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Fiscal Cliff


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I honestly believe that the Democrats think they can postpone a recession forever. What's important to remember is that recessions are a normal, healthy part of economic progress. Creative destruction if you will. That reality seems to escape most politicians in the U.S. and around the world, and now we're on a perpetual course of additional debt and money printing to keep above that magical 0% economic growth.

Er, hum - didn't y'all just have a derecession? Rather bracing, wasn't it, and y'all are still feeling the effects? But you're right. Bring on the tax increases for the middle class and up, cut all the loopholes like the mortgage deduction, and you'll be good. Oh, just go to a single payer health system and you could almost wipe out your annual deficit in one fell swoop.

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Er, hum - didn't y'all just have a derecession? Rather bracing, wasn't it, and y'all are still feeling the effects? But you're right. Bring on the tax increases for the middle class and up, cut all the loopholes like the mortgage deduction, and you'll be good. Oh, just go to a single payer health system and you could almost wipe out your annual deficit in one fell swoop.

If the middle class wants a Northern European socialist state, then they're going to have to start paying Northern European type taxes. Obama's constituency is essentially looking for all he benefits of a welfare state, but having a few select rich guys pay for it. The reality is everyone is going to pay more. You can't fund extravagant benefits for all through the pockets of a couple guys.

But yes, recessions are concerning mostly due to media hype. 2 or 3 percent of the people lose their jobs, worst case. I know it sounds bad and its bad for the few that suffer, but the other 97 percent will be much better off long term. The 2 or 3 percent will eventually get their jobs back.

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....But yes, recessions are concerning mostly due to media hype. 2 or 3 percent of the people lose their jobs, worst case. I know it sounds bad and its bad for the few that suffer, but the other 97 percent will be much better off long term. The 2 or 3 percent will eventually get their jobs back.

Agreed....recessions are normal and to be expected as part of economic cycles that redistribute and lean out markets / resources. The U.S. just "survived" one of the biggest recessions in its history.

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Agreed....recessions are normal and to be expected as part of economic cycles that redistribute and lean out markets / resources. The U.S. just "survived" one of the biggest recessions in its history.

True. However now the mentality in the U.S. is that future recessions must be prevented at all costs. You see that through monetary policy. You see that in the absolute all out effort to avoid a plunge off the cliff, even though the Dec 31 deadline wasn't that critical. Any effort is spared to avoid recession. That's foolish, especially when it costs you your long term viability.

You can postpone a recession for a long time by printing money and paying out thousands of dollars in cash per family (essentially what monetized deficits do). However, along the way you're building up a bigger and bigger problem. The recession, when it does happen, will be much worse and the U.S. will be much more fragile fiscally in dealing with it. I mean if you're burning a trillion a year at 2 percent economic growth, what is that going to look like in a recession? $2 trillion? $3 trillion a year?

During economic growth (which is occurring in Canada and the U.S.), governments should be focused on delivering surplus budgets and building fiscal capacity to handle the next recession. The LPC and CPC had a tradition of that here, a tradition I'd like to see restored. In the U.S., they are so far beyond returning to sound fiscal policy that I'm really concerned about how they will cope with the next recession, when it occurs.

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True. However now the mentality in the U.S. is that future recessions must be prevented at all costs. You see that through monetary policy. You see that in the absolute all out effort to avoid a plunge off the cliff, even though the Dec 31 deadline wasn't that critical. Any effort is spared to avoid recession. That's foolish, especially when it costs you your long term viability.

You can postpone a recession for a long time by printing money and paying out thousands of dollars in cash per family (essentially what monetized deficits do). However, along the way you're building up a bigger and bigger problem. The recession, when it does happen, will be much worse and the U.S. will be much more fragile fiscally in dealing with it.

There will be a recession either way....sooner or later. There really is no fiscal cliff.....it's more like a sloping hill.

During economic growth (which is occurring in Canada and the U.S.), governments should be focused on delivering surplus budgets and building fiscal capacity to handle the next recession.

The US will not likely have fiscal surpluses for quite some time. The conditions for Clinton's success with a Republican House won't happen anytime soon because of demographics and government/state social programs. So the idea in Washington is to get chronic deficits down to "sustainable" levels, while monetizing the debt with a weak dollar policy, just as you stated.

Edited by bush_cheney2004
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The US will not likely have fiscal surpluses for quite some time. The conditions for Clinton's success with a Republican House won't happen anytime soon because of demographics and government/state social programs. So the idea in Washington is to get chronic deficits down to "sustainable" levels, while monetizing the debt with a weak dollar policy, just as you stated.

True, I should have not said surplus budgets, but rather a country can build fiscal capacity by running deficits as a lower percent of GDP than the GDP growth rate. Doesn't need to necessarily be a surplus.

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There will be a recession either way....sooner or later. There really is no fiscal cliff.....it's more like a sloping hill.

It's interesting to note that Ben Bernnake coined the phrase "fiscal cliff". It would appear that whatever it is, he doesn't care for it. What I wonder is underneath all of the politicking and spinning, what does Obama think of it? You can't go by what he says.

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It's interesting to note that Ben Bernnake coined the phrase "fiscal cliff". It would appear that whatever it is, he doesn't care for it. What I wonder is underneath all of the politicking and spinning, what does Obama think of it? You can't go by what he says.

Ben is walking a tightrope of confidence right now. The U.S. hitting a major economic recession right now could really hurt his monetary policy strategy, no confidence in the U.S. economy = mighty hard to keep bond yields from rising. Anything to prolong the time until a recession is critical to the Fed right now.

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It's interesting to note that Ben Bernnake coined the phrase "fiscal cliff". It would appear that whatever it is, he doesn't care for it. What I wonder is underneath all of the politicking and spinning, what does Obama think of it? You can't go by what he says.

Part of the problem is growing government spending as a percentage of GDP....Keynesian economics on steroids. Bernanke's perspective comes from the existing framework that is proving to be unsustainable sans economic growth.

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You know, it seems like Bush Jr was able to negotiate with the Dems and get things done far better than Obama negotiates with the GOP. At least concerning the fiscal situation.

Apples and oranges. The GOP has a concerted plan to be obstructionist and to make Obama fail.

Heres a quote from a GOP leader in congress...

my number one priority is making sure president Obama’s a one-term president

Thats their number one priority! Not American prosperity... not American security... not Americas future.

How do you "work with" someone thats entire plan is to make you fail?

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If the middle class wants a Northern European socialist state, then they're going to have to start paying Northern European type taxes. Obama's constituency is essentially looking for all he benefits of a welfare state, but having a few select rich guys pay for it. The reality is everyone is going to pay more. You can't fund extravagant benefits for all through the pockets of a couple guys.

Do you really think the 'entitlements' of the US social welfare programs even begin to approach the benefits of the "Northern European Socialist" states? Also, given 10% of Americans own 81% of all the real wealth (stocks, bonds, gold) in America, why can''t you fund such a state with their money?

Edited by Argus
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BTW, for those who are behind the idea of cutting costs rather than raising more funds, here is a very good breakdown of where the budget is going.

I know nobody in the Republican party or its supporters wants to be specific about cuts, but have a go and see if you can find a trillion in savings.

http://www.usfederalbudget.us/federal_budget_detail_fy13bs12012n_0002104041_651_605#usgs302

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BTW, for those who are behind the idea of cutting costs rather than raising more funds, here is a very good breakdown of where the budget is going.

I know nobody in the Republican party or its supporters wants to be specific about cuts, but have a go and see if you can find a trillion in savings.

http://www.usfederal...651_605#usgs302

Looking at that budget, military defense is already getting a ~16% cut by 2014. Applying a similar 16% cut to Social security, medicare, and welfare would save ~$438 billion in 2017, out of a total projected deficit in 2017 of 612 billion. That would reduce the deficit to 174 billion, or about 1% of GDP. So long as the ratio of deficit/GDP is less than the GDP growth rate, your debt will shrink relative to the size of the economy over time. So you don't need $1 trillion in annual spending cuts, the $438 billion I mentioned would do.

To achieve those 16% cuts, you could go a long way by doing the following:

- increase the social security age brackets by 2-3 years, and thereafter index it to a % of life expectancy at birth

- get rid of the unemployment extension that's been getting extended since 2008 due to the recession and put it back to the usual max duration

- reduce the rate of adjustments for inflation in social security and welfare benefits (i.e. the "chained CPI" method)

- means test social security and medicare (those seniors who are rich enough not to need it should have these benefits phased out)

Edited by Bonam
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Looking at that budget, military defense is already getting a ~16% cut by 2014. Applying a similar 16% cut to Social security, medicare, and welfare would save ~$438 billion in 2017, out of a total projected deficit in 2017 of 612 billion. That would reduce the deficit to 174 billion, or about 1% of GDP. So long as the ratio of deficit/GDP is less than the GDP growth rate, your debt will shrink relative to the size of the economy over time. So you don't need $1 trillion in annual spending cuts, the $438 billion I mentioned would do.

To achieve those 16% cuts, you could go a long way by doing the following:

- increase the social security age brackets by 2-3 years, and thereafter index it to a % of life expectancy at birth

- get rid of the unemployment extension that's been getting extended since 2008 due to the recession and put it back to the usual max duration

- reduce the rate of adjustments for inflation in social security and welfare benefits (i.e. the "chained CPI" method)

- means test social security and medicare (those seniors who are rich enough not to need it should have these benefits phased out)

What is the problem with this "math". a study just released from the IMF on austerity found for every dollar cut from a governmental budget it lead to a one dollar and fifty cent fall on GDP. You want to cut 700 Billion from the US government budget it will mean a 1.1 Trillion dollar fall off in GDP. Recession here we come, oh and you wont actually get any savings. You would have already known this though if you just looked to the UK.

Your math is way off here.

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a study just released from the IMF on austerity found for every dollar cut from a governmental budget it lead to a one dollar and fifty cent fall on GDP.
Obviously a study from the ganja weed school of economics. Chronic deficits must be below the rate of growth of the economy (surpluses would be better). If they are not then there will come a time when there is no one willing to buy government bonds - Greece and Spain are discovering this reality today and it is not pretty.

IOW - cuts may reduce growth today but that reduction in growth is a price worth paying to avoid a massive crisis in the future.

Edited by TimG
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You know, it seems like Bush Jr was able to negotiate with the Dems and get things done far better than Obama negotiates with the GOP. At least concerning the fiscal situation.

I wish I could totally agree but sadly the whole fiscal cliff was a tradeoff for getting the tax cuts through at all. The Democrats would not pass them unless they sunsetted.

The problem with that was that the incentive effect of the cuts was pretty much eliminated, since the tax rates were poised to rebound. Obama will now get the benefit of the permanent cuts. Oh the irony.

Except he wanted big tax increases and won't get them. This may tank Obamacare.

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Do you really think the 'entitlements' of the US social welfare programs even begin to approach the benefits of the "Northern European Socialist" states? Also, given 10% of Americans own 81% of all the real wealth (stocks, bonds, gold) in America, why can''t you fund such a state with their money?

Ever try to extract that kind of money from the truly wealthy? It has never worked out well.

Just ask Mick Jagger where his legal residence is and why.

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Obviously a study from the ganja weed school of economics. Chronic deficits must be below the rate of growth of the economy (surpluses would be better). If they are not then there will come a time when there is no one willing to buy government bonds - Greece and Spain are discovering this reality today and it is not pretty.

IOW - cuts may reduce growth today but that reduction in growth is a price worth paying to avoid a massive crisis in the future.

What are you talking about? Do you know what the IMF is? Just because you really really want to believe something does not make it true.

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What are you talking about? Do you know what the IMF is? Just because you really really want to believe something does not make it true.
Nothing I said contradicts what you claimed the IMF report says. The problem is you took the IMF report to mean that deficits should not be reduced. That is what I call 'ganja weed' economics. Chronic deficits that exceed the growth of the economy WILL result in a massive crash in the future. Any reduced growth from cutting spending is simply a price that needs to be paid to get the economy on a sustainable course.

BTW: The IMF has back peddled on its previous claims:

Belt-tightening in advanced economies may not be as harmful to growth now as it was during the height of the financial crisis, but governments should still be careful about drastic cuts, an International Monetary Fund research paper found on Thursday.

Blanchard and Leigh said the effect of government spending on the economy could vary depending on the

country and the state of the economy. They cautioned that governments should not necessarily delay austerity, but should take into account its negative impact on growth.

Edited by TimG
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Nothing I said contradicts what you claimed the IMF report says. The problem is you took the IMF report to mean that deficits should not be reduced. That is what I call 'ganja weed' economics. Chronic deficits that exceed the growth of the economy WILL result in a massive crash in the future. Any reduced growth from cutting spending is simply a price that needs to be paid to get the economy on a sustainable course.

BTW: The IMF has back peddled on its previous claims:

Someone has to spend, if not....Great Depression. We can't all cut at the same time. Canada didn't have such a drastic hit when it cut its deficit, and the reason for the IMF report was because they never thought it was going to be such a deep hit to GDP. The countries that cut ended up in more debt then if they didn't cut anything. That sounds like bad economics to me maybe you think you should cut during a depression, end up putting people out of work and not help your deficits one bit but that sounds lose lose to me.

Edited by punked
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