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The Fiscal Cliff Hanger

The Fiscal Cliff Hanger

Paul C. Wright

Paul C. Wright

The spat between President Obama and Congress over the looming fiscal cliff is the latest piece of economic drama emanating from Washington D.C. Business owners, workers, unions, and government agencies are all on edge, waiting for the latest developments over how the U.S. will address the crisis of our national deficit and national debt. The problem is that the points and counterpoints aired by all parties do not and will not come close to solving the problem. All parties involved are lacking an essential key to unlock the solution to the problem. The key is a sense of reality.

The debate thus far has circled around incremental cuts in spending and incremental increases in tax revenue. Put simply, some parties want to increase taxes by a few hundred billion dollars and others want to cut spending by a similar amount. These proposals do not scratch the surface of the problem, considering that America is facing a federal budget deficit – the amount needed to balance our books in 2013 – of a projected 2 trillion dollars. Compounding the problem is the fact that our total national debt – the amount of money owed to nations and institutions the federal government has borrowed from – is listed at over 16 trillion dollars. Once future unfunded liabilities are added to the pot, the U.S. is in debt by more than 100 trillion dollars. So what does this really mean and how can the U.S. ever repay this debt? What will the ramifications be for our national socio-economic and political life?

To put things into perspective, the U.S. takes in over 2 trillion dollars per year in taxes yet it spends nearly 4 trillion dollars per year. If the U.S. takes in about 2 trillion dollars less than it needs for spending obligations in a given year, it has to take a loan out to pay for its obligations. The loan usually comes from selling bonds to other countries. By selling bonds, the U.S. can cover its shortcomings for the year but it must also at some point in the future pay the bond holder back for the loan – with interest. The net effect is a continuing increase in the national debt and debt repayment obligations that stretch far into the future, putting the next generations of Americans on the hook for paying back the debt incurred by the current generation. Based on current projections by the Congressional Budget Office, President Obama’s current policies will result in the official 16.5 trillion dollar debt exploding to nearly 22 trillion dollars in the less than a decade. Considering that the debt is not being paid back and that the country is running deficits every year, and has to continuously add about 2 trillion dollars per year to its mountain of debt keep the government operating, it begs the question – how on earth can the U.S. ever pay back this money if it doesn’t even make enough money to fund itself for one measly year? As one can see, a hundred billion in cuts here or there is not going to make a dent or a difference. So what must the government do to fix the problem?

The only solution to the problem is dramatic, not incremental changes to tax and spending policy. For instance, the largest single piece of government spending is military spending which takes up 25% or more of our federal budget. If all military spending was completely eliminated, it would only cut our annual deficit in half, from 2 trillion to 1 trillion dollars. One can rule this proposition out, of course since the military will never likely face cuts of more than ten percent, even in an extreme case. A ten percent cut essentially leaves America with the same deficit as it started out with. Similarly, no tax increase is likely to solve the problem. Tax increases stifle growth and economic activity, particularly when the middle class faces tax increases as occurred with the recent two percent payroll tax increase that hit the middle class this year. Taxes could always be raised on the wealthy and on corporations like GE which paid zero dollars in taxes last year. The problem with this, however, is that the U.S. has already erected a national tax policy that is favorable to globalization. That being the case, lofty tax increases on the wealthy and their corporations will merely drive them to relocate overseas and keep their money out of the U.S. It is already happening as record numbers of Americans are moving to foreign countries and corporations are relocating their headquarters offshore. Until the U.S. is willing to return to a policy of import taxes and the elimination of free trade agreements, there is absolutely no incentive for American companies to be based in or have their manufacturing operations based in the U.S. In essence, America is financially screwed with its current tax policy and no one in Washington D.C. has the courage to admit what is really going on. Instead, they paper the problem over with lengthy discussions, meaningless incremental policy debates, and preparations for mass civil unrest at home. At some point in the future, the system will implode.

The implosion of the financial system can mean a lot of things – austerity, deflation, hyperinflation, or regardless of those aforementioned items, a certain collapse in living standards for the average American. With the government intent on an incremental policy that only benefits big global moneyed interests, we will likely see things come to a head sooner rather than later.

Paul C. Wright, J.D. is the CEO of Sand Dollar Group, LLC. He is an attorney and global business consultant leading the firm’s operations in international law; offshore asset protection; business intelligence, political, and market research; and international trade, management, banking, and corporate finance. He can be reached at paul@sanddollargroup.com.

 

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