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This is the way the (financial) world ends...

Discussion in 'Financial Cents' started by TheEconomist, Nov 9, 2012.

  1. TheEconomist

    TheEconomist Creighton Bluejay Site Supporter+

    This is the way the world ends
    This is the way the world ends
    This is the way the world ends
    Not with a bang but a whimper.
    -T.S. Eliot

    Since the reelection of President Obama some have come to believe that there is a sort of financial “Judgment Day” ahead. Chairman of the Federal Reserve, Ben Bernanke, called it a “Fiscal Cliff”. Economists and politicians have been pointing to this event since concern arose that a republican house and democrat executive branch and senate would be unable to reach an agreement on how to extend the Bush era tax cuts and spending measures.
    In August of 2011 a supercommittee was put together and charged with stopping an American default of sovereign debt. They were faced with raising the debt ceiling by $1.35 trillion while at the same time cutting spending by $1.5 trillion over the next 10 years. In the end a committee of bipartisan politicians was unable to come to terms. Other than raising the debt ceiling in order to avoid a default on sovereign debt nothing was accomplished. This is what led to the downgrade on the outlook of our national debt.
    Fast-forward to the evening of November the 6th 2012. Almost as soon as it became apparent that leadership in this country would not change hands across the board news media was plastering Fiscal Cliff headlines everywhere. The morning came and markets, which are historically forward looking, opened down and continued that way to close out the week.
    President Obama issued a statement that he will remain committed to lowering the deficit through raising taxes on people who make $250 thousand a year or more while continuing to raise the debt ceiling and spending our country through recession into stability. QE3 is now active and perpetual with no end to its $40 billion a month spending on the horizon.
    John Boehner, speaker of the house and republican congressman, issued his own statement that he wants to continue with all of the Bush era tax cuts and the reduction of government spending.
    Both sides are unwilling to budge…
    However, if or partisan government cannot come to terms, a trigger mechanism kicks in which promises automatic spending cuts of $1.2 trillion equally across national security and domestic policy. Save for entitlement programs like social security, veteran’s benefits, and federal pensions. Tax cuts will expire as well leading to higher taxes on the upper and middle classes. All of this will happen in January of 2013.
    But what does this all mean? What can we draw from the happenings of the past few days, years?
    That is exactly what one of my coworkers asked me this week. She works with me in the ethics and compliance office of one of the world’s largest banks. We monitor the activities of our executive board, portfolio managers, analysts, you name it. My co-worker is a well educated middle aged woman with an MBA and a lifetime of experience. Curious to hear more of what she was thinking I turned to her and asked;
    “Well, what do you think?”
    She responded without hesitation.
    “I think Obama just needs to sign an executive order and raise taxes on the rich. I was listening to him speak, he takes my breath away every time I hear him, and he is right that the rich need to pay their fair share.”
    I said, “That is an interesting thought.” knowing that she was a liberal democrat, brainwashed, and unable to be reasoned with on the issue. “The only problem is the President is not able to make an executive order effecting taxation. That is reserved for our congress as per the US Constitution.”
    She sighed and turned away shaking her head, not wanting to believe what I had just told her. She was unable to accept that her savior was unable to waive his hand and make our problems go away. This seems to be a common mindset among those who voted for President Obama’s reelection.
    This does not mean that I enthusiastic ally believed that Mitt Romney, or his 20% tax cuts across the board, would have saved us from our problems and a republican house and senate would have placed us on the right path. In fact, I was almost equally unsatisfied by what both candidates had to offer. But overall I believe that smaller government and less regulation are better for business and our economy.
    When it comes down to it, thinking about the plans set forth by the democrats and republicans, we should all be left wanting. The democrats wanted to increase spending while telling us they would be able to pay for it by taxing only the rich at a higher rate. The republicans offered us a plan of tax code simplification, lower taxes, and reduced spending. I do not feel either of these methods will work.
    This feeling stems from the fact that we are going bankrupt and can no longer afford our spending levels or exceedingly low tax rates. I know I am a radical and my beliefs do not fall along any party line. I am not giving you the Chris Matthews or Sean Hannity versions of what we should do. I am simply looking at the finances of the United States of America.
    Love it or hate it we need to raise taxes and cut spending at the same time. Don’t believe me? Look at the numbers from the congressional budget office if we do not cut spending:
    Yep, you are reading that correctly. We would need to see growth rates that only the emerging markets countries are seeing over the next 10 years to get out of this mess. Oh yeah, I forgot to mention, this is without cutting taxes and letting the Bush era cuts expire. What could cause this kind of growth? Innovation of course, a kind we have not seen since the internet and tech boom. The closest we have to that right now is Apple (AAPL) and we can see that is not getting the job done.
    With no innovation on the horizon to save us we are left with another picture painted by the CBO:

    Fiscal or Economic Measure (A)CBOBaseline (B)AlternativeScenario
    Federal deficit in FY2013 $641 billion $1037 billion
    Economic growth in FY2013 −0.5% of GDP 1.7% of GDP
    Unemployment rate 2013 9.1% 8.0%
    Public debt in 2022 58% of GDP 90% of GDP

    If we extend the Bush era tax cuts, raise the debt ceiling, and increase government spending we are looking at the world of column B. In other words if we continue the status quo world B is projected. This is a world with a massive federal deficit and rising public debt. Unemployment and economic growth would remain the same.
    But there is light at the end of the tunnel. There is something the government can do to help this nation. And that SOMETHING is NOTHING!
    Well, would you look at that? This chart depicts our federal deficit if we let the “trigger mechanism” kick in. We let the tax cuts expire and decrease spending without raising the debt ceiling and our federal deficit all but disappears. We would have the world of column A. The price is jumping off the cliff. Yes we would fall back into recession. Yes unemployment would be higher. Yes times would be tough. But we need to bite the bullet now to save the countries future. Once we jump off the cliff we can then begin to reform entitlement programs and other government spending. Once the deficit is gone we can lower tax rates.
    But that’s not up to me. It’s up to our elected officials. In a time where we need them to do nothing chances are good that they will work something out and continue to push us in a path of financial Armageddon. We would be left to die slowly, “Not with a bang but a whimper.” All to save their jobs.
    But the apocalypse doesn’t have to come. We just need to stand together at the edge of the cliff. I am there with my arms stretched out and my hands open ready to jump with anyone who wants to come with me. It will be a bumpy ride down and the climb out won’t be any easier but we have to jump and I pray that we as a country are ready to do it.
    us-election-011. CBO+projection+of+federal+budget+deficit.
  2. VisuTrac

    VisuTrac Ваша мать носит военные ботинки Site Supporter+++

    Which way to the cliff please and thank you!
  3. Clyde

    Clyde Jet Set Tourer Administrator Founding Member

    TE: I am all for going over the fiscal cliff as well as the less regulation and government intervention you suggest. The economic analysis you provide looks only at the economics from a the pure "social science" perspective. But what are the root causes of this economic stupidity which seems to exist in the electorate?

    I would put forth 2 major issues:

    1) Direct Election of Senators, April 8, 1913 (17th Amendment) - Senators are no longer beholden to their state legislatures. They are beholden to the people. As a result, the House of Reps, The Senators, and the President are all directly elected. The states lost their representation and the senators are now the ones who can be lobbied by special interests to spend. Since every democracy in history has failed when 50.01% of the people can vote for the stuff the 49.99% of the people will give to them, I would say we are remarkably close to "Democracy Cliff" as well as the Fiscal cliff.

    And the second major issue that has brought us to the dual cliffs that are forefathers warned us about:

    2) Public Eduction: People have sent their children off to be indoctrinated by those sympathetic to overspending and over handing out and those who can have the single greatest influence over the future. ("Give me four years to teach the children and the seeds that I have sown will never be uprooted" -Lenin) Just as the communist forefathers suggested, the best way to change the mindset of the next generation is to control their minds. That is exactly what has happened over the last 2 generations to an extreme. The education system has been dumbed down to the point that kids now think everyone should be given handouts and the "rich" should have to pay more. We have 2 generations of technically, mental illiterate, mind numbed robots.

    If I sent your analysis above to 50 kids in high school or college for that matter, I bet the "majority" would come back and say, "Don't cut the money being given out and raise taxes on those rich people. We are arguing that $250,000 a year means you are rich. Which is a great income, but by no means does that type of cash make you rich.

    So, all the analysis in the world will not change the fact that our congress will never really cut spending and the increase in taxes will be way too tempting to our friends in Washington DC who are addicted to debt. The President and Congress will punt the issue.

    Finally, your analysis forgets about the unfunded future liabilities. When you toss those into the kitty, we both know the game is over.
  4. TheEconomist

    TheEconomist Creighton Bluejay Site Supporter+

    Clyde, I agree with you that the mindset of the people has come from school and media. However I do think that direct election is best. Actually we do not even have the for the president, we still use the arcane electoral college.

    You are right, my analysis is not over a period longer than 10 years because that was not the point of this article. It was to show that we could reduce our deficit over the next 10 years to be in a better position to meet those unfuded liabilities.

    Also, you wrote:
    "Finally, your analysis forgets about the unfunded future liabilities. When you toss those into the kitty, we both know the game is over."

    In my defense I did write:

    "Once we jump off the cliff we can then begin to reform entitlement programs and other government spending. Once the deficit is gone we can lower tax rates."

    saying that we needed to take the first step, "off the cliff", before we can do anything abotu future expendature. I am sure I do not have to tell you about the time value of money. If we reduce our deficit now we will be better able to handle expendatures. Also, the CBO's numbers DO count spending in ALL programs so they were included. (this does count the $1.35 trillion in undfuded liabilities Obama created. It simply assumes we will not be able to enact them if we go off the cliff."

    As far as my analysis being only social I would argue that is not the case. Data was provided. In the past when I have gone to quantitative people on here do not seem to listen/understand. However, when looking at government spending you could argue that it is all for social purposes as the idea behind it is that any money spent by the government is used to benefit the people. Or at least its supposed to.

    Thanks for the passionate response, keep them coming. We need more of it.
  5. Clyde

    Clyde Jet Set Tourer Administrator Founding Member

    Entitlements will not be reformed. Our politicians are influenced by too many special interests. Their solution will be to raise taxes.n The people want the paltry return on the money they paid into the system.

    The archaic system was set up to prevent want we are seeing right now. In your economic research, please show me the currently existing countries that have been in existence for over 200 years that are true democracies.
  6. TheEconomist

    TheEconomist Creighton Bluejay Site Supporter+

    There are Zero. Because 200 years ago slavery still existed everywhere.
  7. VisuTrac

    VisuTrac Ваша мать носит военные ботинки Site Supporter+++

  8. NWPilgrim

    NWPilgrim Monkey++

    I agree with Clyde. There may be theoretical oaths out of this mess but to assume at some point politicians will reduce spending is fantasy. Even if the trigger forces cuts Congress WILL find a way to increase them again. As Clyde points out, spending equals more votes.
    oldawg and TheEconomist like this.
  9. scrapman21009

    scrapman21009 Chupacabra Hunter

    Remember, a a spending increase of 10 billion, when the projected increase is 18 billion, is an 8 BILLION DOLLAR CUT!!!

    Gotta love politico-think!
    VisuTrac likes this.
  10. ghrit

    ghrit Ambulatory anachronism Administrator Founding Member

    Yep, still going up, just not as fast ---
  11. Capt. Tyree

    Capt. Tyree Hawkeye

    Cheerfully jumping off the Fiscal Cliff, set up by an unprecedented, and probably unconstitutional "super committee" of senators and congressmen, and an untold number of unelected staffers, who could not agree to more a more sane process (ie softer landing), reminds me of passing the Obamacare Bill in order to see what's in it. This whole Fiscal Cliff & Bush Tax Cut Termination New Year Gift is the .gov version of putting the American populace through a "bank stress test" so the think tanks can plot the next move in taking complete control of "Livin' in the USA".

    I learned long ago to ensure that I had a working parachute strapped on my back along with a reserve chute on my belly before I jumped out of an airplane. We ought to soberly and willingly "climb" down this Cliff with eyes open, gauging our footholds along the way, biting small bits off this economic bitter pill as we go, ensuring that everybody's got "skin in the game", and not just leave it to the evil rich top 5% of income earners who are "only" paying 59% of the total Federal Income Tax and could easily afford another 40% (just kidding)!!!
    TheEconomist and tulianr like this.
  12. larryinalabama

    larryinalabama Monkey++

    Raising tax rates will actually reduce monies collected by the government. The answer to a spending problem wehate its personal of goovernment is not to throw more money at the problem.

    I know several people who have sold there businesses this year to avid capital gains that are increasing by 58% on Jan 1. Personally I plan to scale way back and do everything here on the little "compond or farm or whatever you want to call it" my self.

    Higher taxes wont work, they never do.
  13. TheEconomist

    TheEconomist Creighton Bluejay Site Supporter+

    Higher taxes and spending cuts will. As long as they are not those $8 billion dollar cuts on a projected $18 billion dollar increase lol. The reason the CBO projected higher unemployment and negative economic growth if we swallowed "the fiscal cliff pill" is because business will pull back when faced with higher taxes. Maybe I am too optomistic about what the goverment will do once they pull back.
  14. Clyde

    Clyde Jet Set Tourer Administrator Founding Member

    TE - I think you are too optimistic. Congress can't stop spending or it would have happened already. Show me when in the course of the past 100 years that congress has lowered spending when they know that is what is necessary. OPM is their crack.
  15. ghrit

    ghrit Ambulatory anachronism Administrator Founding Member

    Raising taxes too much will reduce revenue. Reference the Laffer curves for the whys and wherefores, and they work with no drop in businesses. If businesses close their doors, it's even worse of an outcome.
  16. TnAndy

    TnAndy Senior Member Founding Member

    There will be an 11th hour 'compromise', and they will kick the can on down the road. Nothing will happen until the rest of the world turns on the US buck and says "no more".

    Then it won't matter how many the FED prints because few around the world will take them. Oil will go to multi-hundred buck/barrel prices, and food will be unaffordable to the masses in this country, EBT or not, ( remember: 10 calories of oil energy to make 1 calorie of food ) and THEN we'll have an Arab Spring that will make the last one look like a cake walk.
    NWPilgrim, larryinalabama and Clyde like this.
  17. Clyde

    Clyde Jet Set Tourer Administrator Founding Member

    Business has already pulled back in the Obama economy. Watche the u nemplyment lines grow after Jan 1
  18. larryinalabama

    larryinalabama Monkey++

    Obamacare also starts to kick into full force thus making the unemployment numbers larger.
  19. NWPilgrim

    NWPilgrim Monkey++

    Any significant spending cuts will also mean more unemployed federal workers. Once it starts several factors can snowball and it can all get far uglier than we can imagine. Fast.
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