Guest Post: The Upside Of The Fiscal Cliff

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Facing reality is positive. That's the upside to the fiscal cliff.

There are two definite upsides to the fiscal cliff:
1. We are finally starting a national discussion of spending-taxation trade-offs
2. We are at last starting to (grudgingly) accept there is no free lunch, what I call the Free Lunch Fantasy of limitless borrowing at near-zero interest rates: taxes for upper-income wage-earners will revert to previous levels while those drawing Federal dollars must accept reductions in spending.
The last decade's fantasy that we could borrow our way to prosperity while lowering taxes on upper-income earners (because it's so cheap to borrow trillions at near-zero interest rates) is finally running into reality-based resistance: interest on all that debt is starting to squeeze the spending everyone wants, and long-term rates might rise despite the Federal Reserve's constant intervention.
That would eventually raise interest costs paid by the Federal government.
How can interest rates rise if the Fed is buying much of the Federal Debt?
The first part of the answer is to accept the fiscal consequences of the Baby Boom entering Social Security and Medicare at the rate of 10,000 retirees a day: Federal spending will rise far faster than tax revenues, dwarfing the relatively minor spending cuts being discussed.
Notice how unprecedented the Boomer generation is demographically:
As correspondent Michael Goodfellow explained in Where There Is Ruin II: Social Security (July 25, 2006):

Now of course, retirees are also dying, so you might think this is only half the story. However, the people who die are, on the average, 15 years older than the new retirees. So when the number of retirees surges in 2011, the number of deaths is still from the pre-boomer group, and stays roughly constant.In other words, Social Security and Medicare outlays continue to increase for 15 years, until the number of retirees dying rises to match the number of new retirees.

Simply put, the retirement and healthcare systems were not designed to match the nation's demographics, nor was Medicare designed to limit costs, which continue to rise faster than inflation, despite various cost-saving measures.
Combine these trends with stagnating wages and employment and you get a triple-whammy: soaring number of retirees, rising Medicare costs per retiree and a stagnating tax base.
Federal spending and thus borrowing will rise unless the promises made are slashed.
This sets up an increasingly unstable dynamic: the Federal deficit of $1.3 trillion will continue to rise, forcing the Fed to increase its balance sheet as it buys hundreds of billions of dollars of newly issued Treasury bonds. Is there no upper limit on the Fed's purchases of Treasury bonds? Even if there is no financial limit, there is a political limit, as the Fed's policies will be recognized as counter-productive failures as the 2013 recession kicks in.
The Fed's political room to maneuver is shrinking, and its policy of keeping interest rates at near-zero by buying unlimited quantities of mortgages and bonds has limits. Once the markets sniff these limits, yields on long-term bonds will rise, pushing up borrowing costs. The Fed can play around with yields by selling long-term bonds and buying short-term bonds, but these Operation Twist manipulations also have limits.
The Fed's purchases of Federal debt enabled the Free Lunch fantasy. Rather than let the market price Federal debt higher, which would have set limits on Federal borrowing, the Fed's purchases of Treasury bonds suppressed the recognition that there was a cost to essentially unlimited Federal borrowing.
All these policies that enabled the Free Lunch Fantasy are reaching financial and/or political limits. The fiscal cliff is one expression of this recognition, and it is very positive that Americans are finally facing up to the personal costs of dealing with reality: higher taxes and lower Federal spending are no longer abstractions to be borne by others. We will pay more taxes and we will get fewer benefits/Federal contracts, and these reductions in income will negatively impact the economy.
Facing reality is positive. That's the upside to the fiscal cliff.

My new book Why Things Are Falling Apart and What We Can Do About It is now available in print and Kindle editions--10% to 20% discounts.

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evolutionx's picture

24 Reasons For Gold

There are many reasons for Gold. First and foremost: Preservation of Wealth. The illusionary paper wealth will implode in the next few years. The initial trigger will be the collapse of the world’s reserve currency – the US dollar. The financial system is unlikely to survive in its present form. Gold has been money for 5,000 years and will continue to be the only currency with integrity.

rotagen's picture

If you say "reality" and "fiscal cliff" in the same sentence then I'm going to excercise my right to print this out and wipe my ass with the whitened cellulose.

There's nothing real about fake debt incurred by a fake government generated by fake money printed by fake people (organized crime cartel called the Federal Reserve).

Zer0head's picture

"We are at last starting to (grudgingly) accept there is no free lunch"


by "we" are you including those with Obama Phones?

francis_sawyer's picture

Nah ~ We're working on the Echo [Chamber] Boom at the moment...

Manthong's picture

I am by nature an optimist, but in this regard I feel as if I have advanced flesh eating disease, all my limbs must be amputated and my face reconstructed without anesthetic, and it is not at all certain that I will survive to live a disfigured, limbless life of pain and struggle.

Outside of that, now that I have faced up to the situation, I am pretty upbeat.

GottaBKiddn's picture


"Facing reality" in this instance is the regular people having to pay the consequences of the upper class living in a economic fantasy. The only people who can find something positive in that are those who aren't going to have to struggle to feed their families. Thanks, Sir Charles, for helping us to have a happy holiday, even though we know that the "Fiscal Stiff" is just for the little people.

SamAdams1234's picture

The reality is the upper class no longer want to abide by the bargain they made: in exchange for paying more taxes to support  the bottom, the bottom would be content with Lohan stories and plastic chinese trinkets while the upper classses could rule. If the bargain is being re-negociated, I vote for making the upper classes bacon. Everything tastes better with bacon.


Fredo Corleone's picture

"[T]axes for upper-income wage-earners will revert to previous levels while those drawing Federal dollars must accept reductions in spending."

Correction: "Those drawing Federal dollars must accept reductions in the increase of spending." 

The government will, of course, increase taxes on the so-called "upper-income" wage-earners ( "upper," by political definition an arbitary term; thus, quite flexible in terms of parameters ). That said, when was the last time there was enacted a veritable, genuine baseline reduction in any governmental budget: No increase whatsoever in spending from the prior fiscal year, but an actual reduction from the prior FY's level of spending ? What is currently being deliberated is simply a reduction in the rate of increase in spending, as opposed to a reduction in the level of spending itself -- that, a foregone conclusion as it is, will continue to rise in absolute terms. 

The current activities in Washington are but a dress rehersal for that which is to come a decade or more hence, when the financial liabilities coming due will be of a far greater magnitude.

Pool Shark's picture



Despite all the screaming and shouting; going over the 'fiscal cliff' would actually be the best thing for the USA's future fiscal soundness...


Jason T's picture

That's why I call it a Fiscal Ravine.. and warning it's getting dark soon and the wolves and coyotes are coming out.  So raise taxes and cut spending .. and stop importing so much crap and make more things here in America again.  

kridkrid's picture

There is no such thing as "the USA's future fiscal soundness". The belief that there is some sort of "solution" that exists to create fiscal soundness shows a lack of understanding of our monetary system. Timing of the collapse and "what comes next" are valid questions to consider, not "how do we fix this".

j0nx's picture

Enough said. /thread.

Hard Assets's picture

You are probably correct.

I don't know who advises the 2 chief clowns but working out 2 trillion over 10 years leaves them 1 trillion per year short.

My understanding of the "fiscal cliff" is a "hit" of about $600 billion leaving a deficit of about the same. Seems more of a fiscal challenge as opposed to cliff.

Is it possible that the political theatre we are witnessing is only and exactly that? Is it possible that it has been realized that trillion dollar ++ deficits cannot be financed anymore?

Has it finally been decided (by whom?) that the runaway debt of $16 T, that no one wants part of anymore, with rising interest rates, is the REAL "fiscal cliff"?   

Dr. Engali's picture

Now that the elites have everybodies attention squarely focused on gun control and the fiscal cliff I have one question.......what are they doing while we are distracted?

Tijuana Donkey Show's picture

Prepping the pleb virus. The issue with the virus is getting the people out of residental areas to die, so clean up is easier. 

Bob Sacamano's picture

We have been told for a decade - "Clinton tax rates good, Bush tax cuts bad"

So let ALL Bush tax cuts expire.  It is the only way to get back to the coveted Clinton rates.  The left will scream bloody murder, the right will just scream.

Then let's get federal govt spending back just to 2008 levels (which is what every American is doing individually - so government can do the same)

Deficit problem solved.   Entitlements to be dealt with in 2013.

fattail's picture

I used to care about the deficit and the debt... until they both became to large, to unwieldy, and blatantly unsustainable.   to see the gov't use  their unlimited borrowing and taxing power to target our constitutional freedoms and liberties all to bring this country under the rule of the fascist kleptocracy and politically connected cronies, makes me wonder who I should be rooting for when I watch the news.

The fiscal cliff will not be solved in any way that will bring the required austerity and reduction in the size, scope and power of the federal government. 

So I say, let it burn.  Let the politicians borrow more enormous  sums of money for more freebies for the moochers, parasites, and policital cronies.  Borrow more money, and keep borrowing, the bigger the implosion the better...  maybe at that time we can repudiate our debt and start over.


lunaticfringe's picture

Always there has to be some optimist looking for the upside. Shit. Me, I am sticking wih Plan A.

IridiumRebel's picture

Nice little trough in the early thirties....seems people had other things on their minds like lunch and shelter. Children can be expensive........

suteibu's picture

We should be having a national discussion on the evils of taxation altogether.  The fact that we are talking about rates reminds me of the old joke about prostitutes,

Man to woman, "Will you have sex with me for a million dollars?"

Woman, "Sure!"

Man, "Will you have sex with me for one dollar?"

Woman, upset,  "What do you think I am, a whore?"

Man, "We have settled that question.  Now we are just haggling over the price."

Well, we know we are all whores.

Spastica Rex's picture

Hey, Tarzan: we only need one freaking law, the LAW OF THE JUNGLE.

suteibu's picture

Right.  How about a 72,536 page tax code that even the people hired to enforce do not understand.  That working out for you okay, champ?

Dr. Engali's picture

Hey Rex are you picking fights? I thought you were a Catholic South Park watching pacifist. ;->

Spastica Rex's picture

Nah, I just love ridiculous extremes. And Tarzan.

suteibu's picture

Nice debate, a microcosm of our national situation of social degeneration and economic elitism.

econature's picture

The people who wrote it don't understand it either.

Quinvarius's picture


The Treasury can mint unlimited coinage without the Fed.  Pay the seniors in change!

DonutBoy's picture

Excellent post.  Could not agree more.  The cliff is the best of all the options on the table.  It would be a step in restoring faith in our government and our currency.

Spastica Rex's picture

I think our socio-economic system and its associated government are very faith based.

Quinvarius's picture

Why do we all have to go over the cliff?  Can't we just throw a few over and the rest of us divide up their stuff?  I think that is basicly Obama's plan.

viahj's picture

and that is why the politicos are furiously trying to avoid it with some sort of compromise.  how absurd is that?

\sarc because i believe that this is all kubuki and we're going over the so-called cliff and even then, the changes going into effect will not do squat to stop the economic and fiscal implosions.  just as planned. 

oh and why they are distrzacting us with gun and cliff debates, they are positioning troops and hardware.  war is coming.

kridkrid's picture

It only restores "faith" in those who don't understand how the system works. The same thing is happening everywhere. And it's all we got, really... Faith. Faith takes many forms: blind optimism, normalcy bias, American exceptionalism, stupidity. I'm guessing that faith will be restored a few more times as we continue to circle the drain.

Dollar Bill Hiccup's picture

Best thing to happen, IMHO, is to go right over and into sequestration. The MIC will never loosen its grip unless forced to. Same for entitlements.

There is no critical thought when all energy is spent defending an entrenched position.

Panafrican Funktron Robot's picture

Defense spending cuts tend to get suspended during wartime and/or expansion of wartime.  Just sayin'.  

tooriskytoinvest's picture

Next Few Days Particularly Crucial: 'Plan B' Collapses, Hope Fading, Consumer Confidence Plunges Sharply, And Unemployment Checks Stop Dec. 29!!


Kreditanstalt's picture

Why the desperation to raise taxes on ANYONE???

CUT SPENDING - period.

Joshua_D's picture

Exactly. Stop the fracking spending.

blunderdog's picture

Old folks vote. Hard to take away their candy without paying the price come election-time.

i_call_you_my_base's picture

Delusional. If you replaced "US" with any country in Europe it would be the same situation and it would make you laugh out loud: "At least Greece/Spain/Italy/etc is now talking about its spending and debt." Yeah, OK.

Joshua_D's picture

"We will pay more taxes and we will get fewer benefits ..."


How about this. We give the finger to FedGov and tell them to default. We're all going to get fewer benefits, but I'd rather not pay more for less.

Catch-22's picture



“The Fed can play around with yields… , but these Operation Twist manipulations also have limits.”


Have limits ???  The line in the sand keeps being redrawn since 2008 !!!


When they get cornered the slimy little weasels change the rules of the game on everyone…


FreeMktFisherMN's picture

The real cliff has already been gone over. It's like Wile E. walking on air momentarily with the ACME weight in hand, and then he chucks that so he doesn't weigh so much, stupidly thinking he'll be able to not fall, but he's going to fall anyway whether he has the weight in hand or not. 

allocater's picture

Social Security is in surplus until 2036. Then you just require the rich to pay as much as the middle class (flat tax) and it is solvent for hundreds of years. (At the moment, the rich pay a lower rate than the middle class)

odatruf's picture

Everyone pays the same rate. Up to the cap, which coincides with the benefit cap on the other end. If you want to have the high income people pay the tax on all their income, then they will get a much, much larger benefit too.

But you probably already knew that.

allocater's picture

Yes, but you could only raise the cap for pay-in and not for pay-out.

Eric L. Prentis's picture

Big business and financial elite shills always mention the drain on Social Security, because of the Baby Boom generation, to scare us into cutting entitlements. President Reagan and Speaker O'Neill fixed the Social Security Baby Boom problem, with the Social Security Reform Act of 1983. Period.

The real problem is President Obama’s unprecedented US sovereign-debt spending over the past four years—including, massive federal budget deficits of -8% to -10% of GDP, and the Fed monetizing debt by electronically printing money, to save the TBTF insolvent banks—TOTALING OVER SEVEN TRILLION DOLLARS!

The financial elite and big business have eaten everyone’s lunch. To learn more, please read:

“WORLD-MARKET-STATE vs. DEMOCRACY: Why We Should Go Over the Fiscal Cliff.”