Guest Post: The Real Fiscal Cliff

Tyler Durden's picture

Submitted by John Aziz of Azizonomics

Guest Post: The Real Fiscal Cliff

It’s that time of year again — time to kick the can.

No prizes for guessing what investors expect Congress to do:

And 2013 seems likely to give way to can-kicking in 2014, and 2015 and 2016 and 2017 and on — the GAO estimates that by 2080 the US public could hold 8 times as much government debt as the US generates GDP. Just as Japan has never truly dealt with its debt complex — and instead chose the path of cycles of deflation, an endless liquidity trap, a soaring debt-to-GDP ratio and mandating financial institutions into buying treasuries — so America will continue to kick the can as long as rates and nominal inflation can be kept low, and goods and energy (the real underlying economy) kept flowing. Which — going by the Japanese example — could be a very long time.

Yet America is not Japan. The key difference? The balance of trade, and the flow of goods and services. While Japan’s debt is overwhelmingly domestically held, and while Japan has long been a net-exporter, the USA imports more goods and services than any nation in history:

And more and more US debt and currency is in the hands of the nations that export the goods and services on which America’s economy functions. Here’s the total debt held by foreigners:

And here’s the dollar reserves of various Asian exporter nations:

So when the can is kicked, the Asians — and especially the Chinese — feel they are getting screwed.

As Xinhua noted the last time America faced the fiscal cliff:

The U.S. has long been facing the same problem: living beyond its means. At present, the country has debts as high as 55 trillion U.S. dollars, including more than 14 trillion U.S. dollars of treasury bonds.

And last October:

Economists agree that as the United States’ largest foreign creditor, China should contemplate ways to pull itself out of the “dollar trap,” as the U.S. economy is faltering with its debt piling up and its currency on the brink to depreciate.

China must make fuller use of the non-financial assets in its foreign reserves, as well as speed up the diversification of investing channels to resist a possible long-term weakening of the dollar, said Xia Bing, director of the Finance Research Institutes of the Development Research Center under the State Council.

Zheng Xinli, permanent vice chairman of China Center for International Economic Exchanges, has suggested that Chinese companies boost overseas investment as a way to absorb trade surpluses and fend off the dollar risk.

Now to some degree the Asians knew the bargain they were getting into in buying US treasuries. They were never buying a claim on the US economy, or on the US gold reserves. They were buying a claim on reproducible Federal Reserve notes, and since 1971 the bargain has been that this is a purely fiat currency. Ultimately, if they do not feel like the US will be solvent in the long run, they should not have started lending to it. But now they are the largest real creditor, they have no choice but to keep on buying and keep on stabilising, simply because a functional US economy and a solvent US treasury is about the only way they will see any return at all.

Yet if they don’t exert leverage on the US, then the US is unlikely to do much at all. Without a little turmoil, legislators have very little incentive to act. If the exporter nations feel as if they are getting screwed, they are only more likely to escalate via the only real means they have — trade war. And having a monopoly on various resources included rare earth minerals (as well as various components and types of finished goods) gives them considerable leverage.

More and more Asian nations — led by China and Russia — have ditched the dollar for bilateral trade (out of fear of dollar instability). Tension rises between the United States and Asia over Syria and Iran. The Asian nations throw more and more abrasive rhetoric around — including war rhetoric.

And on the other hand, both Obama and Romney — as well as Hillary Clinton — seem dead-set on ramping up the tense rhetoric. Romney seems extremely keen to brand China a currency manipulator.

In truth, both sides have a mutual interest in sitting down and engaging in a frank discussion, and then coming out with a serious long-term plan of co-operation on trade and fiscal issues where both sides accept compromises — perhaps Asia could agree to reinvest some of its dollar hoard in the United States to create American jobs and rebuild American infrastructure in exchange for a long-term American deficit-reduction and technology-sharing agreement?

But such co-operation would require real trust and respect — and I just don’t see it. China’s leaders deeply resent the West for the opium war years, and the humiliation that came with the end of the Chinese empire — and they see America as profligate, and culturally degenerate. And America’s leaders see China as an unstable anti-democratic dictatorship, not a prospective partner.

So the future, I think, will more likely involve both sides jumping off the cliff into the uncertain seas of trade war, currency war, default-by-debasement, tariffs, proxy war and regional and global political and economic instability.

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hedgeless_horseman's picture



So when the can is kicked, the Asians — and especially the Chinese — feel they are getting screwed.

JebusKhrist's picture

Holy crap that picture is funny.

economics9698's picture

5 trillion, that sounds like a lot of money.

sdmjake's picture

If you don't feel like the Chinaman w/O'teleprompter in that picture, you aren't paying attention.

Skateboarder's picture

They will forgive insolvency... through purchase of our land, physical, and human resources. Guess which of your favorite $10/person/trip modes of entertainment it recently bought? That's right. AMC.

10mm's picture

+1 Skateboarder.They are just warmin up.

Shizzmoney's picture

I already know how Congress is going to vote.  See below:

mrktwtch2's picture

from a pure accting stance the us has 70 trillion in we arent doing to bad..

mick_richfield's picture

Normally in accounting you add up assets and liabilities to get a picture of how you are doing.

You also mark assets to market.

Dr. Richard Head's picture

They also should mark liabilities as liabilities, instead of REPO105'd assets during earnings reporting season.  Then again, you did say normal - aka honest.  That hasn't been around for some time now.

Paul Atreides's picture

Try that accounting again where debt is not marked as an asset...

Antifaschistische's picture

Yah, all we have to do is sell the Chinese Yosemite and Alaska and we'll be even again.   I'd throw in the Grand Canyon since it's just a big ugly hole.

krispkritter's picture

Then lets sell them Pelosi and keep the Grand Canyon. Both are 'big, ugly holes' but you'd only want to visit one on a vacation...

trilliontroll's picture

Wonderful accounting ,lets look back in history

tulipmania : ( the Netherlands , 1630s, link :

"...At the peak of tulip mania, in February 1637, some single tulip bulbs sold for more than 10 times the annual income of a skilled craftsman. ..."

Thats why as onebody knows , with this incredible amount of (acccounted) wealth, the whole world was dominated by the dutch empire for the last 450 years.

cranky-old-geezer's picture



from a pure accting stance the us has 70 trillion in assests

What gives the government the right to borrow against the entire assets of the nation?

It has no such right. 

Would you mortgage everything you have to support your son's cocaine addiction?



mick_richfield's picture


both sides have a mutual interest in sitting down and engaging in a frank discussion,

As soon as I read that phrase I couldn't help thinking:  Will that discussion be measured in kilotons, or megatons?

azzhatter's picture

that's where I quit reading. More one world bullshit

Aziz's picture

If you're worried about one world government you should be especially worried about more wars and crises between creditor and debtor nations. Anyone who wants a one world government (I don't) can use wars and crises as an excuse to advance their agenda.

Patriot Eke's picture

Regardless of which it is, our future will be bright--momentarily at least.

pods's picture

Let's hope that Roger wasn't right:

the sun is in the east
even though the day is done
two suns in the sunset
could be the human race is run

zapdude's picture

Awesome song on an awesome final album.  Even if just for the melody.

mick_richfield's picture

Brighter than a thousand suns.

LetThemEatRand's picture

The people of the U.S. traded in national prosperity four decades ago in exchange for full-blown trickle down economics (lower tax rates for the wealthy, healthy tax loopholes for off-shore accounts and keeping income overseas, outsourcing of manufacturing to benefit CEOs, etc) and free trade (endless outsourcing of good jobs) and endless deficits.    We are running head first into the result of the voodoo economics that anyone with half a brain knew would sink us.  There is no cliff for the .1%, but they will enjoy watching the rest of us end up on the rocks as they sail off to Monaco or wherever.

Skateboarder's picture

That's what happens when you try to build a nation of "management"... eventually you aint gonna have anythin to manage.

odatruf's picture

What we did was consume the productivity gains and wealth generation of our tomorrows, today.  Nothing more and nothing less.


Sparkey's picture

Let Them Eat Rand; you articulate a popular delusion, to wit; The Elite's, (who caused the problem) will, because of their fortunes, be insulated from the problems caused by their actions~ I think this is false, society is often compared to a pyramid with the elites occupying the point at the top. How secure are you when your wealth position and privlidge is built upon a collasping structure?

The storm coming will affect everyone, if we have Global War, which is ever more likely, society will collaspe and money will have no value, all civilized people need the services civilization provides, when the grocery store dissapears we all dissapear with it, rich or poor it doesn't matter the future is dark indeed and criminality is rampant!

Segestan's picture

Share Technology?  Better cut them off from the innovation and watch the commies beg for trade.

midgetrannyporn's picture

Watching Chinese work so hard makes me tired. :YAWN:

cranky-old-geezer's picture



Finding the Muslim adversaries Washington created insufficient for its energies and budget, Washington has encircled Russia with military bases and has begun the encirclement of China. Washington has announced that the bulk of its naval forces will be shifted to the Pacific over the next few years, and Washington is working to re-establish its naval base in the Philippines, construct a new one on a South Korean island, acquire a naval base in Viet Nam, and air and troop bases elsewhere in Asia.

This is why China and Russia will launch a knock-out blow against America the right time of course.


orangegeek's picture

The real question is when will China invade Russia?

viahj's picture

if you look at demographics in Eastern Russia, they already have.

Temporalist's picture

Zirp it up bitchez

Goldman Sachs, Bank of America Say Fed to Hold Rate

"Goldman Sachs Group Inc. and Bank of America Corp. say a weaker-than-forecast June jobs gain in the U.S. will lead the Federal Reserve to keep its benchmark interest rate at almost zero until the middle of 2015."

Oquities's picture

So when the can is kicked, the Asians — and especially the Chinese — feel they are getting screwed.


US fiat holders are also getting screwed.

ParkAveFlasher's picture

Can-kicking screws all creditors.

sbenard's picture

I'm convinced that they will kick the can again and again -- until we are in free flight -- OFF the edge of the cliff!

Watauga's picture

horseman:  THANKS for that photo!

LawsofPhysics's picture

Why worry when NIRP will soon have the debt paying itself off.

sitenine's picture

I'm taking my toys and going home.

sdmjake's picture

Dammit Gandalfian skater...I was feeling sorta free on this warm monday afternoon and you had to go and ruin it by reminding me that America is no longer what I thought it was in my youth. I hate the police state...

Shameful's picture

One cannot look at the best interests of the public when projecting into the future and the actions of the political classes.  Instead one has to look primarily at what will enrich the political classes and their respective patrons.  Now a war is indeed in their best interest.  Imagine you were in charge of a company or asset, and you plundered/squandered it.  Now eventually the "owners" will find out so you need an excuse.  Nothing like a war for an excuse "The investment was paying off but the War threw us off track!"  "We were on the road to recovery till the War!"  "We invested our assets wisely but they betrayed us and forced us to fight a war!"  These excuses go well with the masses which is why this card is played so often.  The carnage and slaughter of war is quite profitable for those properly positioned and it empowers the political classes and gives them an out for prior malfeasance. 

War is all but assured.  Get used to the taste of ashes.

DaveyJones's picture

it's almost as if...they do not value human life 

NeedleDickTheBugFucker's picture

"Currency manipulator" = BAD

So what about LIEBOR manipulators??? Oh, that's different!

Snakeeyes's picture

Obama continues in his blissful class warfare state. Will the Fed take action?

eddiebe's picture

Ok., now here are our leaders: Hey we don't need those commies, we'll just buy our own debt.

slewie the pi-rat's picture

apparently people are completely conditioned to think all these paper coupons represent something real

all these articles seem to think that if the giant piles of monopoloy money which the kids are playing with can't buy a real motocycle then the world will come to an end and we shall all hafta immedialtely commence destroying eack other's shit-filled planetary bodies

as long as the checks are in the mail, nothing else matters "economically"

people are free to make moMoney or less, but the banksters and pols want to keep the checks in the mail or peeps not gonna like them nomo

the seeds will sprout, the cows the will calve, the nuts and grapes will ripen

neither fiat nor gold commands economics;  can no one think clearly?  just write something and put it up? 

has everyone been eating mushrooms without slewie?  again?

however, yes, aziznomics'  charts do indicate that the children are playing with emormous piles of "money" again

you are too?  well good, son!  enjoy!  maybe you'll be closer to that new motorcylcle by suppertime, huh?  have fun!

slewienomics indicates the banks will fund the Treasuries and the pols will keep the ckecks in the mail and everything is screwed down tight

as far as i'm concerned until that ACTUALLY changes, absolutely nothing of ECONOMIC importance has "happened"

  • china may land hard or soft;  so what?
  • BOE prints another few hundred bill "pounds"; so what?
  • spain spreads go ape-shit!  so what?
  • the VOLTS are stuffed in inventory channels;  so what?
  • the troika is in greece and not to neotiate, either!  so fuking what?
  • germany may vote to shit or go blind!  so what?
  • we can't get the checks out and the goobermint must end the SNAP program;  WHAT???

slewienomics:  simply true!

this is so simple i don't even need graphs:  the checks are either in the mail (system works and is possibly even "stable") or they are not (system fail) and if fiat fails, here come the vouchers!

if  "the checks are in the mail" is not the operative global economic principle, it is certainly doing a fabulous job pretending! 

i've never kicked ass this totally in my entire life, BiCheZ!

i hope i don't lose my humility here...

tony bonn's picture

" agreement..."

lmao - there is no technology remaining for the us to share - the usa gave it all away ages ago - something which accelerated under clinton and his provision of missle technology which enabled the chicoms to aim their missiles at mainland usa.....