We are hearing the term “The Fiscal Cliff” used quite a bit today. I have recently had an increasing number of people ask me what the term means. Some who have asked are people I consider to be successful business people, people who have accumulated quite a bit of wealth.
The Fiscal Cliff is the new term for the conundrum that the U. S. is facing at the end of 2012, which is just days away. The danger is when the terms of the Budget Control Act of 2011 are scheduled to go into effect, along with several other things that will happen at the same instant. These events are scheduled to happen at 12:01 a.m. on 1/01/2013, and are viewed by many to be the elements of the “Perfect Storm” financially that will take us and the US economy over the Cliff. The events scheduled to occur are:
. . . Last year’s temporary tax cuts will expire, thus, immediately causing a 2% tax increase for wage earners;
. . . The end of a large number of tax breaks for businesses will expire;
. . . The scheduled shifts in the alternative minimum tax, which will take a larger bite;
. . . The end of the tax cuts implemented in 2001 to 2003 (referred to as the Bush Tax Cuts) will expire; and
. . . The beginning of heavy and new taxation related to what is known as Obama Care will kick in (one unknown component of the Health Care bill just announced today is the annual enrollment fee for those having “pre-existing conditions,” which is said to cost employers billions of dollars).
Even further, the spending cuts which had been agreed to as part of the debt ceiling deal of 2011 will go into effect. This will impact something like 1,000 government funded programs – including the Defense Department and Medicare. There will be deep, automatic cuts.
Nothing else needs to be done to make this become reality . . . the elements are all in place; but there is a great deal that must be done to prevent it from becoming reality. Most reports agree that there are three possible options available for us to deal with this potential financial nightmare. Those options are reported to be:
- We can let the current policy scheduled for 2013 go into effect. The result is expected to have a significant, negative impact on growth (which is now already non-existent) and will likely put the economy back into a deep recession. I have read that “If there is a plus side to this option it would only be that the deficit, as a percentage of the GDP, would be cut in half.” Frankly, I am not even sure what that means . . . but it seems to me that it simply gives economist a new way to look at the deficit. It seems to be to basically smoke and mirrors bookkeeping and is much like the things we read about that “will save a great deal of money over the next 10 years,” when in fact, there were no decrease in spending but merely a reduction in the projected growth of certain things in the budget.
We can cancel a portion of both the scheduled tax increases and spending cuts. The result would be that the deficit increases . . . and thus, also greatly increasing the odds that we would face a financial crisis much like what is happening in Europe as our deficit continues to grow. Personally, I don’t see much chance of this as the Republican controlled House won’t agree to reduce the automatic spending cuts without also reducing the tax increases …. and the Democratic Senate and White House won’t agree to reducing the tax increases without also reducing the automatic cuts in spending. Where is the olive branch to make this option work?
We could take the middle road and address the budget issues for a brief period of time. I suspect this is the best we can hope for — if anything happens at all. Sadly, this approach is simply kicking the can down the road and won’t begin to solve our financial problems.
The truth is that our political environment today is so partisan in nature and our people so divided it is next to impossible to address our increasingly serious financial situation with any measure of prudence. The greater truth is that this is not a new problem. It has been building over the past 20+ years and only gets worse. We have watched the shadow boxing for the past three years as we have approached the cliff and our elected officials have done absolutely nothing to head this thing off . . . and they still are not.
The American people also did nothing to head it off – in November we sent a divided system back to Washington to represent us. Those elected won’t be sworn in until January 3, 2013 . . . three days after we are set to fall off of the cliff.
The Congressional Budget Office has warned that if all of these things come into play as designed, there will be a dramatic impact and we can expect a cut in the Gross Domestic Product (GDP) of at least 4%, and an increase in unemployment. American businesses have been warning for months that if these things all happen as scheduled, they will be forced to lay off workers in large numbers in an effort to survive. It is certain that unemployment numbers will rise sharply and quickly. The sound we will hear on January 1, 2013, will be something like $600 billion being sucked out of an already-troubled economy.
Do you know anything about economics? Let me show some principles of Economics 101.
There are seven (7) stages in the life cycle of a Nation’s economy, as follows:
Stage 1: Good Money;
Stage 2: Takes on Burden;
Stage 3: Massive Military;
Stage 4: Significant increase in National Expense;
Stage 5: FIAT;
Stage 6: Loss of Faith (in the Nation financially and in its currency); and
Stage 7: The End of the Currency.
Following is a brief analysis of those stages:
Stage 1: A Nation begins its economy with a currency that is backed by something of value to others besides the citizens in that nation. The currency is backed by something sound and solid such as gold or silver.
Stage 2: In this stage, the nation begins to take on financial burden to improve the nation and the way of life for its citizens. It generally begins with things such as roads, bridges, infrastructure, and other such things that benefit everyone in general. The danger over time for a nation is that this type of spending evolves into personal life and becomes ever-growing social programs, which ultimately rewards people for not working. This can grow like wild-fire, and has in the USA since 1937. Over 50% of our annual revenue is being spent on entitlements.
Stage 3: At this stage, the nation develops a massive military. The purpose of the military is basically four-fold: national defense . . . to protect its wealth and way of life; to protect areas around the world that holds an interests for the nation; and to acquiring areas of the planet which the nation wishes to own or control.
Stage 4: The cost of being a nation increases greatly as it maintains its Stage 2 efforts and now maintains, funds, and expands its military. The more ambitious the nation, the more it spends.
Stage 5: As the nation’s expenses increase, its currency is produced in great amounts and there is less of the commodity that backs and supports the currency, so the nation’s leaders shift the system to this FIAT system. What is the definition of FIAT? There are actually several different ones, as follows: 1. A command, an act or will that creates something without, as if without, any further effort; 2. an authoritative determination (e.g. a FIAT of conscience); and 3. an authoritative or arbitrary order or decree (e.g. a government order). Example: In 1971 Richard Nixon took the USA off of the Gold Standard due to the cost of the Viet Nam war and USA monetary policy simply declared the value of the dollar.
Stage 6: Loss of Faith (in the currency): When a nation reaches this stage, several things begin to happen as confidence in the currency and the nation begins to fade. A couple of those things are:
- Other nations begin to demonstrate concern about the nation and its economy; and
- A move away from the currency toward precious metals. As an example, look at what has happened to gold prices over the past 4 to 5 years (from $300 per ounce to $1,700 per ounce).
Stage 7: This process is generally accompanied by either hyper-inflation or hyper-deflation. Mexico and Brazil over the past 25 years are great examples of a nation in this Stage where these events occurred. In the 1970’s, the Mexican economy and inflation was so great that its interest rate went over 3,000%. The same happened in Brazil. Both nations had to recall their currency and re-issue a replacement currency.
The FED has understood this danger since the financial crisis in 2008 and has tried to avoid inflation in our economy. The FED has kept interest rates from 0 to .25%, and that leaves it without many other bullets.
So, what Stage do you think the USA sits at this moment in history?
What is your confidence in the group we have sent to our Capital to address our nation’s problems? Can this group fix this thing, or do we, in fact, go over the cliff? If we do go over the cliff, how far do we fall? From the reports I am seeing, very little is happening to address this situation. Our leaders are too busy protecting their own turf . . . and rattling their sabers.
Seems to me it is time for action. If our elected representatives won’t act, then it is time for wise and prudent people to prepare themselves as much as possible. It seems pretty obvious that something is about to happen . . .