Okay, so here’s the dirtly little secret…The “Fiscal Cliff” that everyone is supposedly working on to avert–is really unavoidable!
Yes, the Sequestration that was put in place that eliminates the broad-based tax cuts from a decade ago and reduces spending across military and domestic government spending–can be replaced by more surgical tax increases and spending cuts.
But with a National Debt of more than $16 trillion dollars and one which has been trending up over a trillion dollars a year, we have gorged ourselves and spent beyond our means for too long–and the time to pay up is fast approaching.
For example, critical entitlement programs likesocial security and medicare are running out of funds and will not be able to cover benefits by 2033 and 2024, respectively.
What is even worse though is that the money you have been paying into “the system” from yourpayroll taxes for decades hasn’t been put aside in trust for you, but has been spent on other things–sort of like robbing Peter to pay Paul. And now what?
At a time when national competitiveness is suffering, jobs are going overseas, test scores in science and math are trending down, and we have the lowest percentage of Americans working in 30 years, we are saying that we’ve essentially spent our last dime decades ago and have been doubling down with more and more borrowing–that we don’t really know if we can ever pay back.
While we would like to “grow” our way out, by having more people working, earning more, and paying more into the system, our growth projections of slightly more than 2% next year and a historical average from 1947-2012 of just 3.25%–this seems more than wishful thinking.
More likely, as the percent of our national debt to GDP continues to rise and our national credit ratings are are at risk of falling, interest rates will start to rise first slowly and then faster to elevated levels to compensate for the increased borrowing risks, and we will see inflation rear it’s ugly head–it is ugly because inflation will mean your savings are worth less or potentially even virtually worthless.
This will make the $16+ trillion deficit also worth less, so we pay it back through inflation as Germany did with hyperinflation after WWI, and the essential wiping out of our personal savings. Viola, deficit paid down, but pay attention to at what personal costs!
Unfortunately, the fiscal cliff is here and will happen whether spending is cut here or there and taxes go up on some or everyone. This is just the negotiation of how to spread the pain and spin the tale.
And either way the fiscal cliff is going to hurt, because you have to cut spending and increase taxes leaving people with even less money in their shrinking pocketbooks, and if you don’t, the credit agencies will continue cutting our national credit rating leading to higher interest rates on the debt and higher inflation–so either way, our creditors will get their pound of flesh.
In the E.U. now, we are seeing the effects with countries from Greece to Spain, Portugal, Italy, Ireland, and more reeling from the impact, but this is only the beginning, because the lending spigot instead of being turned off, has been opened up further to kick the can down the road. But who will be the lender of last resort, when there is no one that can reliably pay it back?
In the end, you can’t raises tax or cut your way out of decades of financial mismanagement, overnight. In the corporate sector, we say Chapter 11–what do you say for Western civilization? And what do we tell our children and grandchildren?
Originally posted at my blog: TheTotalCIO;
All opinions are my own.
Excellent post, Andy.
I would just reiterate that the interest we pay on the national debt is consuming an ever ncreasing percentage of the overall Budget of the U.S. Government. According to the Center on Budget and Policy Priorities (CBPP), “In 2011, these interest payments claimed $230 billion, or about 6 percent of the budget.” For more from CBPP click here.
An even bigger concern may be what would happen if China were to stop financing our national debt and demand full or partial immediate repayment on the principle? Similar to the U.S. housing bubble which burst — arguably laying the groundwork for the subsequent Great Recession — the national debt cannot be financed forever by socalled “interest only” loans from China or any country. These faulty financial mechanisms provide little or no short term gain, but will result in colossal long-term pain.
At some point, the bubble being created by growing interest payments on the debt, plus titanic and growing entitlement costs, will also likely burst. This will leave future generations in such a deep hole that it may lead to a second Great Depression.
Shared sacrifice by all Americans appears to be the only way out. The longer we wait, the worse this situation becomes for future generations.
DBG
Andy – What’s your perspective on the fiscal cliff’s impact on federal employees?
Hey Andy – Did my own research real quick. Though I had asked your perspective on how the fiscal cliff would impact federal employees, but it turns out the fiscal cliff will affect state government as well:
http://www.pennlive.com/midstate/index.ssf/2012/11/fiscal_cliff_to_affect_states.html
From this article, we learn:
“George Mason University recently estimated that more than 615,000 federal jobs would be cut as a result of Congress’ inaction.“
And even local government will feel it, perhaps more than federal or state levels, as the article says:
“The most obvious group to be impacted by Congress’ inaction would be regions and cities whose economies rely heavily on federal payrolls.”
Thoughts?
Sounds like we’re in for some rough waters ahead…
There appears to be sufficient political support for another bipartisan agreement that kicks the can down the road another 3-5 years. Some sort of short term extension of deadlines expiring in January followed by some major tax increases later in the year. It is important to remembe that for all the drama about draconian spending cuts, no fiscal deal in the past 40 years has ever produced meaningful reductions in government spending. Several agreements called for $2 or $3 in spending cuts for every $1 in tax increases. These agreements were never honored. Initially, lawmakers would agree to these cuts as measured against existing spending levels. After the tax increases were enacted, the agreements would be retroactively changed to measure cuts against an ever incresing baseline so lawmakers could claim they were cutting spending while it was in fact increasing. When even this level of fiscal discipline became to painful, everyone would agree that spending had decreased when compared to what baseline spending would have been as a percentage of GDP given various unrealistic assumptions.
Bottom line, taxes are going up. There will be a great deal of rhetoric about spending cuts but 3-5 years from now we will be spending as much or more than we are now. Government families with dual earners in the upper grades are likely to see their income taxes increase but their jobs are not in any real danger.