Things That Make You Go Hmmm - Such As The Fiscal Cliff

Tyler Durden's picture

From Grant Williams, author of Things That Make You Go Hmm

The effect on the USA of its casually wandering over the Fiscal Cliff will be catastrophic; adding approximately $607bln to the US deficit which in turn would sap anywhere up to 4% (according to the CBO) or possibly even 5% (if Chairman Bernanke—in full-on ‘scare Congress’ mode—is to be believed) from US GDP and send the country crashing into outright recession (or further into recession depending on how things continue to deteriorate in the coming months). “That we cannot have” was the opinion of Erskine Bowles who, along with former Sen. Alan Simpson, devised a debt reduction plan last year to prevent this doomsday scenario.

Bowles was just warming up, however:

“If we do nothing and barrel through this fiscal cliff at the end of the year, we are going to have about $7 trillion hit this country right in the gut,”


A look at the statistics published by the Office of Management and Budget (OMB) demonstrates just how swiftly the US deficit has spiralled out of control in recent years. More worrying still— and illustrative of exactly how these organizations work—are the figures for the first full year where no hard data is available i.e. that is solely reliant on the suspension of disbelief government estimates; 2013.

(WARNING: adjective-infested paragraph) As you can see from the table (left), next year (always next year), the OMB is predicting that the US will see a huge 30% reduction in the deficit which will be achieved through the magical combination of a whopping 18% increase in receipts combined with a tiny 0.2% increase in outlays.


“So, how is this all going to play out”, I hear you ask. Well, according to the Washington Post, it breaks down like this:

(WaPo): The payroll tax break expires this December, and the Bush tax cuts expire Jan. 1, meaning that new, higher rates will take effect the following year. Since payroll taxes are deducted from wages every week, the effect there will be immediate, whereas the income tax rate increases only affect income starting in 2013. If employers adjust withholding, the effects could come sooner, but if there are logistical hurdles to that, the economic dent could be delayed.


The sequestration cuts will take effect starting in January too, meaning their impact, like the payroll tax cut’s expiration, will be more immediate. The cuts are evenly split, with $27 billion each in 2013 for defense and nondefense spending, plus $12 billion in cuts to Medicare.

The chart above shows the expected effect on the deficit of the various constituents and, as you can see, it’s the Bush tax cuts that have by far the biggest impact, but according to CBO estimates, if just the payroll tax cuts were allowed to expire but the other provisions were extended, the effect on GDP would be a reduction of 2.3%.

The Washington Post also looked at the varying effects on growth of a range of different policies and the picture, I am afraid, does not look pretty, as the chart at the bottom of the page shows.

According to the OMB estimates, any attempt to do something remotely meaningful will result in at least a percentage point reduction in US GDP, which is fine in a world of 3% growth, but today that 1% is not something these guys have to play around with.

In the run-up to December 31, you can guarantee that the issue of the US Fiscal Cliff will replace Europe as the major concern facing the world in general and the US in particular and, if things continue to deteriorate at their current pace, anything that will lead to even a 0.5% cut inGDP will be seen as a  disaster.

Ernst & Young threw their considerably-sized hat into the ring this past week with a helpful survey into the ancillary effects allowing the Bush tax cuts to expire on December 31:

(CNBC): Hiking taxes on upper-income Americans could cost 710,000 jobs, according to a new study.


The study, from Ernst & Young and a collection of pro-business groups that includes the National Federation of Independent Business and the U.S. Chamber of Commerce, looked at the impact of raising taxes on capital gains and dividends and hiking the top two individual tax rates to 36 percent and 39.6 percent respectively. It also included the tax hikes for health-care reform.


The report found that all of the hikes combined would cause output to fall by 1.3 percent and capital stock and investments to fall by between 1.4 percent to 2.4 percent. It said employment “in the long run” would fall by half a percent, or by about 710,000 jobs. Wages would fall 1.8 percent.


“This report finds that these higher marginal tax rates result in a smaller economy, fewer jobs, less investment, and lower wages,” the report stated.

Should the Bush tax cuts be allowed to expire (something President Obama and the Democrats seem hell-bent on ensuring), the top tax rate will climb from 35% to 40.9%, the top tax rate on dividend income will soar to 44.7% from 15% and the tax on capital gains will increase to 24.7% from the current level of 15%.

Last week in the pages of Things That Make You Go Hmmm..... I predicted that François Hollande’s attempts to increase tax revenue in France by increasing taxes on the ’wealthy’ would end up having the opposite effect and I can’t think of any reason why the same wouldn’t be true in the United States. Neither country can afford to get this one wrong. Both seem set to do so.

It’s hard to foresee a set of circumstances under which America’s elected representatives put aside partisan squabbles and knuckle down to make the hard decisions that absolutely need making in order to save their constituents from impending disaster, but what IS certain is that the shift in focusto the Fiscal Cliff we spoke about earlier has already begun as a look at Google searches for the terms ‘euro’ and ‘Fiscal Cliff’ demonstrates. The Washington Post continues to monitor the situation and, in a recent piece, they shed some light on this change in focus in the United States as potential troubles at home becomes more of an issue than those continuing to dog Europe:

(WaPo): For much of the year, economists worried about the impact of the slowdown in Europe on the U.S. economy. Now, analysts say anxiety about the  impact of the fast-approaching fiscal cliff — the series of federal spending cuts and tax hikes set to take effect at the beginning of 2013 if Congress and  the Obama administration do not act — is displacing Europe as the primary threat to the nation’s sputtering economy.


Morgan Stanley said this week that concerns about the fiscal cliff are reaching new heights across a wide range of industries. It is already seeing reductions in business orders and hiring, among other areas.


“While our analysts are somewhat less worried about the impact of European bank strains,” a Morgan Stanley report said Monday, “the negative impact of fiscal cliff uncertainty is becoming more widespread.” The potential economic impact could smother the flickering recovery and further stifle job creation, analysts warn.

Full report below:


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NewThor's picture

If everyone's goal is to get stinking fucking rich,

who shall protect the 7 billion humans?

sickofthepunx's picture

by making yourself stinking fucking rich, you are protecting the 7bil.

-ayn rand

NewThor's picture

That's the John Galt Ayn Rand, bro.

Not the Howard Roark Ayn Rand. 

Howard Roark > John Galt

mick_richfield's picture

Not if you do it by theft, or fraud.

Printing money is theft.

Fiat currency is theft.

Securitizing mortgages and selling a trillion dollars' worth of them twice is fraud.



Widowmaker's picture

Theft and fraud do not exist for corporations.  Those words are total vapor in the citizens united world of fucking over the individual.

Their employees - immune, too.


Dr. Engali's picture

METH ; Monkeys for the ethical treatment of humans. 

5880's picture

The same thing that has protected homo sapiens for the last ~200,000 years

Comay Mierda's picture

If everyone's goal is to get stinking fucking rich,

who shall protect the 7 billion humans?

most people have that desire, but they do not set goals for financial success

and if one achieves financial success in a legitimate way, he/she has done so with the public consent

after all, who is buying the product/service from the successful person?

no one is forcing you to buy anything and you do not have to be "protected"

did you have to be "protected" from Steve Jobs?

You're just a stupid commie listening to NPR podcasts on your ipod that filthy fucking rich Steve Jobs made available to you, and you voluntarily exchanged your $$$ for it

NewThor's picture

"You're just a stupid commie listening to NPR podcasts on your ipod that filthy fucking rich Steve Jobs made available to you, and you voluntarily exchanged your $$$ for it"

I double dog dare you to say that to my face, bub.

Do you really think I am talking about JK Rowling?

No. She can make 100 billion and I've been happy to make her richer, but if you want to defend the financial industry, who makes up 40% of all American profits by corrupting our government and destabilizing the entire world economy. Go ahead, punk.

To you Corzine, Diamond and Blankenfiend are Patriots, and I'm a commie. LOL


Central Bankster's picture

The irony of socialists attacking corrupt fascists and calling the fascists "capitalists" to strawman attack capitalism. Truly amazing.

NewThor's picture

I'm a socialist? LOL

Fuck it. Nuke yourselves into oblivion.

All this too must pass.



NewThor's picture

Under your line of thinking...

Ben Bernanke, Jamie Diamon, Llyod Blankenfien, and Warren Buffett


They are the best of the best of the best.


Central Bankster's picture

If you think those men represent free market capitalism, ZH has failed you. They are the embodiment of a centrally planned economy which has misallocated resources on a grand scale.

SgtShaftoe's picture

You truly should go back and read Atlas again, if you even read it in the first place, because I suspect you missed some points.  Dagney's brother James, a crony capitalist / fascist is singled out specifically and thematically then highlighted in the book as an example of what is wrong with the country.  James Taggart repeatedly cuddles up with government overseers to pound down and out the little man, in favor of the state sponsored and supported companies i.e. fascism. Ben Bernanke, Jamie Diamon, Llyod Blankenfien, John Corzine, and Warren Buffett are all real life James Taggarts and/or much worse.  They are fascists.  They are the enemy of all free individuals (or those that yearn to be).  Ayn Rand is not the strawman you are looking for, though I don't know if I buy in to her entire philosophy, and I find Atlas to carry a twinge of condecension in tone, it doesn't make it any less of a resource for reference. 

TWSceptic's picture



Commies aren't humans? Omg I knew it!

sessinpo's picture

And what goal would you like to impose on others?

Further more, why aren't the 7 billion protecting themselves and are you expecting me to protect them?

Additionally, aren't you responsible for your own life? You have to live it, not me.

Finally, why do you assume I should be responsible for anything and anyone but myself and my family? Am I your slave? Do you believe in slavery? I know the government does as well as other institutions despite their claims otherwise.

Precious's picture

Twitter will protect them.

nmewn's picture

You mean we can't just sprinkle fairy dust on the road out front and throw some solar panels on the roof?

Quisat_Sadarak's picture

I've got my FLEXFuel Escalade which has been modified to run on Unicorn Tears, and Leprechaun farts, which I will pay for with my Hopium bucks, stored safely in my MFGlobal account. It is important to be flexible, that way I am covered if there is a shortage. You should look into it. ;-)

Frastric's picture

The likely outcome to all this: retain all the tax breaks and cuts, making the savings, cuts and tax hikes 'later'.

Bobbyrib's picture

The can will be kicked?

csmith's picture

And numbskull Howard Dean was on CNBC this morning saying we "need" to go over the fiscal cliff because doing so will begin to "solve" the deficit problem...where does he get this stuff?


TrainWreck1's picture

Can't let a Howard Dean reference slip past without a video (not the one you've all seen, either)


RSloane's picture

Ah the complete libtardian fucking moron~! Dean wishing such a thing while Obama is the sitting president makes it all the more funny.

SgtShaftoe's picture

There is logic in his reasoning, Is he right? I don't know.

If you believe that our options are crash the plane at lower airspeed and low altitude sooner, or conversely in interests of buying time, allow the plane to run out of fuel, then nosedive the plane at maximum airspeed at sometime in the future, are the two options we face, his logic holds.  There is logic in bringing it in sooner rather than later.  Others believe that the plane's critical parts (wings, tail, fuselage) can be reconfigured in mid-flight, but most of those people who would have had any chance in making that happen aren't going to be in a position of real power to give a concerted attempt (Ron Paul, Simpson, Bowles, et al).


The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. 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 the 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

harleyjohn45's picture

Paul, Simpson, and Bowles have all been around 30 years and they haven't done shit.  We are looking to them to do something?

SgtShaftoe's picture

Not for lack of trying.  What do you want them to do?  They tried, we tried, and we'll keep trying, but it's not looking good. 

Bobbyrib's picture

Exactly. Doing nothing will correct the problem better than allowing the deficit to expand through spending and tax cuts (revenue cuts unless you believe in the "Laugher" [yes I realize it's Laffer] Curve). What a joke! There is no fiscal cliff. Unless you mean jumping off the fiscal cliff into insanity by extending everything.

Basically GDP backed by government spending (in terms of spending programs) will decline, which will show where the economy would be without government intervention.

radicall's picture

On ZH of course! Haven't we read enought times here that government doesn't create wealth?

So if government cuts spending like the country has been asking for - will it destroy wealth?



Central Bankster's picture

Nominal gdp growth is not real gdp growth.

#reading comprehension fail

SgtShaftoe's picture

Correct, just as if you glue your spedo in your car at 220 Km/Hr, it doesn't mean the car is moving.  Unfortunately, most people miss that subtlety. 

alangreedspank's picture

The fiscal cliff after smashing through the concrete wall is what will get people to actually start thinking. Perhaps start by getting rid of governement instead of, countless times, reform it after witnessing (yet again) how corrupted it is.

erheault's picture

As we speak Big Ben is loading up the helicopter fear not we are in good hands.

unrulian's picture

everything is OK.... when looking through facebook colored glasses

mrdenis's picture

“we are going to go over to the fiscal cliff, I think that’s a good thing.”.........Howard Dean on CNBC this AM

azzhatter's picture

Actually we have already approached the cliff at breakneck unstoppable speed. There's no stopping now, may as well go voluntarily

fonzannoon's picture

The only part of the fiscal cliff that will be implimented will be the lowering of the retirement age since it worked in France.

tabasco71's picture

I was initially concerned that your suggestion would only increase the number of non-working population with long life-expectancies.  Then, by thinking it through, I realised that the expiry of the tax cuts would allow a greater percentage of the current working population's income to be harvested and thus, the equation balances out again.

As a member of current working population with a couple decades of active service remaining, I am delighted by this ingenius thinking.

I hope that is dripping with sufficient sarcasm.

Bartanist's picture

Personally, I think you are thinking too small scale. The question is: "why are 'they' taking a running start toward the cliff?"

The answer seems to be either in the fulfillment of prophecy or "fake" fulfillment of prophecy. In the biblical "end times" a global government is formed and through the works of one who at first appears to be solving all of the problems of the day everything appears to be set, right... at least financially and governmentally.

However, the global government and global leader is simply enslaving and collecting souls who become dependent on him... and under his iron control, people must submit their free will and endure huge tribulations ... none of which can be directly tied to him. But he promises to guide people through... and the give up their free will to him.

Problem, reaction, solution. The question is: "is this the real end times OR are they just trying to make it look like to end times to exert an evil power?"

So, what MUST the set-up be for a global government under the control of one? It must be the destruction of local governments. The first step in doing that is destroying the economies of the world.

I do not know if Obama et. al. are part of the progression or if they are simply deluded into believing that the alternative solution is a form of communal living, ruled by elitists who know better than everyone else (think Bolsshevik or Maoist communism where elitists rule). It will be equal tyranny and oppression for the masses. I believe this is the case because I do not believe that good comes from evil acts, no matter how noble the end goal. By this standard, Obama and the elitists are evil. They use evil as a tool, possibly realizing and possibly not that they have been corrupted and tainted by it.

See, the punchline is that, in the end without the evil and disruptive influences, we need no government at all... and so enters the new golden age of love, peace, harmony and men who have cast aside greed, anger and jealousy and only want to do more for others than they do for themselves. I believe man is capable of making this leap... if not now, then sometime.

RichardP's picture

I believe man is capable of making this leap...

If this were true, wouldn't we have seen some sustainable evidence for it by now?

In a world where there is not enough to eat, not enough clothing to keep warm, and not enough shelter from the elements - what percentage of the population do you believe is ever going to offer up theirs, at the risk of dying because of it, so that others might live?  Man's inherent survival instinct is going to forever guarantee that those who choose to die so that others might live will remain a small segment of any population.  The rest will do whatever it takes to survive - which is the opposite of living in peace and harmony.

harleyjohn45's picture

Offer yours up, there will be willing takers.  The state of Alabama is now 1 in 5 on food stamps.  Do you think someone might be gaming the system.  Mississippi is almost 50 percent disability, do you think someone might me gaming the system.

AGuy's picture

"I believe man is capable of making this leap... if not now, then sometime."


Yes, a Leap off the cliff! The other stuff is non-sense. We been fighting each other since before the dawn of civilization. Or survival and success comes from our drive to complete and this ultimate leads to war and conflict. We are also doomed by our own success, as we obtained the technology and infrastructure to exploit every concievable resource. Now those resources are being depleted at an alarming rate, Too fast to prevent adapt to their depletion, which will lead to war. We can already see the beginning in the Middle East, but the conflict will not be contained to the Middle East. Its just amatter of time.


ebworthen's picture

What did they think was going to happen when they bailed out TBTF banks, insurers, and corporations while outsourcing employment and allowing illegal immigrant slave labor?



razorthin's picture

Just start another off-balance sheet war and pretend it won't hasten the dollar demise and the impoverishment of the next 15% of the masses, while you may or may not get your knee-jerk but ephemeral bump in GDP.

Azannoth's picture

"It’s hard to foresee a set of circumstances under which America’s elected representatives put aside partisan squabbles and knuckle down to make the hard decisions that absolutely need making in order to save their constituents from impending disaster"

There IS 1 such scenario! If All American people converted to Judaism, clearly the politicians can and do Always support the Jews 1st

Peter Pan's picture

I hate to tell everyone this but we have aready jumped off the fiscal cliff and any attempts to avoid impact will be as useless as those by Wile E Cyote.

The 21 trillion stashed away in tax havens for a rainy day is out of bounds yet screwing Iran by freezing her out of the international payments system is fair game.

Who is kidding who?

viahj's picture

as long as the bombs don't drop, we actually did Iran a favor by cutting them out of the corrupt global USD fiat system. they now are trading in gold and other currencies. 



alangreedspank's picture

And what's this assumption that by raising taxes, the pie which the governement stuffs its face from will remain the same size ? Is that even counted in ?

mendigo's picture

Very impressive congress has fabricated a crisis from which they may save us. Of course they fabricated the crisis to protect us from our incompetent government. Do we jump or burn in the fire - obamas choice.

alangreedspank's picture

They're too dumb to have produced anything, even a crisis. The crisis is the inevitable and predictable outcome of a statist democracy.