The US's "EU Style" Negotiations Will Take Us Right Over the Cliff
Ever since the EU Crisis began in earnest in January 2010, EU leaders have maintained the following strategy:
- Engage in endless meetings/ discussions, none of which resolve anything.
- Announce that the situation is resolved.
- Wait for the world to realize nothing has been fixed.
The prime example is Greece. There have been no less than 30 “Greece is saved” press releases/ announcements, accompanied by market rallies only to discover that Greece is not saved and in fact is worsening by the week.
We’ve now had two formal Greece bailouts. We’re currently working on a third/ debt buyback program, the stated goal of which is to get Greece’s Debt to GDP ratio to 120% by 2020.
Again, the goal for the current proposal is to get Greece to the point at which it will still be totally broke in eight years. It’s amazing no one laughs out loud at EU meetings.
Actually they did… the below came from a recent Q&A session with Jean-Claude Juncker, current Prime Minister of Luxembourg.
Question: Is the goal still to get Greece's debt to 120%?
Juncker: The fact is that the target of 120% will remain, but the target as far as the time frame is concerned has been postponed to 2022.
[Laughter in the room]
Juncker: That was not a joke!
The reality is that no politician wants to implement actual solutions (total default, wipe out of all bad debt, and massive economic structural changes) because all of them are 100% politically toxic.
Meanwhile Greek unemployment worsens while its GDP continues to collapse. Indeed, from peak to today, Greek GDP has fallen nearly 20%. This collapse is equal to that of Argentina in 2001, when it had a full-scale systemic implosion.
Again, this is the country that political leaders and financial luminaries claim has been “saved” dozens of times.
US leaders see that this strategy has worked for EU leaders (those who went along with it are still in office, those who didn’t have been kicked out). And so they are now adopting a similar strategy with discussions on the fiscal cliff.
President Obama is out campaigning the notion that we need to increase taxes on those who earn more than $250K per year. According to the Congressional Budget Office, Obama’s current proposal would raise an additional $83 billion in taxes per year.
The US budget deficit is over $1 trillion. It has been ever since Obama took office. So his proposal would not even cover one month of deficit spending. And this is supposed to represent a “solution.”
Mathematically, the only way to cut the Federal deficit would be to either raise an additional $1.2 trillion in taxes (politically impossible, no one would go for it) or cut Federal Spending by $1.2 trillion (again, politically impossible).
Indeed, the US’s fiscal problems are so great that tackling them would require truly impossible measures. For instance, consider that the top 1% of income earners (the very folks Obama is targeting) paid $318 billion in income taxes according to the most recent data.
So, even if we doubled their taxes, we’d only raise enough money to cover about six months of the US deficit.
So, in order for us to close the deficit in the US, we’d have to both double the taxes paid by the top 1% AND cut spending by $600 BILLION. Now imagine trying to get the American people to go along with this.
My point with all of this is that the US budget talks are really just an American version of the various EU crisis talks we’ve seen over the last two years: a lot of discussion over phony “solutions” all of which fail to address the try size of the problem.
As a result, we’re likely going to experience something very similar to the debt ceiling talks in July-August 2011: a lot of talks which fail to go anywhere followed by a market collapse.
For more market commentary, investment ideas, and macro-economic research swing by www.gainspainscapital.com
PS. We also offer a FREE Special Report detailing the threat of inflation as well as two investments that will explode higher as it seeps throughout the financial system. You can pick up a copy of this report at:
- advertisements -