “If we get that in place, we’re actually removing half of the fiscal cliff.”

We are…really?  Just like that?

We’re certain there have been worse presidents.  Surely, there have been dumber presidents.  But has there ever been a president that was so doggone funny?

Not in living memory, if ever, that we can think of.

The critical thing about the fiscal cliff that President Obama is unwilling to mention is that the current debate is just the jumping off point.  The fall into the abyss will be long and painful.  Moreover, it’s unavoidable.

Austerity, in the form of higher taxes and spending cuts, is coming.  It will either be voluntarily achieved through government policy or it will be forced upon the country by markets.  Given Congresses inability to understand the problem, it will likely be up to the markets to force real change upon the country’s finances.

The Returns of Empty Promises

Here at the Economic Prism we disparage taxes; but we also disparage public spending. Unfortunately, the collective will of the voter relishes public spending…as long as someone else – the rich – has to pay for it.  But even if the rich get soaked more than they already are, tax revenue will never cover spending.  Unfunded obligations are impossible to meet.

Social Security and Medicare currently pay out more than they take in.  The difference is made up with debt.  In other words, money is borrowed today to make good on promises made yesterday.  This system of financing past obligations with new issuances of debt is resulting in ever escalating debt levels.

The idea that Social Security and Medicare can somehow be salvaged by raising taxes on the rich is completely absurd.  According to Boston University Professor, Larry Kotlikoff, unfunded entitlement liabilities have reached $222 trillion.  This is money that millions of people have been promised, which they will not receive.

Regrettably, these people will be given the returns of an empty promise.  They’ll have to make do without these expected entitlements.  They’ll have to restructure their lives, down size their living standard, move in with the kids, and whatever else they need to do to get by with less.

This is the ill-fated place that politicians have put millions of Americans.  When lenders lose faith in the value of Treasuries, and they stop lending to the government, the great default will occur.  The Federal Reserve may be able to extend out the ugly mathematics for a bit longer – they already are – but eventually they risk trigging a complete currency collapse.  That’s how markets will bring the distortions back into balance.

Jump!

“Liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system,” advised Treasury Secretary, Andrew Mellon, at the onset of the Great Depression.  “High costs of living and high living will come down.  People will work harder, live a more moral life.  Values will be adjusted, and enterprising people will pick up from less competent people.”

It’s too bad President Hoover, and later President Roosevelt, didn’t listen to the callous words of Mellon.  For by attempting to bailout the economy, they succeeded in turning a downturn in the business cycle into a 10-year economic depression.  So, too, contemporary politicians and central bankers, by continually propping up an over indebted economy, haven’t allowed markets to purge the rottenness out of the system.  Rather, they’ve erected a mammoth edifice perilously poised for collapse.

“There will be pain, and there will be very substantial pain,” explained Gloom, Boom and Doom Report editor, Marc Faber, earlier this week.  “The question is do we take less pain now through austerity or risk complete collapse of society in five to ten years’ time.  And in a democracy, they’re not going take the pain now.  They’ll kick down the problems and they’ll become bigger and bigger.

“I can’t tell you precisely the day, but I think the whole global financial system will have to be reset at some problem.  And it won’t be reset by central bankers, but by imploding markets; either the currencies or the debt markets or the stock markets, but it will happen.  It will happen one day big time and then we will all be lucky if we still have 50 percent of the asset values that we have today.”

Here at the Economic Prism we’d prefer to get it over…so we can pick up the pieces and get on with it – the quicker the better.  Stretching this out with more fiscal and monetary stimulus will only make the ultimate pain worse.  So while members of Congress and the President haven’t yet called us up to ask for advice on how to deal with the fiscal cliff, we’ll offer it up free of charge…

Jump!

Sincerely,

MN Gordon
for Economic Prism

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