Skip to comments.What is a fiscal cliff?
Posted on 11/11/2012 5:58:13 AM PST by DartmanEdited on 11/11/2012 6:51:02 AM PST by Sidebar Moderator. [history]
..and why Canadians should care.
Since were going to be hearing a lot about the so-called fiscal cliff and raising the debt ceiling of the United States over the next few months, heres a primer on whats going on.
The fiscal cliff refers to $560 billion in tax hikes and expenditure cuts set to occur in the U.S. beginning Jan. 1, 2013.
On the plus side, this would cut the current U.S. deficit of $1.17 trillion almost in half.
On the down side, the non-partisan Congressional Budget Office says the sudden imposition of $560 billion in tax hikes and spending cuts on the still-fragile U.S. economy would cost two million domestic jobs, drive U.S. unemployment up by a full percentage point above 9%, and send the American economy back into recession.
That, in turn, would have a negative impact on the Canadian economy, since were tied so closely to the Americans.
Thats why Prime Minister Stephen Harper last week urged President Barack Obama to address the fiscal cliff , after congratulating him on his victory, now that the U.S. election is over.
The fiscal cliff was created in the summer of 2011, a result of acrimonious negotiations between Obama and Republican House Speaker John Boehner to raise the U.S. debt ceiling.
Under American law, both the Democratically-controlled Senate and Republican-controlled House of Representatives have to agree to allow the government to borrow money so the U.S. Treasury can meet its day-to-day financial obligations.
As part of their negotiations to raise the debt ceiling in 2011, Obama and Boehner tried and failed to reach a $4-trillion, long-term agreement on tax and entitlement reforms to pay down the U.S. deficit, while getting the American economy back on a sound footing.
The impasse occurred because the Democrats were focused on raising taxes to reduce the deficit, while the Republicans wanted to cut government spending.
During the negotiations, the Republicans, later joined by some Democrats, threatened to withhold their consent to raise the debt ceiling, unless there was a long-term deal on deficit reduction.
Without an agreement to raise the debt ceiling, the U.S. Treasury would have run out of money, resulting in the U.S. government defaulting on its payments to foreign creditors like China, withholding Social Security payments from the elderly and failing to pay the military.
Even the threat not to raise the debt ceiling, which would have sent U.S. interest rates skyrocketing, was enough to send global stock markets reeling. It also caused the first downgrading of the U.S. governments credit rating in history.
In the face of this, and having failed to reach a so-called grand bargain on deficit reduction, Democrats and Republicans finally agreed to raise the U.S. debt ceiling to its current level of $16.4 trillion, while deliberately designing the fiscal cliff as a poison pill for both parties.
In other words, the fiscal cliff raised taxes in a way the Democrats didnt want and cut spending in a way the Republicans didnt want.
The theory at the time was that this would force both the Republicans and Democrats to come up with a better plan before the fiscal cliff came into effect at the start of 2013.
However, as usually happens when politicians kick a problem down the road instead of solving it, nothing has been done since.
Now the fiscal cliff is looming for the start of 2013, with no new agreement in place.
Meanwhile, the U.S.s current $16.4 trillion debt ceiling only provides the U.S. Treasury with enough money to operate until early 2013.
This means Obama and the Democrats and Boehner and the Republican now have to negotiate a new deal all over again.
The last time, they almost crashed the global economy with their reckless brinkmanship. Who knows what theyll do this time?
This cannot be true.
Except tax hikes now will only reduce revenues so they will just further cripple what used to be America.
Gross Domestic Product / St. Louis Adjusted Monetary Base or Aggregate Monetary Velocity
The fiscal cliff is when interest rates rise and we spend all our money rolling over our debt.
This debt ceiling stuff is just a short pit stop on the way up the cliff.
The real debt limit isn’t our own restriction on how much we’re willing to borrow, but the lenders’ restriction on how much they’re willing to lend.
And we hit that several years ago.
Something more than 30% of our so-called debt isn’t really debt, because nobody’s willing to buy it. Instead, it’s manufactured from whole cloth, via “quantitative easing”.
In other words, it’s not debt, it’s inflation of the money supply. Printing money like it’s worthless paper.
And there isn’t all that much space between our printing money like it’s worthless paper and the rest of the world deciding it’s worthless paper. And when that happens, expect Weimar-style inflation.
In truth, I’m surprised it hasn’t happened already.
Why,pray tell, is it so urgent after the election !?
Just make sure it's tied to the Dems (yeah, fat chance, I know with stupid repubs in he house.)
Jeez. Just think of how many small businesses at 50k/pop that 16.4TT would have started!
But no, we had to pay for abortions and contraceptives, hundreds of billions in foreign aid, 2.5 billion on the worthless UN and on and on and on, not to mention a healthy lining of Dem Donor's pockets and so many Green boondoggles that it boggles the mind. Then there's fed salaries, a bloated bureaucracy, free healthcare for half of govt while we have to pay for ours, half of govt employees not paying incom taxes, Dems getting 200k/yr+ and yet stiffing the House Cafeteria for their meals, crooked stamps for campaign cash deals and again, on and on and on.
Reagan wisdom is for the ages. Government is not the solution, Government is the PROBLEM! The Nearest thing to immortality you're ever going to see is a federal tax.
Yeah, let it go over the cliff. Republicans have been screaming about this for decades and every single time the American people have treated it like a puppy that had just peed on the floor and gave it a smack on the nose with a newspaper.
Let er go.
looking at the above money velocity graph however, it appears that this increase in the money supply has not yet filtered into circulation though. Where is it? who has it and what are they doing with it? I have a theory.
Where is it? The Gov loaned it to banks at zero interest.
The banks loaned it back to the gov at about 3% interest.
It is right back where it started except now Bronco Bamma is flush with cash to give the leeches free phones and welfare.
Why,pray tell, is it so urgent after the election !?
It was urgent before the election. It was urgent during the election. It's simply urgent.
We're not at the brink of a precipice - we're in that short pause in a Chuck Jones movie, after we've run off a cliff, and before we've started to fall.
No they don't. This is the first time anything they have done has addressed the deficit. We can live with reduced government spending.
People forget America isn’t a closed system. All kinds of foreigners hold US dollars because their own currencies are in a more hazardous situation than the US dollar.
If you’re newly rich in China, are you going to trust the Chinese government to protect your wealth? How about a European with confiscatory tax rates? Or how does a drug lord protect his wealth?
Owning gold isn’t practical or even possible for a lot of the wealthy.
I was highly amused to read an AP “fiscal cliff” story the other day. Their summation: it’s all the fault of the Republicans.
Lets see 1.2 trillion deficit, CBOsay eliminating tax cuts on rich results in 89 billion, fical cliff, please 1 trillion over 10 years is 100 billion per year outof what 3.4 trillion budget, if that is a cliff I have a bridge......, if and I mean if this happens our deficit goes down to 1 trillion, yup what a cliff. We are screw if we can’t cut 3% of our spending, lol
The Canadians don’t want us to become the Mexico at their sothern border. I don’t blame them, look what it’s done for us the last 30 years.
Mexico has some nice people, but we should not be giving social programs and services to non citizens or to residents because they had a citizen baby IMO.
What is a fiscal cliff?.Obama in office note last four years.
Banks hold it as reserves.
And if you wonder why that is a problem, think about how it will feel if your money is worthless, buys NOTHING....food, gas, medicine, ammo.
Companies out of business. No jobs. Expect violence as Homeland Security tries to restore/keep order.
Frack. The more I think of this, the more I think it’s going to make Greece’s pains look like an bright Sunday afternoon picnic. :(
Why is it so urgent? We run out of money to pay interest due, government payments to SS, military pay, government employee pay just before the end of this year.
then the money velocity graph shouldn’t look like it does and the excess reserves of depository institutions graph definitely shouldn’t look like it does. The money is just sitting there in limbo according to the graphs. If it’s just going to sit there in reserve, what was the point of creating it in the first place? It was like raising the largest army the world has ever seen and then not using them to fight the biggest war the world has ever seen.
Fed used it to buy toxic debt from banks which now sits on the Fed’s books.
According to the graphs it's sitting in reserve. Why? The money was created to bail out main street as well as wall street but it clearly never made it to main street for some reason. So where is it really? The only people who truly know where the money went are the people who ultimately received it and the people who gave it away and they weren't required to tell us. It smells like theft by fraud to me.