Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Obama To Continue Extend and Pretend, Going Over the Fiscal Cliff is Good for America

Politics / US Debt Nov 10, 2012 - 10:28 AM GMT

By: Peter_Schiff

Politics

Best Financial Markets Analysis ArticleNow that President Obama has been re-elected, the media is finally free to focus on something besides the clueless undecided voters in Ohio, Florida, and Colorado. The brightest and shiniest object that has attracted its attention is the "fiscal cliff" that we are expected to drive over at the end of the year unless Congress and the President can agree to turn the wheel or apply the brakes.


Fresh from his victory, the President took time today to let the nation know how he proposes to avoid the cliff: to raise taxes on those Americans who make more than $250,000 per year. He made clear than no one making less than that will be asked to pay any more. The two percent of taxpayers that the President is targeting earn 24.1% of all income and pay 43.6% (as of 2008) of all personal federal income taxes. Sounds like a fair share to me. But the four or five percent tax increases on those earners that are being proposed would only yield around $30 to $40 billion per year in added revenue, a drop in the federal bucket. Even if they were to double the amount that they pay our deficit would only be cut by about one third (even if those increases did not trigger an economic slowdown).

So what exactly is this looming menace, and why is it so dangerous? Stripped of its rhetorically charged language the fiscal cliff is simply a legal trigger that will trim the deficit in 2013 by automatically implementing spending cuts and tax increases. In other words, the government will spend less, and more of what it does spend will be paid for with taxes rather than debt. Isn't this exactly what both parties, and the public, more or less want? The fiscal cliff means that the federal budget deficit will be immediately cut in half, shrinking to approximately $641 billion in 2013 from the approximately $1.1 trillion in 2012. What is so terrible about that? I would argue that there is a greater danger in avoiding the cliff than driving over it.

If you recall, the cliff was created by a deal last year when Congress couldn't find ways to trim the deficit in exchange for raising the debt ceiling. When they failed to reach an agreement, Congress knew they had to raise the debt ceiling anyway. The resulting Budget Control Act of 2011, signed in August of that year, offered the pretense that they were dealing with our long-term fiscal crisis and not simply raising the debt ceiling with no strings attached. This was done not only to appease some House Republicans, who had threatened to vote against a debt ceiling increase, but to satisfy the bond rating agencies that had threatened (I would choose a different word or provide a source to back this up)a down-grade if Congress failed to act.

Now the focus turns to how Congress will dismantle the structure it created just 16 months ago. There can be little doubt that they will as economists are assuring politicians that driving over the fiscal cliff will immediately bring on a recession. The expiration of the Bush era tax cuts for all taxpayers will cost Americans an estimated $423 billion in 2013 alone. Hundreds of billions of across the board spending cuts, including the military, have been delineated. No politician would allow that to happen.

It is amazing that members of Congress can keep a straight face as they claim to want to address our long-term deficit problem while simultaneously working to avoid any substantive action. No doubt an agreement will be reached that will replace the looming fiscal cliff with another one farther down the road (which they can easily dismantle before we actually reach the precipice). Will the rating agencies buy this bill of goods a second time? If we lack the political courage to go over this fiscal cliff, why should anyone think we will be able to stomach going over the next one? Especially since each time we delay going over the cliff, we simply increase its future size, making it that much harder to actually go over it.

Many currently believe last year's S&P downgrade resulted from the same congressional dysfunction that resulted in the fiscal cliff agreement. The truth is that the downgrade would probably have been much greater, and more rating agencies would have likely joined S&P in taking action, had it not been for the fiscal cliff agreement. If further downgrades fail to be issued when the lame duck Congress inevitably comes up with another can kicking deal, then the agencies themselves could lose any remaining credibility. In my opinion, the only explanation for inaction by the rating agencies would be for fear of regulatory retaliation by a vindictive U.S government.

I do not think it is a coincidence that while the banks are suffering a regulatory backlash as a result of their perceived culpability for the mortgage crisis, the credit rating agencies have been relatively untouched. But the credit agencies played a key role in catalyzing the mortgage crisis by giving questionable ratings to the mortgage backed securities. My guess is the government simply does not want to open up that can of worms as similar mistakes are being made with respect to the agencies' ratings of government debt.

The truth is that regardless of what you call it, going over the fiscal cliff is not the problem, it is part of the solution. Our leaders should construct a cliff that is actually large enough to restore fiscal balance before a real disaster occurs. That disaster will take the form of a dollar and/or sovereign debt crisis that will make this fiscal cliff look like an ant hill.

Peter Schiff is the CEO and Chief GlobalStrategistof Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show.

Subscribe to Euro Pacific's Weekly Digest: Receive all commentaries by Peter Schiff, John Browne, and other Euro Pacific commentators delivered to your inbox every Monday!

And be sure to order a copy of Peter Schiff's recently released NY Times Best Seller, The Real Crash: America's Coming Bankruptcy - How to Save Yourself and Your Country.

Opinions expressed are those of the writer, and may or may not reflect those held by Euro Pacific Capital, or its CEO, Peter Schiff.

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in