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The Stunning Political Reality Of The Fiscal Cliff Debate

Tyler Durden's picture




 

In his testimony over the last two days, Bernanke has listed the 'fiscal cliff' as one of the two greatest risks to the US economy, along with the situation in Europe, and urged Congress to enact 'earlier rather than later' a plan that achieves 'short-term and long-term objectives,' with the primary short-term objective to adjust the timing of the near-term fiscal contraction "to allow the recovery a little more space to continue." . However, like us, Goldman believes that resolving the two key issues - the fiscal cliff and the need to raise the debt limit - will be more difficult than it was last year, for three reasons: (1) the "easiest" options to lower the deficit have already been adopted, so the remaining options touch more controversial areas than those enacted last year; (2) some members of both parties have indicated that they regret the agreements reached in 2010 and 2011, implying less willingness to compromise this year, and (3) both parties appear to be contemplating strategies that involve allowing most or all of the policies to change at year end, as a means to achieving their ultimate policy goal.

Sure enough, as debate on the fiscal cliff gets underway in earnest, the tone of rhetoric has predictably worsened.

Given these challenges, Goldman still believes Congress will ultimately reach an agreement. Mainly because they do not believe that either political party will want to run the risk of imposing such a large amount of fiscal restraint, given the negative economic consequences that it would have. We suspect this will only occur after the market makes it clear that any other path is unacceptable.

Goldman Sachs, US Daily: The Fiscal Cliff: Finding Middle Ground Will Be Harder Than Last Year

lawmakers may have more difficulty reaching agreement on fiscal matters later this year than it was in 2010, when Congress extended the expiring 2001, 2003, and 2009 tax cuts, or in 2011, when Congress raised the debt limit. There are three general reasons that the upcoming fiscal issues looks even tougher to resolve than the previous debates:

  1. The politically "easy" options to lower the budget deficit have already been used. Reaching a long-term fiscal agreement later this year or early next year is going to require additional budgetary savings. Last year's agreement was made possible by the fact that the $2.1 trillion over ten years in savings was not linked to specific programs; spending caps reduced the overall amount of projected future spending, but left specifics to future Congresses, while the cuts under the "sequester" received less attention because it was assumed that the congressional "super committee" would replace them before they took effect. This year, only the more politically difficult savings options remain. The table below shows revenue and spending levels under the Republican-authored House budget, the President's budget, and current policy extended. The columns on the right show how each segment of the budget would change under those options compared to current law, in which Congress takes no action and policies take effect or expire on schedule. The table highlights two important issues. First, neither party proposes substantial cuts to Medicare or Social Security spending over the next ten years. Second, neither party endorses the cuts under the sequester, implying that some budgetary savings might be used simply to replace those cuts, rather than generating new deficit reduction. The upshot is that the two parties have limited their deficit reduction options, for now, to a few controversial areas of the budget. House Republicans focus on cuts to Medicaid, the new health law, and other mandatory spending. The President generates most of the additional deficit reduction (beyond the discretionary cuts agreed to last year) from higher tax revenues.
  2. Members of both parties appear more hesitant to compromise after the experiences of 2010 and 2011. While one might imagine that the effects of the debt limit debate on financial markets and the economy, and the related US credit rating downgrade would lead lawmakers to seek an earlier compromise this year, this does not appear to be the case. Some Democratic lawmakers have indicated that they regret agreeing to extend the 2001/2003 tax cuts in their entirety in late 2010, and have implied they will oppose the next extension more strongly. Likewise, several Republican lawmakers have recently said that they regret agreeing to the Budget Control Act enacted in August to raise the debt limit. Now that the consequences of the sequester enacted as part of the BCA are coming into focus, members of both parties are likely to be wary of "triggers" meant to enforce whatever agreement that might be reached later this year.
  3. In certain scenarios, both parties perceive upside from allowing the fiscal cliff to hit. Senator Murray pointed out in her comments earlier this week that one political advantage of letting the tax cuts expire is that it would allow Congress to focus on debating how large of a "tax cut" should be enacted next year, since taxes would have already risen, rather than debating how large of a "tax increase" should be adopted. In a scenario in which Republican Presidential Candidate Mitt Romney were to win the presidential election and Republicans took a small majority in the Senate, Republican lawmakers may be inclined to let current fiscal policies lapse at least temporarily until the election results have taken effect in January.

 

For these reasons, it appears likely over the next few months that uncertainty regarding the outcome will persist and will probably increase. While there are only anecdotal reports of concern regarding the fiscal cliff weighing on investment decisions--the Fed's Beige Book, released this afternoon, included a few--over the next several months the risks around the year-end fiscal situation seem likely to weigh on public and market sentiment more heavily, particularly as the election nears and political rhetoric escalates.

Given these challenges, why do we think Congress will ultimately reach an agreement? Mainly because we do not believe that either political party will want to run the risk of imposing such a large amount of fiscal restraint, given the negative economic consequences that it would have. Beyond the economic reasons for wanting to avoid this, it simply is not clear who would be blamed for letting these policies lapse and we suspect that politicians in both parties will view the political risks--in addition to the economic risks--associated with letting the fiscal cliff take effect to be too great. Finally, most of these policies have been extended at least once before, and some have been extended several times. Since a short-term extension is possible and could be enacted explicitly as a means to reach a broader fiscal agreement in mid-2013, this would seem to be a less risky means of resolving the issue, while preserving whatever political advantages either party believes it has.

 

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Thu, 07/19/2012 - 11:27 | 2632127 Bicycle Repairman
Bicycle Repairman's picture

Taxes are going up.  A VAT tax is in the works, because it can get at wealth and black income.

Thu, 07/19/2012 - 11:44 | 2632206 lucidwanderer
lucidwanderer's picture

good call.  now we're going to get 9% fed vat on top of current income tax rape scenario and the healthcare reform tax.  if you add on my alimony payment I'll be living with my family on something like 30% of my gross income.

Thu, 07/19/2012 - 12:05 | 2632310 Azannoth
Azannoth's picture

WoW you get to keep 30%(with alimony nether less)! I live on 25% without here in Europe, few Kings ever darred to raise taxes above 30% on their serfs without an imminent rebellion, .. and we get to keep 30%(at best) that needed 'Democracy'(just a fancy name for Reforme'd Communism) to accomplish this

Thu, 07/19/2012 - 11:28 | 2632137 logicalman
logicalman's picture

Politicians will do the right thing.....

But not until they've tried everything else first!

 

Thu, 07/19/2012 - 11:37 | 2632181 Careless Whisper
Careless Whisper's picture

Politicians do what they are told. This whole post is a smoke screen because Goldman tells politicians worldwide what to do.

Thu, 07/19/2012 - 11:51 | 2632239 john39
john39's picture

and when everything blows up...  the puppet congress will be a great fall guy.  Perhaps we will even get an emperor appointed to save everything.  /s

Thu, 07/19/2012 - 15:44 | 2633325 The They
The They's picture

The ESF tells Goldman what to do

Thu, 07/19/2012 - 11:44 | 2632207 Al Huxley
Al Huxley's picture

Politicians might do the right thing, but only by accident, and because it coincidentally lined up with their own best interests.  BTW that won't be the case here.

Thu, 07/19/2012 - 11:29 | 2632142 Gimleteye
Gimleteye's picture

Since Obama has erased welfare reform, everyon eshould apply immediately for ALL possible government beneifts. One of two things will happen:

1. All applicants will be accepted, all checks will be issued and the Ponzi will once and for all crash and burn allowing the reset

2. All offices will be overwhelmed with new applicants, paperwork, etc and the bureaudrones will collapse from the --gasp--work they have to do and the absuridity of the system will be laid bare.

 

Crash the system, the suspense is annoying.

Thu, 07/19/2012 - 12:15 | 2632389 Neo
Neo's picture

 

Crash the system, the suspense is annoying.

 

Thats a bumpersticker right there.

Thu, 07/19/2012 - 12:58 | 2632628 graneros
graneros's picture

You're assuming one will have a bumper to put it on.  Not much room for that on a Moped, bicycle or dog sled.

Thu, 07/19/2012 - 11:31 | 2632151 Jlmadyson
Jlmadyson's picture

They have a debt ceiling to deal with before they even reach this so called fiscal cliff. Let's see if they can even get beyond that first. A nasty fall-winter fast approaches.

Thu, 07/19/2012 - 11:33 | 2632159 Cognitive Dissonance
Cognitive Dissonance's picture

All my life I've wanted to be a debt slave. Now I'm finally gonna be one even though I have no debt.

<sigh>

I love America!

/sarc

Thu, 07/19/2012 - 11:32 | 2632160 mrktwtch2
mrktwtch2's picture

zzzz..oh excuse me i dozed off there..how bout some market moving infromation??

Thu, 07/19/2012 - 14:57 | 2633139 viahj
viahj's picture

move your own markets, GS does

Thu, 07/19/2012 - 11:34 | 2632168 Hype Alert
Hype Alert's picture

“The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure,” he said. “It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies. … Leadership means that ‘the buck stops here.’ Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt and a failure of leadership. Americans deserve better. I therefore intend to oppose the effort to increase America’s debt limit.” 

Obama, 2006

Maybe we just need to create a Super Commitee and put this thing off a while?

Thu, 07/19/2012 - 11:43 | 2632201 j8h9
j8h9's picture

Slash the Defense Budget!

Thu, 07/19/2012 - 12:53 | 2632608 Sofa King Confused
Sofa King Confused's picture

Slash the Congressional Budget.

 

Thu, 07/19/2012 - 13:32 | 2632782 CrashisOptimistic
CrashisOptimistic's picture

Already been done.

Have a look at the numbers.  You could set DoD to ZERO, give Defense zero, and all those folks working at Lockheed, and Boeing as well as the troops themselves, are out of work and stop playing taxes.

You would get almost no deficit improvement.

Thu, 07/19/2012 - 13:42 | 2632817 blunderdog
blunderdog's picture

DoD spending is only a fraction of "the defense budget," if you want to be technical.

Thu, 07/19/2012 - 14:01 | 2632899 boogiedown
boogiedown's picture

Offense Budget -- fixed it fer ya

Thu, 07/19/2012 - 12:49 | 2632586 marathonman
marathonman's picture

Demagoguery?  Sophistry?  Lies?  Barack Hussein Obama's ability to lie even puts Slick Willy to shame.

Thu, 07/19/2012 - 13:02 | 2632648 graneros
graneros's picture

Obama really puts that old saw "talk is cheap" into a whole new perspective doesn't he?

Thu, 07/19/2012 - 11:34 | 2632170 Everybodys All ...
Everybodys All American's picture

But first make sure you send the president a birthday gift?

Thu, 07/19/2012 - 11:37 | 2632183 Al Huxley
Al Huxley's picture

I'm surprised that so many people (eg GS clients) would continue to buy into this whole 'the fiscal cliff is threatening and Congress must do something about it' fairytale.  All that's going to happen, after all the theatrics, is that the debt ceiling will be raised again.  Oh yes, and the legislation will be changed accordingly, to make that ok.  'Tough spending cut decisions'?  Give me a fucking break.

Thu, 07/19/2012 - 11:44 | 2632208 Rainman
Rainman's picture

agree....when push comes to shove, they'll choose the Japanese non-solution over and over again....debt to infinity and beyond. 

Thu, 07/19/2012 - 12:23 | 2632443 centerline
centerline's picture

We all have to remember the playbook here and not get too caught up in the daily grind.  The FED is between a rock and a hard place.  Maybe somewhat unexpected.  But, I doubt it.  The next move has to be a shift from push to pull.  It needs to be the politicians that grab the QE3 lever.  But, they aren't that stupid either.  So, down the line is the public and the welfare state.  J6P is going to have to grab the lever.  MSM, along with some deflationary pain, will help convince him this is necessary.  Just read the headlines today - and notice how times have changed over the last 1-2 years.  My my.

Financial crisis = sovereign crisis = political crisis = public crisis = currency crisis.  Any questions anyone?

Thu, 07/19/2012 - 13:00 | 2632638 marathonman
marathonman's picture

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved.  Ludwig Von Mises.  You're right, they will inflate until they have lost all credibility with paper dollars and the muppets start fertilizing the Tree of Liberty.

Thu, 07/19/2012 - 13:26 | 2632754 graneros
graneros's picture

Ding ding absolutely +1 for "GS clients" though I think you meant AKA not eg.  Which brings us to a cool line in the movie "Get Shorty," when Ray 'Bones' says to Chili Palmer, "ie, eg, fuck you just never hand me a book with a miss in it."

Thu, 07/19/2012 - 11:41 | 2632194 Dr. Engali
Dr. Engali's picture

Another non -event that will get "solved" like all other "crisis". Some political theater on the talk shows and a back room deal behind the scenes. Shit they probably have the deal worked out already but they want to look good on tv in front of their sheeple.

Thu, 07/19/2012 - 11:47 | 2632218 Cognitive Dissonance
Cognitive Dissonance's picture

I tend to agree. "They" only talk about the problems they intend to "fix"........and I use the term "fix" very loosely.

It's what they don't talk about that frightens even them.

Thu, 07/19/2012 - 11:43 | 2632202 roadhazard
roadhazard's picture

All politicians in Washington should be tried for Treason. I am serious.

My Representative quit (not running) about four months ago. Now two run to take his place. You can tell by looking at them that they will be, yes men.

Thu, 07/19/2012 - 11:53 | 2632253 Al Huxley
Al Huxley's picture

You can tell they'll be yes men because they're running.  Honestly, the most accurate way to predict the actions of politicians in any circumstance is to approach the situation with the maximum amount of cynicism you can muster, think carefully about the situation and try to determine what will be of absolute maximum benefit to the politician in question, and then that gives you your prediction as to what will happen.   It's also a good idea to always take into consideration the fact that a good chunk of the benefit to a politician will come to him/her as a result of pleasing his owners, so its always a good idea to consider the impact on financial institutions and other large corporate govt owners, and assume that the politician in question will be seeking to make his/her owners as happy as possible, in anticipation of some nice treats as reward for good behaviour.

Thu, 07/19/2012 - 13:57 | 2632881 Nobody For President
Nobody For President's picture

Al, if you're not careful, you are gonna become a real cynic in your old age.

Thu, 07/19/2012 - 11:47 | 2632217 bankruptcylawyer
bankruptcylawyer's picture

goldman is simply talking its book. the second the debt ciebling is not raised GS, JPM and others are all out of business withing weeks a la 2008. 

the implicit undertone to their 'reports' is that the ciebling will be raised to allow for more debt to feed the ponzi, and don't you worry. they hire suiciders just in case any congressmen start being uncooperative.

Thu, 07/19/2012 - 11:52 | 2632241 LMAOLORI
LMAOLORI's picture

 

I want to go over the Fiscal Cliff I'm sick of this nonsense get real we are already bankrupt anyway and I know we will collapse irregardless the only question really is when?  So let's get it over with now then we can have a do over maybe even a divorce and we can divide up the place, The U.S. could be split evenly Commies aka Dems can have 1/3, Conservatives can have a 1/3 and Libertarians 1/3.

Thu, 07/19/2012 - 14:01 | 2632902 Nobody For President
Nobody For President's picture

And all those that refuse to be labeled by others' prejudices get 1/3. Those that understand math get nothin'.

Thu, 07/19/2012 - 11:57 | 2632267 Little John
Little John's picture

I don’t give any more of a Damn about the US guv’s financial woes than they do about mine.  Texas will strike out on it’s on in the nation state business with sound money, honest laws, and a mercantilist economic orientation as the product line.  In short order we will become the Singapore of North America.  Then we will be able buy the Space Shuttle that went to LA for about 10 oz’s of gold and a couple of truck loads of pinto beans - or we might just go take it, depends on how we are felling at the time.

 

Thu, 07/19/2012 - 12:32 | 2632501 qussl3
qussl3's picture

If having negative interest rates for a decade plus, and a third of your income gated by the state pension fund, where it is now automatically swept into a state administered aunnity upone retirement is your thing.

Go right ahead.

Thu, 07/19/2012 - 12:39 | 2632539 prodigious_idea
prodigious_idea's picture

Easy there cowboy.  That taking things from each other might be reciprocal in the case of oil.

Thu, 07/19/2012 - 13:14 | 2632703 Lednbrass
Lednbrass's picture

If that were to happen they would get alot of company in very short order I think, 6-10 states would sign up to go along for the ride.

Thu, 07/19/2012 - 15:26 | 2633248 PulpCutter
PulpCutter's picture

I think I speak for all of us (the other 44-40 states) in saying "don't let the door hit you in the ass on the way out".

Fri, 07/20/2012 - 01:49 | 2634951 Lednbrass
Lednbrass's picture

It would certainly make everyone happier.

Thu, 07/19/2012 - 14:30 | 2633005 PulpCutter
PulpCutter's picture

Singapore has one of the world's highest-achieving public education systems.

Texas is #49 in verbal SAT scores in the nation (493) and #46 in average math SAT scores (502). Texas also has the highest % of employees on minimum wage, and lowest % with health insurance. 

Can Texas compete with Mexico or Vietnam for the shit jobs?  Sure.  Can Texas compete with Singapore?  Keep dreaming.

Thu, 07/19/2012 - 14:38 | 2633064 Hohum
Hohum's picture

And yet Texas is a net oil importer.

Thu, 07/19/2012 - 17:56 | 2633878 Panafrican Funk...
Panafrican Funktron Robot's picture

Food and water are other problems with Texas surviving on it's own.

Fri, 07/20/2012 - 14:58 | 2637252 bankruptcylawyer
bankruptcylawyer's picture

singapore and texas. couldn't think of 2 more opposite cultures , peoples, government, geographies, hemispheres. 

 

if youre trying to imply you'll have a state that is just as productive as singapore. sure sure why not. who knows what kinds of positive outcomes would result from texan secession. 

i have a better idea. instead of seceding, texas has the legal right to break up into 5 states with 10 senators. why not do that? instead of seceding, why not break up and take over the fed with 8 more senators. a block of 10 senators working togeher could accomplish quite a bit. 

zeev

Thu, 07/19/2012 - 11:58 | 2632275 tarsubil
tarsubil's picture

Look at the FYs "quantified" in that first figure. To think about the amount of work that went into getting these numbers. Chicken entrails are just as informative and useful but they are a heck of a lot cheaper. All we want is life beyond the Thunderdome.

Thu, 07/19/2012 - 11:59 | 2632279 JR
JR's picture

This controlled actor’s performance should not be misinterpreted as a professor’s honest effort to solve problems.

Bernanke is following script. The cartel's plan has long been to use a mountainous load of U.S. debt to steamroll a beleaguered American people into accepting the international-banker-solution of world government.

Bernanke is printing America into a monetary crisis cum national bankruptcy to trigger the Trilateralists’ goal of a single world monetary system.

“The Trilateral Commission’s most immediate concern is the creation of a new world monetary system to replace gold and the dollar as the international exchange with a new currency.” – Jeremiah Novak, 1977, Atlantic Magazine


Thu, 07/19/2012 - 12:16 | 2632397 FieldingMellish
FieldingMellish's picture

FUGS!

Thu, 07/19/2012 - 12:32 | 2632504 vote_libertaria...
vote_libertarian_party's picture

They will extend everything for 6 months then a second 'behind the curve' rating agency will down grade the US for not being serious about debt reduction.

 

My bet is on Moodys.

Thu, 07/19/2012 - 12:41 | 2632544 silverserfer
silverserfer's picture

democrat solution = hyperinflation

republican solution = deflationary crash

whichever will end the FED and its banking minions the fastest gets my vote.

Thu, 07/19/2012 - 13:21 | 2632729 the night watchman
the night watchman's picture

Total government debt: $16 trillion

Annual government revenue: $2.2 trillion

Annual government spending:  $3.6 trillion

Annual deficit (added to debt each year):  $1.4 trillion

Percentage tax increase/tax cut (either or both) needed just to stop the growth of debt:  39%

Percentage tax increase/expense cut represented by the "fiscal cliff" people are complaining about:  3.8%

DEMOCRAT OR REPUBLICAN = Childish bickering trumps problem-solving every time

Thu, 07/19/2012 - 12:55 | 2632612 The Duck Stops Here
The Duck Stops Here's picture

This is quite a situation the U.S finds itself in, Somehow it's about to hit a ceiling while at the same time fall off a cliff. Hmmm sounds like the S&P

Thu, 07/19/2012 - 12:56 | 2632615 boiltherich
boiltherich's picture

Seen in Safeway two days ago, two perfectly normal pork chops for $9.11, and when the shock wore off I took them from the meat case to the butcher's counter and pointed out there must be some kind of mistake, two pork chops cannot possibly cost almost $5 apiece.  He weighed them and said no, the price was accurate. 

HYPERINFLATION is already here and no further away than your local supermarket.  A deflationary depression in residential real estate to own, and employment, hyperinflation in all else, buckle up because it is going to be a bumpy ride from here on out.

Thu, 07/19/2012 - 13:08 | 2632675 marathonman
marathonman's picture

Just think what the price is going to be after the corn harvest is down 20% and the Fed twists another trillion into the economy!  And I have to look at that freaking lieing sack of excrement BHO advertise on ZH while I'm complaining about hyperinflation.  We'll all be hunting "free range" hog, oppossum, armadillo, squirrel, and pigeon soon.

Thu, 07/19/2012 - 13:17 | 2632707 Lednbrass
Lednbrass's picture

Yep, we arent anywhere close to seeing the worst of it. All of the extra animals being slaughtered now is actaully keeping price down, but come the end of the year and next year meat is going to get alot more expensive.

Thu, 07/19/2012 - 14:22 | 2633001 Gimleteye
Gimleteye's picture

Any recipes?

Thu, 07/19/2012 - 15:20 | 2633228 boiltherich
boiltherich's picture

Take one rich banker and a 30 gallon garbage can which you have half filled with oil (used is OK) boil till you hear a satisfying popping noise, serves nobody but man does it make you feel better!

Thu, 07/19/2012 - 14:40 | 2633077 Hohum
Hohum's picture

BTR,

Maybe so.  You do realize that meat prices would be much higher in a pure free market, though, don't you?

Thu, 07/19/2012 - 21:18 | 2634497 boiltherich
boiltherich's picture

Neither of us can know what meat prices WOULD be in a free market since we have never seen one Ho. I doubt they would be much higher since people would/could not pay much more, (with what? real incomes are falling while real wealth is cratering as never in our history) in a free market theoretically supply and demand determine pricing. I think the market clearing equilibrium would be lower than what I have been seeing here lately. Of course there are external factors that will sometimes limit supply beyond the demand side, like drought, but that just means there is a higher VIX in pricing over a longer period, and any spike up would spur production which would eventually mean a spike down owing to a glut. The long-term mean would be about where it has been in the last few years. I know from personal experience that protein substitution can and will happen when red meat becomes expensive.

I will take back that first statement though, partially, I did have an uncle that raised cows, he and several other farmers/ranchers in the area would get together and slaughter their herds and have them butchered and wrapped at a local abattoir, and then sell the meat directly to friends and family in the county at a price substantially lower than the supermarkets charged, even gave quite a bit to ailing or unfortunate friends. The region was so remote that transporting the animals for market just destroyed the slender profits once they got the market price in the city for them, and paid commissions and such to everyone in the process. They just decided it was more profitable to kill and sell locally under the table. Of course that means the meat was not USDA inspected, but I have seen You Tube video of meat plant conditions and treatment of animals and I just doubt the reassurances of government in this matter.

 

Thu, 07/19/2012 - 13:09 | 2632682 the night watchman
the night watchman's picture

Once again I see another article where all the numbers are presented as a percentage of GDP.  GDP is not a valid tool for looking at debt repayment and deficits because the government can't use GDP to repay its debts - it can only repay debt from its own REVENUE - just as it makes no sense to evaluate my ability to repay my mortgage by comparing my mortgage balance (or payments) to the combined income of everyone in my neighborhood.  But it sure would make the numbers look better!  I call on ZH to call out anyone who posts government debt information in terms of GDP percentages!  Let's stop sugarcoating the truth and allowing others to do so!  Abhor obfuscation!!

Thu, 07/19/2012 - 13:30 | 2632771 blunderdog
blunderdog's picture

The boldface is annoying, dude, but the point is legit.

GDP ratio is a lot like me at my NarcAnon meetings saying, "I'm doing really well--my alcohol expenditures are up to 65% of my total chemical-recreation budget."

Thu, 07/19/2012 - 13:35 | 2632789 CrashisOptimistic
CrashisOptimistic's picture

Taking this point a big further, debt or deficit to GDP ratios imply that the function of government is GDP.

It's not.  It's the population.  

Debt and deficit should be expressed as a % of population.

Why is it not?  Because population doesn't grow at 3%.  Because GDP does (or used to), this can be rationale for more gov't spending.

Thu, 07/19/2012 - 13:12 | 2632692 sitenine
sitenine's picture

Umm, dude, look, I'm a little short. Think you could spot me like $26 trillion? I'm good for it.

Thu, 07/19/2012 - 13:54 | 2632862 Salt
Salt's picture

Make for a good tee shirt though.

 

(that was supposed to be a reply)

Thu, 07/19/2012 - 14:07 | 2632921 PulpCutter
PulpCutter's picture

"Defense" budget is #$1050 billion/year, including the VA, the Department of "Homeland" Security, the NSA snoopers, etc. - more than the rest of the world spends, combined.  It is the biggest single discretionary item in the budget, and the majority of your income taxes go to feed it. 

Needless to say, some are screaming that the military will be destroyed if we trim it by 6% ($54 billion/year).  Note that every time we have built down defense, the economy has boomed.

 

http://blog.heritage.org/2012/05/24/what-u-s-civilian-and-military-leade...

Under current law, the U.S. Department of Defense faces significant spending cuts over the next 10 years—cuts that America’s civilian and military leaders have candidly described as “devastating” and “very high risk.”

This precarious state of the Pentagon’s future fiscal affairs is due to the Budget Control Act (BCA), the controversial August 2011 deal by which Congress and the President agreed to raise America’s debt limit.

Speaker of the House John Boehner (R–OH): “[W]hen it comes to what’s going to happen to our military with these cuts in January, you can imagine that there are a lot of people concerned. The Defense Secretary’s made clear that these cuts will devastate out ability to keep our country safe. The White House has admitted that these cuts will have a devastating impact on our military. So where is their plan? It’s as simple as that.” (May 16, 2012)

Representative Howard “Buck” McKeon (R–CA), chairman of the House Armed Services Committee: “The cuts that I outlined take us right to the limit of acceptable risk. Because the Congressional Super Committee failed to reach an agreement on mandatory spending, a sequestration mechanism will kick in on January 1st. Sequestration takes all the cuts I outlined and doubles them. It pushes us far past the limit of acceptable risk, and would put this great country in considerable danger.… The cuts will force another one hundred thousand troops out of the Army and Marines. We’ll shrink our Navy to its smallest size since before World War One. And the Air Force will be the smallest in its history. We will not modernize our nuclear deterrent, which hasn’t seen replacement systems in decades and is the smallest since the early 1950s.Active duty military, reservists, federal civilians, and contractors will be laid off. Some assembly lines and shipyards will close. We estimate that around one and a half million people will lose their jobs as a result of the defense cuts in sequestration.” (March 13, 2012)

Representative Martha Roby (R–AL), member of the House Armed Services Committee: When commenting on the effects of sequestration: “Our military will cease to operate as we know it today. They can’t. They don’t have the resources. We will not be able to have the presence that we need to have in certain areas of this world. And it’s frightening.” (May 4, 2012)

Thu, 07/19/2012 - 15:13 | 2633207 Jack Sheet
Jack Sheet's picture

The third derivative of the increase of debt with time (d3D/dt3) will be reduced by 10%. That is 10% slowing of the rate of increase of the rate of increase of the rate of increase.

Thu, 07/19/2012 - 15:17 | 2633216 PulpCutter
PulpCutter's picture

Nonsense. America's total (public + private) debt/GDP ratio has been dropping since 2010.   America is paying down private debt at the fastest rate since the 1950s.

http://articles.marketwatch.com/2012-06-08/commentary/32103077_1_debt-pr...

 

Thu, 07/19/2012 - 15:26 | 2633250 boiltherich
boiltherich's picture

Normally I would agree except for two things, first that American incomes are dropping even faster than their debts, and their REAL incomes are dropping even faster than that due to grossly understated inflation.  Second, while nominal debt in aggregate might well be falling it is not necessarily because we are "paying if down," much of it is being discharged in bankruptcy or simply written down as bad debts because it is not paid at all.  A third consideration is that consumer credit is now pretty hard to get, one black mark on your FICO and you are a cash customer. 

Thu, 07/19/2012 - 15:43 | 2633296 PulpCutter
PulpCutter's picture

"...discharged through bankruptcy..."  No argument there....but why is that a problem?

Investors/those who make loans have to exercise due diligence.  If they make foolish loans, they should get their fingers burned - aka, 'moral hazard'.  One of America's recent problems is that we've allowed the banks to shove that risk off onto the taxpayer.

Third point is also valid IMO, but I think the normal case is for private credit to stay tight until private debt is sufficiently deleveraged.

Normal course of things: 1) debt bubble 2) Minsky moment collapse 3) sharp drop in availability of private credit with resulting contraction in GDP 4) public stimulus provides demand (and runs up public debt) while private debt deleverages 5) gradual recovery with (often) a nice boom because private debt levels are low 6) increased GDP allows relatively easy paying down of total debt/GDP ratio.

America did this after 1938, and America & the rest of the world has pretty much followed this same script getting out of every recession since 1938.

Fri, 07/20/2012 - 00:48 | 2634897 boiltherich
boiltherich's picture

Not a problem at all PC, just pointing out that the statement above that we are "paying down debt" is misleading.  I went to business school and finished a degree in finance, thus I understand that emotions and guilt are not part of the business decision process, at least not in any good business transaction.  All pricing includes a margin for the inevitable failures to repay.  And all corporate decision making  considers the financial impacts and facts void of pedestrian middle class "morality" surrounding honor and debts.  Those concepts are for the fools that should have conservators handle their money for them. 

Thu, 07/19/2012 - 15:22 | 2633233 Entitled
Entitled's picture

Both Sides Now, Rewritten by Barack Obama

Fair rules, fair shakes and fair shares, and contraception everywhere
There is no need for class warfare, I've looked for votes that way
But special interests block "The Won" they climate change on everyone
So many things I would have done, but votes got in the way

I've looked at votes from both sides now
From up and down and still somehow
The vote's conclusion is recalled
I really don't count votes … at all

Wall Street cash and solar deals, the dirty dancing way you feel
Your every fairy tale come real, I've looked for votes that way
But now it's just another show, love 'em, leave 'em, don't say no
If they don't care, don't let them vote, no, don't give yourself away

I've looked at votes from both sides now
Some give and take and still somehow
The vote's conclusion is recalled
I really don't count votes … at all

No I ain't too proud to pout, to say "Are you in? Are you out?"
Or occupy with circus clowns, I've looked for votes that way
But now old votes are acting strange, they've lost their hope, don't like the change
But nothing's lost when something's gained by lying every day

I've looked at votes from both sides now
From win or lose or draw somehow
The vote's conclusion is recalled
I really don't count votes … at all

Thu, 07/19/2012 - 16:02 | 2633361 khakuda
khakuda's picture

The stunning political reality has nothing to do with the fiscal cliff as far as I'm concerned.  The stunning reality is that the country has no ability to deal with runaway spending.  There is always an excuse not to cut spending but, in fact, always one to spend even more.  As long as the Fed ensures that money is free and plentiful, the spending binge will go on.

For f**** sake, the government is now running advertisements on the radio telling people they can get food stamps even if they make $40,000 a year. The Fed has rates at zero and prints money constantly, lobbyists/banks/unions/elderly/corporations have turned Congress into a special interest joke.

I could go on for pages, but this is NOT what the founding fathers envisioned and what made the US great.  It is not the country's divine right to succeed if it does any stupid thing it wants.

Thu, 07/19/2012 - 20:05 | 2634149 SwingForce
SwingForce's picture

Hopefully the debt ceiling gets hit during the August Recess.  Never have we had 2 worse candidates to pick the lesser of, pathetic. Let the Shitstorm BEGIN!

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