The "Fiscal Cliff": Three Feet to the Bottom
“Equating tax hikes and spending cuts in the U.S. with a ‘fiscal cliff’ is like calling a spot of exercise and a balanced diet ‘Caloric Armageddon’ for the morbidly obese.”
So quipped The Daily Reckoning’s Joel Bowman yesterday during a flurry of intercontinental emails.
Surely, it’s more entertaining than this: “Stocks and commodities,” reports the Financial Times this morning, “are struggling for traction as investors express renewed concern about the prospects for the U.S. economy amid continual bickering in Washington over the fiscal cliff.”
“The only real problem with the fiscal cliff,” added our investment director Eric Fry, “is that it isn’t two or three times higher. The very term rests on the specious premise that government spending — fed by confiscation from the private sector — is essential to producing growth.”
The big “news” yesterday was that the House Republicans came forward with a budget proposal to counter the one the White House offered on Friday.
Looking at the proposals side by side, we’re underwhelmed… by how little difference would either proposal make. Fair warning: The following analysis is likely to cause your eyes to glaze over.
While you ingest, keep in mind, in the logic of Washington…
- Numbers come in a 10-year increments. Never mind that future presidents and congresses are not bound by the actions of current ones
- “Spending cuts” are merely reductions in planned spending increases.
First, the White House…
Now, the Republicans…
Divide these numbers by 10 to get a true idea of the impact. We’re talking about a difference between $180 billion versus $220 billion in “savings.” Or in the context of a $1.2 trillion deficit, the big standoff in Washington is about whether the deficit will be trimmed by 15%… or 18%.
(Pardon us while we stifle a yawn.)
The “fiscal cliff” looks exhilarating, by comparison. According to the Congressional Budget Office…
More than half a trillion in the coming year alone. But even then, assuming a $1.2 trillion deficit, we’re talking only about cutting the deficit in half.
A deficit of $600 billion would have set a record in any year before 2009.
“That ‘cliff,'” a reader quips, “is about three feet to the bottom! Let’s just go off it and, hopefully, get a sample of the self-discipline we really need to get our financial house in order.”
Indeed, the political farce reinforces our optimism of late: Maybe we’re getting to “the end” faster than we wrote about a month ago…
The preceding article was excerpted from Agora Finacial’s 5 Min. Forecast. To read the entire episode, please feel free to do so here.