The US ‘Fiscal Cliff’ – One Small Part Of A Huge Debt Crisis

FYI.

From the article:

“The US annual budget deficit has almost tripled under Obama, from $450bn in 2008 to $1,200bn this year.”

“America’s national debt is now around $16,000bn, two-thirds higher than when Obama was first elected. In 2008, US government debt was 70pc of GDP. Now it is 102pc.”

“Debt growth at that pace simply cannot go on.”

…

“If fiscal and monetary stimulus worked, Japan wouldn’t have spent the past 20 years in and out of recession and now be shouldering a debt to GDP ratio of 250pc.”

“If printing money worked, Zimbabwe would be in the G7.”

– The US ‘cliff’ – one small part of a huge debt crisis (Telegraph, Dec 29, 2012):

So here we are, at the turn of the year, with the global economy tottering on the edge of America’s fiscal cliff.

What’s kept springing to my mind over the holiday season is the final scene of The Italian Job – the iconic 1969 original, not the tacky 2003 remake.

“Hang on a minute, lads,” says heistmaster-in-chief, Charlie Croker, as he and his merry band of crooks balance precariously in a bus on the edge of an Alpine cliff. “I’ve got a great idea.”

The Italian Job’s cliff-hanger finale is all make-believe. A brilliant film ends, we marvel at Michael Caine’s acting genius, the credits roll and then we get up and make some tea.

Real-world predicaments aren’t so easy.

Right now, Washington’s deeply divided ruling classes are locked in tortuous negotiations to try to prevent the world’s biggest economy falling over the fiscal cliff – shorthand for $600bn (£370bn) of tax rises and spending cuts set automatically to apply from the start of 2013.

If Congress and the White House can’t agree over the next 48 hours, we apparently face a renewed US recession that would be likely to push a meaningful global recovery even further into the future.The problem facing America’s political elite is that no single party has genuine control. The Democrats regained the presidency, yes, but the result was far from “decisive”.

Obama prevailed in most of the swing states, so claiming 332 electoral college votes to Mitt Romney’s 206. Yet such states were won on wafer-thin margins, meaning the popular vote was extremely close.

If just 1.4pc of Obama’s supporters had switched to Romney – some 850,000 people among more than 170m registered US voters – then Romney would have out-polled his incumbent rival.

The Democrats hold the White House and Senate but the Republicans control the House of Representatives.

So the only winner in November’s US election was gridlock – not least on fiscal issues, as spending bills always start in the House.

The GOP now controls 238 House votes, compared to 197 for the Democrats.

Having campaigned for months before the election that deep spending cuts are needed to tame the US deficit, not higher taxes, Republicans still hold a commanding House majority.

That’s why many of them insist, with some justification, that “there is no mandate to raise taxes”.

Obama has cut short his Hawaiian holiday and Congress has reconvened.

Unless a deal is struck by the end of this calendar year, the spending cuts and tax increases kick in.

This would amount to a significant fiscal retrenchment, hence the concerns that going over the cliff would tip America back into recession, with the International Monetary Fund warning of “large international spill-overs”.

The Democrats most definitely want higher taxes, especially on the rich, but worry about spending cuts.

Republicans, in contrast, think the cuts don’t go far enough and that higher taxes will stymie America’s fragile recovery.

So Washington’s political gridlock reflects a deep ideological divide.

The most likely outcome, in my view, is a minute-to-midnight fiscal cliff compromise, with lawmakers loudly claiming victory along partisan lines, while covertly agreeing to delay any fundamental decisions about how to tackle America’s perilous fiscal future.

I would also predict, though, that investor angst over the cliff is rapidly replaced by concern about the US “debt ceiling” and that the current dispute turns out to be just a dress rehearsal for a much more serious row – one that really could destabilise global markets.

The inconvenient truth is that the US will also hit its federal borrowing limit on the first day of 2013 – leaving just a few weeks of “extraordinary measures” before an agreement on that is also required.

The Republicans may try to use the debt ceiling to force more spending cuts, as they did during a lengthy stand-off in early 2012.

By messing with the debt ceiling, though, US lawmakers will raise the danger of a sovereign default, a prospect which, even if it doesn’t happen, has the capacity to reduce global markets to meltdown status while halting investment worldwide.

Having said that, the debt ceiling debate really matters as it concerns the crucial issue of whether or not America can achieve some kind of meaningful budgetary retrenchment.

The US annual budget deficit has almost tripled under Obama, from $450bn in 2008 to $1,200bn this year.

America’s national debt is now around $16,000bn, two-thirds higher than when Obama was first elected. In 2008, US government debt was 70pc of GDP. Now it is 102pc.

Debt growth at that pace simply cannot go on.

Yet, above and beyond the fiscal cliff shenanigans, there is no sign whatsoever of any agreement on how to reform old age benefits so as to avoid Uncle Sam’s finances going completely haywire over the next decade as tens of millions of baby boomers retire.

While a debt ceiling row has the capacity to rock global markets, in many ways this is the debate that America – and the entire Western world – really needs to have.

My broader concern going into 2013 isn’t that we fall over America’s cliff.

While doing so would cause a panic, fiscal retrenchment is actually vital.

My overwhelming fear, instead, is that the Keynesian policies America has pursued since 2009-10 will begin to be used in the UK and eurozone, too.

Obama’s White House has overseen a Keynesian resurgence.

Cheered on by former US Treasury Secretary Lawrence Summers and economist Paul Krugman, Obama and his ever-flexible Federal Reserve chairman, Ben Bernanke, have engaged in massive fiscal and monetary expansion – hence the past four years of huge budget deficits and another looming debt ceiling impasse, coupled with the Fed’s third round of “open-ended” quantitative easing.

No European nation has followed America’s fiscal path, even though the UK and eurozone have competed to out-pace the States on QE.

Despite America implementing an unprecedented fiscal boost, sustainable recovery hasn’t arrived.

Europe’s ongoing torpor, meanwhile, has nothing to do with a lack of government spending.

Instead, it is largely about our unresolved banking crises and the massive undeclared liabilities that continue to gum up the wheels of commerce.

If fiscal and monetary stimulus worked, Japan wouldn’t have spent the past 20 years in and out of recession and now be shouldering a debt to GDP ratio of 250pc.

If printing money worked, Zimbabwe would be in the G7.

The Italian Job ends with the heroes left in limbo, the gold bars they covet just out of reach.

But while the audience is left wondering if the bullion really will fall out of the back of the bus and into the abyss, there is also the strong impression that Charlie Croker’s “great idea” will somehow resolve the predicament, using the same nous that outsmarted the Turin police.

Four years after sub-prime, our leaders still seem to be hoping for a “great idea” that will rescue the Western world.

But there is no quick fix – and most certainly not Keynesian fiscal policy.

Were Europe to take the Keynesian path, trying to spend its way out of recession with no reserve currency, by far the most likely outcome would be a creditors’ strike and pandemonium on global markets.

The only way to rediscover growth in the big “advanced” economies is continued de-levering, structural banking reform and a steady and deliberate scaling back of the state.

We’ve made some moves in this direction but not nearly enough.

The danger facing us in 2013 is a deeply counter-productive reversal even of this scant progress.