It was clear the fix was in the moment the term “fiscal cliff” was coined to describe the series of spending cuts and tax increases that were set to kick in on January 1, 2013.
The American people were told in 2011 that the debt ceiling needed to be raised again to avert an outright default on the national debt. So the Budget Control Act of 2011 was passed, which authorized the Treasury to borrow an additional $2.1 trillion — enough to keep the federal government operating until December 31, 2012. But this act also imposed a series of automatic spending cuts (sequestration) and tax increases to address the country’s debt crisis.
Then in February 2012, Fed Chairman Ben Bernanke appeared before the House Financial Services Committee, where he warned of “a massive fiscal cliff of large spending cuts and tax increases.” Many others warned of the supposed baleful effects of withdrawing hundreds of billions of dollars from the economy as Congress trimmed the federal budget.
That analysis was pure Keynesian nonsense, of course. Government, having no money of its own, cannot stimulate economic growth by spending other people’s money. Sure, it can confuse the matter with debt and inflation, but those are just alternative forms of taxation. Either way, public-sector spending must be gouged from the private sector.
Nevertheless, “fiscal cliff” became the buzzword used by the politicians and pundits to warn the American people of the disaster that would befall humanity if Congress actually borrowed a little less money in 2013 than it did in 2012.
So how large were those “large spending cuts” that threatened to end civilization as we know it?
Well, under sequestration, spending would have been reduced by $109 billion a year for the next nine years. That may sound like a large figure, but when you consider that the annual federal budget is $3.8 trillion, it really isn’t that much. And with Congress now routinely running trillion-dollar annual-budget deficits, how was “cutting” $109 billion from the federal budget expected to make a major impact?
Well, it wasn’t, and Congress never had any intention of permitting even those phantom spending cuts to go through. That is just how addicted Washington is to debt.
So on January 2, 2013, Congress produced a deal that imposes higher taxes on 77 percent of American households in return for a promise to consider modest spending reductions in the future. When have we heard that before?
Contrary to the claims of the White House and Congress, the “fiscal cliff” did not threaten to plunge the nation into oblivion. If anything, allowing the nation to fall off it would have been a step in the right direction.
Yes, the automatic tax hikes would have caused harm to the economy. But given the current levels of spending, they would have been far less harmful to the long-term health of the economy than the inflationary deficit financing that now must substitute for them. If I may paraphrase a presidential campaign slogan from a few years back: It’s the spending, stupid!
Zero Hedge helped put things in perspective with this chart. It compares the annual tax increase imposed by the Budget Control Act of 2013, which is $62 billion, to the federal government’s budget deficit for FY 2011, which was $1,089 billion. The budget deficit for FY 2012 came in at $1.1 trillion. That’s the fourth year in a row of trillion-dollar-plus budget deficits. Do you see the financial problem?
The political problem is that with 150 million Americans now receiving a government paycheck or some other government benefit, any fiscal policy approaching sanity is not politically viable. Neither political party wants to stomach the short-term pain that is necessary for the long-term health of the economy. Both the Democrats and the Republicans prefer the opiate of inflationary deficit financing.
As the libertarian-conservative commentator and author Charles Goyette says,
Both parties have carefully cultivated their constituencies for many years. They disappoint them at their political peril. That means they are committed to more of the same spending: Welfare and warfare!
Goyette’s analysis is spot on. The country’s addiction to debt is a bipartisan problem. While the two parties may differ on some minor details, both support massive military and domestic spending programs that are simply beyond the capacity of the economy to maintain.
The “fiscal-cliff” debate, however, has shifted the attention of the public to a relatively minor problem from a much more serious one: the bond market.
The real effect of the Fed’s successive rounds of “quantitative easing” has been to prop up the price of U.S. Treasuries. This inflation has saved a few large banks and permitted Congress to continue borrowing cheaply, but it is also ruining savers by depriving them of interest income and eroding the purchasing power of their dollars.
Moreover, the Fed’s debt monetization is making all holders of U.S. dollars very nervous. If the Fed’s devaluation were to spark an international run on the dollar, interest rates would have to be raised to arrest the panic. This would wipe out bondholders overnight, and the interest payments on the national debt would explode. Congress would then be forced to make massive across-the-board cuts to the federal budget.
But that’s a problem for another day. For the time being, Congress can still write the checks, because the Fed is willing and able to cover them with inflation.
And now it is being reported that the next big budget fight is going to be over the debt ceiling. The Bipartisan Policy Center is projecting the U.S. Treasury will be exhausted of funds sometime between February 15 and March 1 and thus will be seeking authorization from Congress to borrow more money.
So the current debt limit, which stands at $16.4 trillion, is to be raised again.
But why not borrow $18 trillion, or $25 trillion, or $100 trillion for that matter? When you have the power to create the money you borrow, and then pay the interest on the debt with even more funny money, why stop?
