Aloha, Merry Fiscal Cliffmas! Look at What Awaits at the Bottom of the Cliff

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The fiscal cliff is a shorthand term coined by Ben Bernanke to describe the conundrum that the U.S. government will face beginning January 2nd when the Bush tax cuts (Clinton tax increases) run out. He used the term to describe the “massive” negative effects such an event would have on the U.S.

We don’t know how the markets will react but we could face a recession (it feels like a recession now). Some economists say we could lose hundreds of thousands of jobs. Defense will be hit very hard if nothing is done soon.

Bernanke said the politicians must act because the feds can’t do much. The politicians are at an impasse and they went on vacation.

The chart gives us a good idea of what jumping over the fiscal cliff will cost you. It is the largest instant tax increase in our history and it is happening while our economy is barely dragging its feet with 2% economic growth. These increases will possibly lead to a drop of 1.5% economic growth, hurtling us towards recession. Democrats feel we can sustain it.

Fiscal-Cliff-Fallout05

Before President Obama flew off to his lavish Hawaiian vacation, he told the lawmakers to take some eggnog and think about their obligations to the American people. I wish he’s take his own advice.

The Obamacare taxes are coming on Jan. 2nd at the same time we jump over the fiscal cliff. Republicans will be blamed and people won’t realize they are a separate issue.

How much time does the average person spend watching the news in a week? Fifteen minutes? Most listen to the mainstream media or hear Obama soundbites. Many don’t realize what the fiscal cliff is.

Obama has offered a plan to the Republicans which demands double the taxes he asked for last time and which gives him unlimited power to spend by eliminating the debt ceiling. It’s like giving an alcoholic the keys to the liquor store.

President Obama wants to eliminate the debt ceiling which takes Congress out of the equation as the Obama administration spends without limit. Congress would be reduced to naming post offices and giving out medals. This was a deal they had to refuse.

The Republicans offered the increased taxes Obama originally asked for, an increase on the rates for people making over a $1 million dollars,  and two years of free reign on the debt ceiling, which would easily equal another $2-$3 trillion in deficit spending by the Obama administration. Obama refused. He wants to double the tax increases while we are near-recession.

Obama claims he is cutting spending. No one is offering that. He is actually offering cuts in spending 9-10 years down the road when he will be long gone. In other words, they are no cuts at all.

Other variations of the plans were offered by Boehner as he negotiated with himself. Obama will not budge, but with the Media on his side and polls telling us that people will blame the Republicans no matter what Obama does, Obama will continue to not negotiate and he will cut nothing.

Obama wants to go over the cliff. He wants cuts to the military and he wants higher taxes. He can come back in a few months and give us some of it back and look like the hero.

 

THE EFFECTS OF THE FISCAL CLIFF

  • We are facing another downgrade by the ratings’ agencies
  • Full sequestration will take place. President Obama said sequestration would not happen during the presidential debates but there are other statements which indicate that he never meant that. Panetta warned in a recent memo,“These cuts, while significant and harmful to our collective mission as an agency, would not necessarily require immediate reductions in spending…Should we have to operate under reduced funding levels for an extended period of time, we may have to consider furloughs or other actions in the future…” Panetta added.
  • We could face a possible recession as the economy slows. We don’t know how the markets will react.
  • Income Taxes will increase:
    • 10% rate will be collapsed into the 15% rate
    • 25% rate will go up to 28%
    • 28% rate will go up to 31%
    • 33% rate will go up to 36%
    • Top rate will go from 35% to 39.6%
    • The marriage penalty returns
  • Estate Tax will increase:
    • Maximum estate size that is exempt will fall from $5 million to $1 million
    • Top rate on taxable estates will rise from 35% to 55%
  • Capital Gains and Dividends will go up:
    • Top tax rate for long-term capital gains will rise from 15% to 20%
    • Dividends will be taxed at ordinary income tax rates
  • The Social Security Payroll Tax is also set to expire:
    • Employee’s share of Social Security payroll taxes rises from 4.2% to 6.2%
    • For the self-employed, Social Security payroll taxes rise from 10.4% to 12.4%

 

GOVERNMENT SPENDING

The US government borrows $4 million dollars a minute and $239 million each hour. For every dollar they bring in, they spend $2.06.

The government takes in a little more than $5 billion a day in revenue but spends $11 billion a day leaving $6 billion which the government has to borrow. HHS spends $3.01 billion, SSA (Social Security) spends  $2.46 billion, DOD spends $1.79 billion.

The interest for this deficit spending is $854 million a day at a time when we have the lowest interest rates in our history. Can you imagine how bad it will be when the interest rates go up? We get nothing for spending money on interest. We will have the same problems as Europe down the road if we don’t change course. The majority of Americans feel we are on the wrong course but they are happy with Obama’s performance – it’s baffling!

Obamacare, SSA and Medicare will force us to continue this deficit spending.

Obamacare is a new entitlement program forced on the American public even though Mediacare and SSA are broken.  Obamacare is far more expensive than Obama promised. The cost will be at least $1.75 trillion for coverage alone and it will cover fewer people than originally promised.

The CBO estimates Obamacare will reduce the deficit because the government plans to tax and levy fines against  individuals and companies to make up for the added costs.

Obama says he needs more money from taxes and Republicans say we have a spending problem and we need to cut the deficit spending. Most people agree with the latter but they voted for the former.

 

PROPOSED CUTS TO THE DEBT

President Obama’s cuts rely on the popular “tax the rich” mantra which will only pay for the government for 7 days. His cuts do not make substantive changes to the way the government does business and they only affect discretionary line items, a small part of the budget in relation to entitlement spending:

  • $7b in Medicare and Defense
  • $68b in Deductions
  • $82b by taxing the top 2%
  • $3b on the post office that can’t sustain itself now

The total for all this comes to $166b a year in savings but we are now spending $3.5 trillion a year and our total debt is $16.3 trillion.

 

OUR FUTURE IF WE DO NOTHING ABOUT SPENDING

We are currently printing money that is backed by nothing so we can keep the interest rates low and, in doing so, we are reducing the value of our currency. Many nations are already looking for ways to end the dollar’s reign as the world currency and replace it with another currency such as the yuan.

If we destroy the value of our currency, we will destroy the middle class. Instead of limiting the printing of money in response to this eventuality, the feds have doubled down to keep the interest rates low until 2015.

They are doing this because the debt to GDP ratio is almost at 102%, the highest it has been since WWII and that is with historically low interest rates.

The interest will cost the US more-and-more each year.  It will cost $220b this year and $570b by 2020 at current rates which will not continue until 2020. The monetizing of debt and printing of money cannot continue. It is unsustainable.

The feds are using a credit card and not paying it off.

 

MEASURING THE HEALTH OF OUR ECONOMY

The best way to measure the health of our economy is to compare the credit market debt to GDP ratio. This has steadily increased to a high of 370% in 2010 with a slight decrease to 350% in 2012.

There wasn’t a lot of borrowing until the 1950’s and then the country starting being leveraged. We are now over-leveraged, so even if interest rates rise even slightly, all sectors (government, households, corporates and financials) will have trouble paying the debt.

As former Democratic Senator Evan Bayh said, even if the interest rates go up a little bit, as tough as this is, we ain’t seen nothing yet. Eventually interest rates will go up, the burden will be immensely greater and it will start taking from everything else.

Economist John Taylor said that if the interest rate goes from 2% to 4%, it doubles what you have to pay on a given amount of debt. With our debt so high, that’s a lot of money.

Economist Robert Genetski said that when the problems come, they will happen very rapidly. Once that increase starts, it will be very difficult to contain it.

While things are under control, we must implement changes that will halt the coming crash but will we?

We owe half our debt to other countries so if our foreign creditors (and domestic creditors) lose confidence in us, we are in deep, deep trouble according to Clinton former budget director, Alice Rivlin of the Brookings Institute. It will affect everyone. Expensive borrowing can destroy American prosperity.

The feds have accumulated $2 trillion in government debt trying to reduce long term rates. The feds are buying all sorts of securities in exchange for injecting money into the money supply.  As we devalue our dollar by flooding the market with funny money, we can expect that eventually, inflation will come around. It will likely come without warning. Savings will be worth less and retirements will be destroyed as our dollar tanks.

In 1945 to 1947, there was a drastic cut in government spending because of the winding down from WWII and people predicted that less government spending would be a catastrophe. The opposite happened. There was a huge increase in private spending to 25% because there was a lot more private money to spend according to one economist.

Because of interest, time is running out. Drastic solutions are needed and they need to be big.

Of course, if you follow Paul Krugman or Michael Moore, you will say we have plenty of money and we should keep spending. I hope they’re right.

 

WHAT CAN BE DONE

  • We need to slow the costs of healthcare entitlement programs as the baby boomers come onto the rolls
  • At least modest rates of growth in the economy
  • A revised tax system
  • The size of government must be reduced and the cost of programs such as regulatory programs need to be on the chopping block. The opposite is happening. President Obama is adding 101 government workers a day.

 

Main Source: FoxNews, Bret Baier five-part special on the cost of spending

Read more here.

 

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