Guess What They Are Not Cutting In The Fiscal Cliff...

Tyler Durden's picture

Submitted by Simon Black of Sovereign Man blog,

In his farewell address to Congress yesterday, Ron Paul blasted the dangers of what he called 'Economic Ignorance':

"Economic ignorance is commonplace. . . Believers in military Keynesianism and domestic Keynesianism continue to desperately promote their failed policies, as the economy languishes in a deep slumber."

He's dead right. Around the world, economic ignorance abounds. And perhaps nowhere is this more obvious today than in the senseless prattling over the US 'Fiscal Cliff'.

Here's the deal: You may remember the Debt Ceiling debacle of 2011. At the time, the US government was about to breach its debt ceiling, and there was an embarrassing standoff between Congress and President Obama.

As part of their eventual compromise, the debt ceiling increased by $400 billion in August 2011... then again by another $500 billion five weeks later... and finally by another $1.2 TRILLION twenty weeks after that.

In return, President Obama signed into law the Budget Control Act of 2011. The law stipulates that, unless another compromise is reached, a series of tax increases and budget cuts will automatically take place on January 1, 2013, including the expiration of the Bush tax cuts and the temporary 2% payroll tax holiday, plus new taxes related to Obamacare.

They call this the 'Fiscal Cliff' because everyone is terrified that all the budget cuts and new taxes will bring the US economy to its knees once again.

I've spent days analyzing the bill... and frankly, it's a joke. You can read the 200+ pages yourself if you like, but here are the important points--

As we've discussed before, US government spending falls into three categories.

  1. Discretionary spending is what we normally think of as 'government.' It funds everything from the military to Homeland Security to the national parks.
  2. Mandatory spending covers all the major entitlement programs like Social Security and Medicare.
  3. Then there's interest on the debt, which is so large they had to make it a special category.

The latter two categories are spent automatically, just like your mortgage payment that gets sucked out of the bank account before you have a chance to spend it. The only thing Congress has a say over is Discretionary Spending. Hence the name.

But here's the problem-- the US fiscal situation is so untenable that the government fails to collect enough tax revenue to cover mandatory spending and debt interest. In Fiscal Year 2011, for example, the US government spent $176 billion MORE on debt interest and mandatory spending than they generated in tax revenue.

In Fiscal Year 2012, which just ended 6 weeks ago, that shortfall increased to $251 billion. This means that they could cut the ENTIRE discretionary budget and still be in the hole by $251 billion.

This is why the Fiscal Cliff is irrelevant. The automatic cuts that are going to take place don't even begin to address the actual problem; they're cutting $110 billion from the discretionary budget... yet only $16.9 billion from the mandatory budget.

Given that the entire problem is with mandatory spending, slashing the discretionary budget is pointless. It's as if the US economy is a speeding train heading towards a ravine at 200 mph, and the conductors are arguing about whether they should slow down to 150 or 175.

Oh, and there's just one more problem.

The government thinks that they will collect a few hundred billion dollars more in tax revenue when all of these new taxes kick in. Again, wishful thinking.

In the six+ decades since the end of World War II, tax rates in the US have been all over the board. Yet during this time, the US government has only managed to collect roughly 17.7% of GDP in tax revenue.

Conclusion? Increasing taxes won't increase their total tax revenue. Politicians have tried this for decades. It doesn't work. The only way to increase tax revenue is for the economy to grow... and higher tax rates do not pave this path to prosperity.

Ron Paul was spot on. Economic ignorance abounds. And all the Talking Heads in the mainstream media blathering away about the Fiscal Cliff are only reinforcing his premise.

Bottom line-- the Fiscal Cliff doesn't matter. The US passed the point of no return a long time ago. 

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fonzannoon's picture

Thanks Captain Obvious.

Future Tense's picture

If they are not cutting mandatory spending then the gold bull market will stay in tact. Good discussion here on the current supply/demand dynamics in the gold market. Hint: massive demand with little supply growth.

vast-dom's picture

we fell off cliff long time ago and are essentially dead in purgatory stumbling around in the dark netherworld to see how bad hell will be for us all. god can't help us and we are satan.

Fleecer's picture

Next step will be to "fix" the entitlements liabilities by converting SS and Medicare/caid to more of a "defined contrib" plan (versus inflation protected defined benefit). Then let the "inflate the problem away" begin in ernest via printing press. Higher incomes follow, higher taxes...even higher GDP. Hey, looks its fixed!

Oh, you have to live on an inflation adjusted $300/mo in retirement? And market limped along for 20 years... Tough shit. Govt kept their end of the deal.

francis_sawyer's picture

Hey Simon ~ When Thelma & Louise drive off the fiscal cliff, doesn't the T-Bird wind up in New Zealand or something?

MillionDollarBogus_'s picture

The now infamous phrase was coined by Federal Reserve Chairman Ben Bernanke in February 2012, during one of his required appearances before Congress on the state of the U.S. economy. He described ... "a massive fiscal cliff of large spending cuts and tax increases" on Jan. 1, 2013.

Fitting that Bernanke came up with the term...

TheSilverJournal's picture

The debt ceiling is right around the corner too. Last time the debt ceiling came around, they came up with mandatory spending cuts and takes hikes to be implemented in the future, a.k.a. "The Fiscal Cliff."

What's their excuse going to be this time to raise the debt ceiling? They certainly can't create a "Fiscal Cliff 2" any more. The fiscal farce is done. The party is over. Things are going to get pretty dicey.

francis_sawyer's picture

What's everybody wasting their time on a Simon Black post for anyway when you can "ooh & aah" over perhaps the best GOAL in history...


EnslavethechildrenforBen's picture

We are not going off the cliff. We are already at the base of the cliff where we landed when they took the Gold Standard out of underneath us, and five hundred thousand tons of wet mud (inflation) are hurling down on us at breakneck speed. Run for it

Michaelwiseguy's picture

Fiscal Cliff = $700 Trillion Derivatives Blowing Up!

Lets get this party started.

tsx500's picture

wow, u weren't kidding !    (although, just a bit OT maybe ?)

Agent P's picture

"They certainly can't create a "Fiscal Cliff 2" any more."

Are you kidding? Anything that gets ratings this high is bound to have a sequel.

Oldballplayer's picture

The girl they get to blow the boss this time had better be hotter than that pig they got last time. If I am going to be distracted, can't they afford to get a hottie.

HurricaneSeason's picture

When the debt ceiling comes, they'll cut a couple hundred billion out of the annual budget before they raise the debt ceiling. They wont be fooled setting up another fiscal cliff again. I used to struggle a little with zerohedge understanding some of the complicated economic bullshit and abbreviations and it was good to get news before it reached mainstream, if it ever reached mainstream. Now it's getting simple. Increasing taxes doesn't increase revenue? I don't think that even qualifies as complicated economic bullshit. It seems similar to states seceding and being better off without the reserve currency, like Greece. I bet tax revenues went down when they cut social security and income tax by hundreds of billions of dollars. It'd be easy to look it up and do the math, but I wont bother. I'll hold my breath and take my football and go home.

Michaelwiseguy's picture

It's impossible to have job growth in the USA because of the globalist world trade treaties the USA signed on to. Get over it already.

I will never see a MSM article asking;

Are US Trade Treaties Hindering Job Growth?

HurricaneSeason's picture

That will be the cause of the collapse. The corporations love $200 a month labor. The corporations own congress. They actually want to have corporate taxes on profits reduced so they can bring profits home. According to them that's what is standing in the way of jobs coming back and the government being fully funded again. Workmans comp and liability insurance is more than what the Chinese charge. They want to double the value of the Chinese currency, not to help factories come back(like it would matter) but so they can double the profits that they are currently holding in foreign currency, while our prices at Walmart and the gas station double. It needs to collapse but we need to run up the credit card as far as we can. Get some warehouses full of commodities over here. Like the banks and feral reserve would approve that though, they aren't even American.

Michaelwiseguy's picture

I'm getting real sick and tired of the Illuminati and secrete societies pulling their shit on us century in and century out.

old naughty's picture

Thelma & Louise drive T-Bird wind up in New Zealand? 

You wish...

More like at the bottom of the Grand Canyon.

HappyCamper's picture

It was actually at the bottom of the Colorado River near the town of Moab Utah right outside of Canyonlands national park.  Also, the producers had to send three different cars to their demise because the first two takes didn't turn out correctly.

Michaelwiseguy's picture

Is Obama responsible for this too? Here's another great reason for session.

Psychological mind control terrorist tactic psyop warfare, on American citizens, is alive and growing.  We need to bring criminal charges against the mainstream media,  Agenda 21 pushers, and others.

Move to change propaganda laws opens up Cold War argument

Congress Reconsiders Domestic BBG Ban

New Bill Would Make It Legal To Target Propaganda And “Psychological Operations” Directly At U.S. Citizens

Bad Attitude's picture

There is an easier "fix" than "fixing" entitlements. There are several trillion dollars just sitting in 401(k) accounts. It would be easy - a politically cowardly kind of easy - to nationalize those accounts.

Actually, I'm a little surprised Dear Leader didn't mention nationalizing 401(k) accounts during the campaign as another way of getting revenge on "the rich."


ultimate warrior's picture

I am thinking the same thing. 401(k)'s get nationalized or inflation gets so bad that the dollars in that account become worthless. Either way you get it from behind.

NoDebt's picture

That's not funny.

Seriously.  Stop giving them ideas like that.  They have plenty of bad ones already lined up without you helping them out.

cossack55's picture

Would not a better metphor than "fiscal cliff" be speeding towards the "wall of reality"?  I know, less dramatic and may confuse the dunderheads with facts.

TheSilverJournal's picture

It's kind of like the world is one big Wile E. Coyote. It's only time before enough people look down.

Michaelwiseguy's picture

With secession signatures, people should pledge to buy nothing this Christmas season.

WmMcK's picture

Abandon all hope ye who enter here - Dante A.

Urban Redneck's picture

If they are not cutting mandatory spending then Granny still gets her Social Security and Medicare, and there is no reason not to shut the thing down until they get their budget in order, which would actually allow them to raise the debt ceiling in the interim while they come up with a plan to fix entitlement spending.

redpill's picture

We went over the fiscal cliff a llllonnggg time ago.


What's coming up is the fiscal SPLAT.

GottaBKiddn's picture

Don't forget the Baumgartner Acceleration factor!

tsx500's picture GO TO 1:35 mark in video to see where Amerikka is right now

dbTX's picture

I think it will be more like a PHYSICAL splat.

Dr. Richard Head's picture

WHEN GOD DAMNIT??????!!!!!!  Our (not for the majority around here) economic ignorance has allowed for Wil E Coyote to air walk for nearly 4 years now, as the bankster class is fed copious amounts of digital floating fiat.  I know the Japan argument,as they are about the unveil their 1 QUADRILLION in Yen fiat injections, but wonder if the paper machinations of the central banks will just keep plugging up holes.  It is astounding.

Winston Churchill's picture

Not really Doc.

I was involved with a company that went bankrupt long ago.

It dragged on, and on, for three years before the creditors finally

had enough and wound the company up.

Astounding is correct, as to how long it can take.Then suddenly POOF ,and

its gone.Just as you got complacent that it wouldn't.

The wheels turn glacially slowly,then around too fast to see.

centerline's picture

Absolutely.  Just like insolvent companies borrowing from one account to pay another.  The game can go on as long as there is cash flow (some sort of minimum velocity in the finances).  Even promises and lies can extend the game.  The funny thing is that when the situation grinds down to it's lowest level, the screeching halt can happen in an instant.

AldousHuxley's picture

it takes a while...especially for an empire.

look at greece and how they are able to drag things along.



Winston Churchill's picture

I think the 'fuckit' moment is not that far off now.

Maybe a couple of years until our creditors say "fuckit", and take

the hit,if indeed they are really creditors(another story).

In the meanwhile ABCD;

Anything Bernanke Cannot Destroy.

AldousHuxley's picture

well China already said fuckit we will make reminbi the world reserve instead of dollars

IMF already said fuckit and they have SDRs

Iran said fuckit we will trade oil in Euros

Libya said fuckit Africa will have gold backed African Union currency.


but American

(1) has those big bad guns and fuck creditors over.

(2) trying to perma-fuck biggest creditor China over by letting them crash like Japan while they are young.

(3) fucked up Libya

(4) going to fuck Iran


Same shit Nazis did to their creditors.

lakecity55's picture

I think China, Russia, and Iran will have China call in US debt unless the West leaves Iran alone.

China is in a position to Dump the US if we do not behave.

It is up to China, Russia, the US and Europe to all contain the more rabid muslim elements. They are going to find out how stupid they are trying to fight each other.

Common sense co-operation would solve the problems, but, since that is too easy, it won't happen.  Once again, civilians will pay the price along with military.

Winston Churchill's picture

I truly don't believe that China holds any long term UST's anymore.

Maybe on paper ,but in reality.Hmmm.

They've had four years preparing for demise of the US banking system.

Incompotence would be a mild word to describe no active planning for what is

the obvious endgame here.The PBOC is not incompetent.

Pledged as collateral or sold secretly to the FedRes off balance sheet.

Uncle Sam would play along to avoid panic .

Just what I'd do if I was the PBOC, and I'm sure they have other tricks as well.

The countdown starts the moment they have an alternate to SWIFT up and running.

JLee2027's picture

3 years? I worked for a company didn't pay it's bills for a couple months and one fine morning when I went to work the bank had locked the doors and shut them down. Of course, that was 1983. Boy have things changed.

Winston Churchill's picture

It was in the UK back in the 80's.

A 50 year old company ,which got it a lot of  underserved credibility

to keep trading while insolvent.Very long term relationships with

suppliers,etc.Had the Sheriff of London on first name terms after 

monthly visits taking 'walking posession" of the plant and stock on behalf

of alternating  creditors.I bought their factory premises at a very good price.

I had a plant  right next door to them.Facinating, in a ghoulish way, to watch.



alfred b.'s picture


    I've said that at least trice...I think!


BraveSirRobin's picture

Just remember, health care is a right, so no matter what happens, you will always have health care. No one can take that away.