In a recent address, President Obama proclaimed, “If we state that 98 percent of Americans won’t see a tax increase – and that 97 percent of small businesses won’t either,” he remarked on Wednesday. “By implementing this, we are effectively alleviating half of the fiscal cliff.”
Is it really that simple?
While we acknowledge that there have been worse presidents – perhaps even less intelligent ones – can anyone recall a leader as unintentionally humorous as this one?
Not in recent history, to our knowledge.
The pivotal aspect of the fiscal cliff that President Obama seems to overlook is that the current discussions are merely the starting point. The inevitable plunge into economic hardship is set to be both prolonged and painful. Moreover, it’s unavoidable.
Increased austerity, manifested through higher taxes and reduced spending, is on its way. This adjustment will either occur through deliberate governmental policies or will be enforced by market realities. Given Congress’s apparent incapacity to grasp the core issue, it’s likely that the markets will need to instigate genuine changes to the nation’s financial framework.
The Consequences of Broken Promises
At Economic Prism, we criticize both taxes and public spending. Unfortunately, voters often embrace public expenditure, provided that the financial burden falls on the wealthy. Yet, even if the affluent are taxed further, revenue generated will never match spending; unfunded liabilities simply cannot be satisfied.
Social Security and Medicare currently disburse more than they collect, creating a budget imbalance that is patched with debt. In essence, funds borrowed today are used to fulfill obligations made in the past. This practice of financing historical commitments with new debt continues to escalate our debt levels.
The notion that raising taxes on the wealthy could somehow restore Social Security and Medicare is utterly absurd. According to Boston University Professor Larry Kotlikoff, unfunded entitlement liabilities have skyrocketed to $222 trillion. This represents money promised to millions, money they are unlikely to ever receive.
Sadly, these individuals will face the bitter consequences of illusory promises. They will need to adjust their expectations, scale back their lifestyle, move in with family, and do whatever it takes to manage with significantly less.
This predicament is a legacy of failed political decisions affecting millions of Americans. If confidence in U.S. Treasuries wanes and lenders withdraw support, a monumental default will occur. Although the Federal Reserve may prolong the inevitable, it risks triggering an all-encompassing currency collapse. This will be how the markets ultimately rein in these economic distortions.
Time to Jump!
“Liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the decay from the system,” advised Treasury Secretary Andrew Mellon during the onset of the Great Depression. “Living costs and extravagant lifestyles will decrease. People will work harder and return to a more moral existence. Values will understandably shift, allowing industrious individuals to thrive while the less competent falter.”
It’s unfortunate that Presidents Hoover and Roosevelt disregarded Mellon’s harsh advice. Their attempts to rescue the economy only exacerbated the downturn, ultimately morphing it into a decade-long depression. Today’s politicians and central bankers are repeating this mistake by continually supporting an over-leveraged economy, thus hindering markets from effectively cleansing the system. Instead, they are constructing a towering structure precariously close to collapse.
“There will be pain; substantial pain,” stated Marc Faber, editor of the Gloom, Boom, and Doom Report, earlier this week. “The real question is whether we choose to endure pain now through austerity or risk complete societal collapse within the next five to ten years. In a democracy, folks usually opt for short-term relief, pushing issues further down the road.”
“I can’t specify an exact date, but I believe a significant reset of the global financial system is inevitable. This reset won’t come from central bankers, but rather from market implosions—be it in currency, debt, or stock markets. It will happen eventually, and we should all prepare for the likelihood that we’ll hold onto no more than half of our current asset values.”
At Economic Prism, we’d prefer to face this reality sooner rather than later, so we can piece together the aftermath and move forward. Delaying it with additional fiscal and monetary stimulus will only magnify the ultimate suffering. While neither Congress nor the President have sought our guidance on handling the fiscal cliff, we will offer it freely…
Jump!
Sincerely,
MN Gordon
for Economic Prism
