With the re-election of President Obama and a Republican-dominated House of Representatives, media attention has shifted from the election to what has been called a "fiscal cliff" and what a divided government in Washington is going to do about it. This cliff, however, is a much deeper and more dangerous problem than what is being portrayed, and is a result of unsustainable debt and a highly-flawed monetary system.
Yes, there are real short-term dangers for what looms ahead in 2013. Beginning January 1, the Bush tax cuts will expire. Despite the president's complaints that these disproportionately benefit the wealthy, the cuts actually helped increase the amount of money the federal government took in and their expiration raises taxes on nearly all Americans. Even if Congress passed the president's proposed tax increases, it would only add less than $100 billion to the Treasury every year, still leaving over a $1 trillion budget deficit.
In addition, the economy of the last five or six years has essentially been propped up by almost $4 trillion worth of bailouts, stimulus programs, and QE Fed money printing, so much so that that the president's "temporary" stimulus programs of 2009-2010 have now been adopted as discretionary spending for the last two years.
The federal government is looking at a situation where taxes are set to increase while they have exhausted the traditional Keynesian tools of "monetary injections" and money printing to keep the economy limping along in the short-run. But despite these practical realities, the real fiscal cliff is not any spending or revenue problems, it's the debt burden.
The reason that the U.S. government has been able to maintain its binge of spending, borrowing, and printing money is that the interest rates on the national debt have been incredibly low, roughly about 2%, a manageable $300 billion a year. But when the national debt reaches $20 trillion and interest rates likely return to a historical normal of about 5%, that means that interest payments will be about $1 trillion. How is this going to be possible with the projected decrease in tax revenues?
The U.S. government has borrowed trillions under the illusion that interest rates will remain low and have made entitlement and budgetary obligations that are just staggering when one takes a look at the long-term reality of the numbers. According to Boston University economist Laurence Kotlikoff, a former senior economist with Reagan’s Council of Economic Advisers, Washington’s total debts and obligations are actually over $200 trillion. That’s about $2.8 million for every family of four in the nation.
Either the U.S. government can tax this much out of the private sector (a practical impossibility) or it can continue to do what it has been doing for decades, which is slowly monetize the debt using the Federal Reserve. Rather than scare Americans with a huge tax bill, the Fed essentially creates the money out of thin air and adds it to the Treasury's balance sheet. While this may hide the reality of the debt problem in the short run, this essentially does two things: continues to discreetly destroy the purchasing power of the dollar (a hidden tax), and make the rise of interest rates inevitable.
This is the real fiscal cliff: a dollar and debt crisis practically unseen in world history. Because the U.S. dollar is the de facto world reserve currency, the breaking of the dollar affects not just us but many around the world as well. This is why so many countries are threatening to, and have already, looked to gold for financial security. If one thinks the popping of the housing bubble was bad, just wait until the dollar bubble bursts.
And Americans have already felt the sting. Since 1971, when the U.S. defaulted on its financial obligations and closed the gold window, the median wealth of U.S. families has plunged more than 50%, and almost 30% just in the past decade. While the "official" unemployment rate hovers around 8%, others project that the real unemployment rate is almost 23%. Additionally, the fact that the stock market is near the high of its up-and-down flow of the last decade is a sign that many assets are incredibly overvalued.
And with the realities of the fiscal cliff ahead, this may just be the beginning.
All of these occurrences are predictable, of course, with an understanding of sound economic theory. Throughout history, central banking and the growth of government power always coincide with shrinking middle classes, devalued currency, a less prosperous economy, and the loss of economic and personal liberties as the state seeks to squeeze every penny it can out of the productive sector of the economy.
The economic data I cite above should give weight to the argument that indeed there is a fiscal mess that politicians are predictably kicking down the road. If we really wanted to fix some of these problems in the short-run, then we could take Congressman Ron Paul's advice and drastically scale back our overseas empire, patch over those who currently rely on entitlement programs, introduce a sound currency, and work our way out of this.
But fundamentally, this crisis is not a mathematical one, it's a philosophical one. If we continue to demand tax cuts and government checks at the same time, then there is little hope.
What we need more than reforms from Congress is a revaluation of what the role of government is and ought to be in a free society. If we expect it to maintain an empire that must intervene in every corner of the globe, (run a massive welfare state, bailout and subsidize large corporations, maintain the largest prison population in the world, grope us at airports, control the money supply, and countless other things it shouldn't be doing,) than except a long fall off of the fiscal cliff.