The Fiscal Cliff, Currency Devaluation, and You

When it comes to the alleged “fiscal cliff”, both supply-siders and Keynesians are in agreement that jumping off would bring tragic economic consequences. However, conventional wisdom is nearly always wrong, and I believe it’s wrong here.

We won’t reach the fiscal cliff because the incentives that drive politicians ensure a deal.

With the economy still limping, very few politicians will want to be on record as having voted to raise rates of taxation. Every member of the House of Representatives is up for re-election in 2014, a third of all senators are, and they’re not going to vote for large tax increases. Considering spending, though it nearly always occurs at the expense of growth, politicians exist to spend our money. We’ll never jump off the "fiscal cliff".

For Keynesians like Obama and his advisers, they’re deluded by the false belief that government spending is an economic stimulant. So automatic reductions in spending by the feds would directly subtract from GDP growth.

The Keynesians are actually right. GDP would decline in the very near term amid automatic spending cuts, but all this tells us is that Gross Domestic Product is a worthless number.

Economies are nothing more than a collection of individuals, and when we break the U.S. economy down to the individual, it’s easy to see how wrong the Keynesians are. Indeed, are you better off when the federal government taxes away your earnings and consumes limited capital that might otherwise fund a future Apple? No? Well, you’re the economy.
In short, government spending is an economic retardant.

What’s missed by some, but not all supply-siders, is that we’re already in a recession. GDP is once again a worthless number, but if we remove the economic wet blanket that is government spending from the calculation, there’s not much growth to speak of at all. The FED has injected trillions in fiat electronically printed dollars into the world economy. This is the classic definition of inflation - currency devaluation.

When money is devalued, the size of our paychecks shrinks. Supply-siders correctly understand that income taxes eviscerate our paychecks, but not enough understand that currency devaluation achieves the same, and that’s why devaluation always correlates with slow growth. Devaluation is a tax on work.

Tax cuts on income, investment returns and dividends are great, but they’re largely irrelevant at the moment. Worse, their wonders are being discredited by dollar destruction that began under George W. Bush, and that has continued under President Obama.

We’re never going to reach the fiscal cliff given the incentives that drive politicians. Government spending reduces real growth, while tax cuts only work if they’re paired with a strong dollar. Both supply-siders and the Keynesians miss the point.


The Fiscal Cliff, the Democrats and Barack Obama

“Fiscal cliff” is the popular term used to describe the conundrum that the U.S. government will face at the end of 2012, when the terms of the Budget Control Act of 2011 are scheduled to go into effect.

Among the laws set to change at midnight on December 31, 2012, are the end of last year’s temporary payroll tax cuts (resulting in a 2% tax increase for workers), the end of certain tax breaks for businesses, shifts in the alternative minimum tax that will take a larger bite, the end of the Bush tax cuts from 2001-2003, and the beginning of dozens of new taxes related to Obamacare. These tax changes affect everyone -– not just “the rich”.

At the same time, the spending cuts agreed upon as part of the debt ceiling deal of 2011 will begin to go into effect. According to Barron’s, over 1,000 government programs – including the defense budget and Medicare are in line for “deep, automatic cuts.”

This bill was signed into law by Barack Obama on August 2, 2011.

Republicans should allow this to take effect. All of it.

Democrats need to  understand what they elected. Obama supporters will reap what they have sown. Unless Congress acts by the end of the year, more than 26 million households will for the first time face the AMT, which threatens to tack $3,700, on average, onto taxpayers’ bills for the current tax year. Because those people have never paid the AMT, they have no idea they are in its crosshairs.

The Obama administration was a week late with its Sequestration Transparency Act, which was supposed to detail where budget cuts would fall:

Sequestration would impose cuts of 9.4 percent in nonexempt defense discretionary funding and 8.2 percent in nonexempt, nondefense discretionary funding. A 2 percent cut would hit Medicare providers, 7.6 percent would affect other nonexempt nondefense mandatory programs, and 10 percent would be applied to nonexempt defense mandatory programs, according to the report. Cuts in the range of 7.6 percent to 8.2 percent would affect everything from the Capitol Police to the Merit Systems Protection Board to the States Interagency Council on Homelessness.

Amusingly, Obama actually said the law he signed into effect “will not happen.”

When Mitt Romney pointed out the devastating $1 trillion in cuts set to hit our military via sequestration, Obama stated flatly, “[those] cuts will not happen.”

Obama is pledging that he will ignore a law he signed into effect. 

Democrats will now expect Republicans to bend to Obama’s will.

Harry Reid pledged not to work with a President Romney.

Barack Obama had a grand bargain in hand when he stiffed Boehner on the deal.

The first time he was elected Obama said “I won.”

In 2010 Obama said, “We don’t mind the Republicans joining us. They can come for the ride, but they gotta sit in back.” Obama successfully shut Republicans out of the stimulus and Obamacare process.

Now Obama will be looking for a legacy. It is not now nor has it ever been about the country. It was always about Barack Obama.

Republicans have the chance to grant Obama the legacy he signed into law- sequestration.

Obama signed it. He owns it. Let it happen. All of it.

This is a good time for Obama supporters to understand that sacrifice is not simply something for others to make. This is a good time for Obama supporters to understand what they have done.

I for one will enjoy watching them cry about paying their fair share for a change.