The fiscal cliff - world economic collapse

[Subdude]

As it happens I was at a luncheon yesterday where the featured speaker was a Texas politician. He was making an identical argument to the one lockmat quoted in the original post. I mean chapter and verse, down to using identical phrasing such as Spain "going down". His argument too was "this just can't go on" without really explaining why. The whole speech was basically throwing together anecdotal economic stories to suggest impending doom.

If you ask me, this whole "fiscal cliff" thing is the biggest scam since "Y2K" (the end-of-millennium panic over nothing). The world is not going to end come January 1st. I suppose there will ever be a cottage industry of politicians and blowhards (if that's not redundant) with us, trying to stir up the populace for some reason or another. Their motto could be "this just can't go on!".

[RedScare]

There are two components to the "fiscal cliff". One is a return to the tax rates imposed during the Clinton years. The top rate, for incomes somewhere north of $200,000 rise to 39.6%, from 36%. The other component is budget cuts to several major programs, the biggest being the defense budget. There are a few things to note here. Republicans are demanding budget cuts...just not to defense. In fact, they want budget cuts LARGER than the ones in place now. They also oppose tax increases. No surprise there. Now, one must ask, if the fiscal cliff is going to cause Armageddon, why won't the Republican budget cuts also cause Armageddon? Answer: it might. or, it might not. Drastic spending cuts cause a slowdown in the economy, due to less money coming into the system. A strong economy can weather the cuts. A weak economy less so. Of course, another way to close a deficit gap is to raise revenue through taxes. Studies show that minor tax increases do not affect the economy. So, a combination of minor tax increases and budget cuts will close the gap quicker.

Republicans do not want to increase taxes, so the only option is to make the entire program scary. Frankly, they would rather have huge deficits than cuts to defense or tax increases. It simply shows where their priorities lie. While the fiscal cliff will be a bit of a shock to the system, it does not all kick in at once. Many of the cuts take place months or years from now. Tax increases are generally not due until April 2014.

Conclusion: Economic "experts" with a political agenda are probably not the best source for information on the effects of the fiscal cliff. Frankly, this will probably be good for our financial health, though a bit painful at times. Closing budget gaps is never easy. Something must be cut. Might as well be a bloated military budget.

[kylejack]

There are a few things to note here. Republicans are demanding budget cuts...just not to defense. In fact, they want budget cuts LARGER than the ones in place now. They also oppose tax increases.

Not exactly. They oppose tax rate increases, but Boehner's proposal decreases exemptions and deductions, raising taxes.

[JJVilla]

<>

If you ask me, this whole "fiscal cliff" thing is the biggest scam since "Y2K" (the end-of-millennium panic over nothing). The world is not going to end come January 1st. I suppose there will ever be a cottage industry of politicians and blowhards (if that's not redundant) with us, trying to stir up the populace for some reason or another. Their motto could be "this just can't go on!".

This bold part explains mostly what I was trying to state in my previous post.

[KinkaidAlum]

I'd love to see us cut military spending. A good place to start would be to get the HELL out of Afghanistan right NOW. The surge didn't work. Only 1 of the 23 special service units we've tried to create there can operate on their own. ONE. In a decade long war. Additionally, the only thing the surge has done is to cause American deaths to increase.

This last election cycle was laughable in that neither major candidate even bothered to address the WAR. We're in a freaking war and NOBODY is talking about it. How about we stop this nonsense about nation building in Afghanistan and get the hell out of hell? We could save HUNDREDS OF BILLIONS OF DOLLARS and do a little nation building here.

Best way to push our economy over the hump would be a bigger, better stimulus. Build infrastructure. Hire teachers. Expand Americorps. Train and hire new air traffic controllers. Modernize airports.

[ricco67]

Oh yeah. Let's make the same mistake the Russians made when they left Afghanistan after the war they started.

Nothing went wrong then.

[samagon]

This last election cycle was laughable in that neither major candidate even bothered to address the WAR. We're in a freaking war and NOBODY is talking about it. How about we stop this nonsense about nation building in Afghanistan and get the hell out of hell? We could save HUNDREDS OF BILLIONS OF DOLLARS and do a little nation building here.

this and the climate were two subjects that were not discussed by either candidate.

[KinkaidAlum]

Oh yeah. Let's make the same mistake the Russians made when they left Afghanistan after the war they started.

Nothing went wrong then.

Have a better idea?

The truth is, we should have learned from the Soviets mistake and never entered into the war. Hundreds of years of history was pretty clear; you're not going to be able to nation build in Afghanistan.

[ricco67]

When the Soviet Union left the nation the left a government in tatters with no such a control.. This resulted in a 10 year revolution or struggle for control in the region which allowed the Taliban to take control. It was at this point where the people are willing to accept any government at all.

If we were to leave now with no functioning government then we would just be back in 10 or 29 yrs.

Whether or not it was worth to invade the country begin with is pointless. We can always like at what we SHOULD have done with armchair quarter backing, but unless you're there making decisions, you can't really say what you would have done, captain hindsight.

[RedScare]

Whether or not it was worth to invade the country begin with is pointless. We can always like at what we SHOULD have done with armchair quarter backing, but unless you're there making decisions, you can't really say what you would have done, captain hindsight.

Irony. You armchair QB the Soviets, then accuse others of armchair QBing the US. The US had the hindsight of watching the 10 year failed occupation of Afghanistan by the USSR. We knew what we were getting into, yet did it anyway. Afghanistan will be a lawless cesspool no matter how long we stay. It is time we admit failure and leave.

If it makes us feel better, we could admit success and leave instead.

[samagon]

Didn't the Commies leave Afghanistan when communism collapsed along with the USSR?

[lockmat]

How does this factor into the equation?

http://www.treasury.gov/connect/blog/Pages/Secretary-Geithner-Sends-Debt-Limit-Letter-to-Congress-12-26.aspx?hpt=hp_t2

[Subdude]

He said the US govt is printing 40 billion dollars a month on an open ended basis. Of course, the more we print, the less the dollar is worth.

The US is accumulating 4 billion dollars of debt a day.

European Central bank is having to buy Spanish bonds.

Foreign countries no longer want to buy our debt. China is actually selling our debt now, at a rate of 7 billion dollars per month.

He said serious, respectable economists are writing about how we would grapple with the what would happen if there is a collapse of the euro or dollar.

 

Just stumbled on a great blog post that addresses the printing money issue.

 

 

 

1) The government “prints money”.  

The government really doesn’t “print money” in any meaningful sense.  Most of the money in our monetary system exists because banks created it through the loan creation process.  The only money the government really creates is due to the process of notes and coin creation.  These forms of money, however, exist to facilitate the use of bank accounts.  That is, they’re not issued directly to consumers, but rather are distributed through the banking system as bank customers need these forms of money.  The entire concept of the government “printing money” is generally a misportrayal  by the mainstream media.

4)  The national debt is a burden that will ruin our children’s futures.  

The national debt is often portrayed as something that must be “paid back”.  As if we are all born with a bill attached to our feet that we have to pay back to the government over the course of our lives.  Of course, that’s not true at all.  In fact, the national debt has been expanding since the dawn of the USA and has grown as the needs of US citizens have expanded over time.  There’s really no such thing as “paying back” the national debt unless you think the government should be entirely eliminated (which I think most of us would agree is a pretty unrealistic view of the world).

5)  QE is inflationary “money printing” and/or “debt monetization”.  

Quantitative Easing (QE) is a form of monetary policy that involves the Fed expanding its balance sheet in order to alter the composition of the private sector’s balance sheet.  This means the Fed is creating new money and buying private sector assets like MBS or T-bonds.  When the Fed buys these assets it is technically “printing” new money, but it is also effectively “unprinting” the T-bond or MBS from the private sector.  When people call QE “money printing” they imply that there is magically more money in the private sector which will chase more goods which will lead to higher inflation.  But since QE doesn’t change the private sector’s net worth (because it’s a simple swap) the operation is actually a lot more like changing a savings account into a checking account.  This isn’t “money printing” in the sense that some imply.

6)  Hyperinflation is caused by “money printing”.  

Hyperinflation has been a big concern in recent years following QE and the sizable budget deficits in the USA.  Many have tended to compare the USA to countries like Weimar or Zimbabwe to express their concerns.  But if one actually studies historical hyperinflations you find that the causes of hyperinflations tend to be very specific events.  Generally:

• Collapse in production.
• Rampant government corruption.
• Loss of a war.
• Regime change or regime collapse.
• Ceding of monetary sovereignty generally via a pegged currency or foreign denominated debt.

The hyperinflation in the USA never came because none of these things actually happened.  Comparing the USA to Zimbabwe or Weimar was always an apples to oranges comparison.

 

 

http://pragcap.com/the-biggest-myths-in-economics