Over the Cliff

A month ago, I predicted that we would go off the Fiscal Cliff.  So far, my prediction still holds water.  There is now talk of a mini-deal to somewhat mitigate the cliff but it will only deal with taxes, not spending.  So, in effect, the President is asking the Republicans to raise taxes in exchange for nothing.  Well, not entirely nothing.  Provided the mini-deal passes, the Republicans won't be raising taxes on the middle class.  Yes, the balanced approach that the President spoke about throughout the campaign is all tax and no cut.  Of course, the President says we already have the cuts.  We're not going to spend billions in Iraq or Afghanistan for the next 10 years.  As Charles Krauthammer noted, we could save $800 billion by not building a ski resort on Mars.  The mini-deal, whether it passes or not, is of little consequence.  The movers and shakers of the economy are about to be hit with a tax increase.  Also, the middle class is going to suffer the Obamacare taxes.

 

The next big thing will be the debt ceiling.  If the Republicans are serious (they aren't), they will refuse to raise the debt ceiling.  Shutdown the government.  The debt is bigger than the economy and growing several times as fast as the economy.  Current projections add another $8 trillion to the debt over the next ten years.  This will lead to several possible outcomes:

 

1. Hyperinflation: the government puts the printing presses in high gear and produce trillions of new dollars to debase the currency.  This is never good for an economy and tends to collapse the government.
 

2. Tax hikes: Massive tax hikes would be required.  The government is spending 40% of GDP but only collecting just over half that in taxes.  If the government is going to spend 40% of GDP, it needs to tax that percentage of GDP.  It won't be enough to only tax the 'rich' to make that work.  Everyone gets hit.

3. Default: Not really an option but included for completeness.  The government stops paying its bills.  If we default on Social Security, Medicare, Drug Benefit, and Obamacare, the budget could be instantly balanced but the Congress would be voted out to person and possibly attacked by angry constituents.

 

All of this is obvious.  Everyone in DC knows that the current trajectory is suicidal but they are all children.  The President wants the US to be more like Europe and he's succeeding brilliantly.  Unless there is some massive growth in the economy, the government CANNOT possibly pay the money it has PROMISED to pay to future retirees.

 

If the Republicans shutdown the government (they won't) and hold the line until the fiscal house is put on a sustainable glide path (they won't), then there might be reason for hope.  But that won't happen.  Because, as mentioned in a previous post, Republicans are spineless.  I don't understand this since they will be blamed for whatever disaster befalls so they may as well earn the blame and save the country in the process.