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Fiscal Cliff Averted, Fiscal Crisis Looms Ever Larger

Posted by Larry Doyle on January 2, 2013 11:18 AM |

Now what?

With Congress having passed legislation to avoid going headlong over the fiscal cliff, what lies ahead for our nation’s fiscal situation and our economy?

The show we saw play out in Washington over the last few months and culminating in pathetically dramatic fashion late last evening strikes me as little more than a preliminary to the main performance and much more substantive issues that are scheduled for late February and into March. What topics will cross our headlines then? 

Dealing with the debt ceiling and mandatory spending cuts, aka, sequestration. Collectively, these topics are not really part of a fiscal cliff but rather a fiscal crisis.

Both political parties will clearly try to score political points from the legislation passed last evening. Folks, while the issues addressed and legislation passed last evening will have a meaningful impact on many individuals and families in our nation, those issues and the outcome do not meaningfully move the needle in terms of revenue generation and deficit reduction. Recall that at the current path, we are moving rapidly to a fiscal deficit of $20 trillion which equates to more than 120% of our annual GDP. What happens then? More and more of every dollar we borrow goes simply to pay the interest on our debt. How are we to address this mountainous issue?

1. Increase taxes even further? At the peril of crushing our economy in the process.

2. Spending cuts? We will see what type of leadership and character Washington can muster to address this main event over the next few months.

2a. Entitlement reform? This is where it really begins and ends. All other topics may be important to specific industries and individuals, but until we address these entitlement programs in a truly meaningful fashion, we are kidding ourselves if we think we can and will meaningfully impact our deficit. Let’s put it on the table right now. The Ponzi-style financing employed to fund these programs currently does not and will not work for all that much longer. We MUST employ rigorous means testing along with an extension of when benefits kick in. These tools should be drawn up now so as to be implemented in a meaningful fashion in the not too distant future. If we do not enact these reforms, there is one other way to address our deficit.

3. Inflation. Trying to literally inflate our way out of our deficit by devaluing our currency is a pathetic path that Washington has already been navigating for far too long. Choosing to lessen the quality of life and diminish the American dream for our children and children’s children sickens me. Yet, I firmly believe the Federal Reserve, those in the US Treasury, and the pols on both sides of the political aisle are very comfortable taking this path because it comes without bold headlines and seemingly immediate consequences. Make no mistake, the inflationary path is little more than a cancerous serum injected into our system. This serum is also filled with a meaningful dose of cronyism if not corruption. Only the favored few benefit from the cronyism and corruption. The massive majority pays the price and suffers the pain.

The American public should not be so easily duped, although we have been to date.

Navigate accordingly.

Happy New Year to all those who frequent Sense on Cents.

Larry Doyle

Isn’t it time or overtime to subscribe to all my work via e-mail, an RSS feed, on Twitter or Facebook.

I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • Mark J. Novitsky

    Once to every man and nation comes the moment to decide in strife of truth versus falsehood for the good or evil side.” -James Russell Lowell. I don’t bring up this reference for the typical Democrat vs. Republican rhetoric / hype. But of the visible government vs. the invisible government. Always same old moldy wine in a brand new shiny bottle.

  • Barry

    … if we had any leadership in Washington.

    In order to address the fiscal issues, the public needs a clear definition of the problem: given our (current and projected) revenues and expenditures, we cannot maintain our entitlements, we cannot maintain the scope of our military establishment, we cannot, nor should we, put every child through college, we must repair our infrastructure, we must take advantage of the opportunity to become energy self sufficient and we must put people back to work.

    If someone in Washington would, as we do in the real world, list the challenges and issues and begin to craft a strategic plan, we could, again, become great. Let’s be honest, you cannot get re-elected telling the voters their goodies are gone while flying in the face of the special interests who support you in order to influence (bad) policy.

    Maybe we should go over the cliff, piss off the public and, finally, elect some leaders. If we don’t soon come out of this spiral, we will need a Lincoln … to end the next Civil War!

  • LD

    Barry,

    I think you nailed it. What is the end result? Regrettably we get the politics and politicians we deserve. What percentage of the population has little to no interest in the issues you lay out?

    It is not a small number.

    • Barry

      It is not a small number.

      And the percentage of people with a government job or receiving a government subsidy/support (food stamps, education, mortgage relief, etc.) is mind boggling.

      We are screwed.

      • LD

        Barry,

        The ratings agency Moody’s has a little something to say about the legislation passed last evening. As reported in the Chicago Tribune,

        Moody’s: More budget measures needed to save U.S. rating

        Reuters
        3:17 pm, January 2, 2013
        The United States must do more than the recently passed “fiscal cliff” measures if the country is to rescue its sovereign rating from its current negative outlook, rating agency Moody’s Investors Service said on Wednesday.

        The budget deal, meant to avert potentially devastating tax hikes and spending cuts, clarifies the medium-term deficit and debt trajectory of the federal government, Moody’s said in a statement.

        “It does not, however, provide a basis for a meaningful improvement in the government’s debt ratios over the medium term,” Moody’s said.

        Moody’s said it expects more budget measures in coming months “that would result in lower future budget deficits, which are necessary if the negative outlook on the government’s bond rating is to be returned to stable. On the other hand, lack of further deficit reduction measures could affect the rating negatively.”

        Moody’s rates the United States Aaa with a negative outlook.

        Somebody at Moody’s may want to call the President who has already come out and said that he will not negotiate regarding increasing the debt ceiling.

        Well given that we have already experienced one downgrade on his watch . . . just keep screwing the future generations.

  • Huckleberry

    Riddle me this:

    Why do we not have to save ahead of time to pay for our wars?

    Why do we not have to save ahead of time to pay for our hurricanes?

    Why do we not have to save ahead of time to pay for our bank bailouts?

    Why do we not have to save ahead of time to pay for ZIRP, QE, and Op Twist which is keeping the portfolios of the 1% nearly whole, and the bonuse of their – ahem – wealth managers well more than whole?

    But why MUST we save ahead of time to pay for what the oligarchs call “entitlements”?

    Just askin’…

    Happy New Year

  • fred

    LD,

    I hate PORK; no not the bacon producer but the political blackmail that is paid out on a regular basis for votes.

    Why can’t we ban PORK? Why can’t the votes of our politicians be based upon their sense of right or wrong rather than handouts and paybacks to special interests?

    In it’s essence, isn’t PORK whats wrong with american politics? If nothing else, the recent charade in DC has shed some light on the PROCESS both good and bad.

    Let’s get this thing fixed before the new crop of sheep coming to DC are led to the slaughter just like their predecessors.

    • LD

      Fred,

      Why does pork persist? It is a central part of the crony Ponzi-style racket that those in Washington play. The game is slowly crashing as our currency weakens, purchasing power erodes, and quality of life declines.

      Future generations should judge us very harshly for having allowed this crony/corrupt system to not only perpetuate but expand.

      What is the next step in the process? As I alluded to a few weeks back and discussed once again this morning with a close friend/associate, watch for an increasing black market in the United States. Now that’s healthy, right?

      We reap what we sow.

      For more on this topic, read this recent commentary by Harvard’s Kenneth Rogoff who writes,

      As US President in the 1980’s, the conservative icon Ronald Reagan described his approach to fiscal policy as “starve the beast”: cutting taxes will eventually force people to accept less government spending. In many ways, his approach was a great success. But government spending has continued to grow, because voters still want the services that government provides. Today, it is clear that reining in government also means finding ways to shape incentives so that innovation in government keeps pace with innovation in other service sectors.

      Without more ideas about how to innovate in the provision of government services, battles such as one sees playing out in the US today can only become worse, as voters are increasingly asked to pay more for less. Politicians can and will promise to do a better job, but they cannot succeed unless we identify ways to boost government services’ efficiency and productivity.

      The Unstarvable Beast

      • Obsvr-1

        Great article, but the reality of what our Gov’t has become, the ability to spend money without income (e.g. Obozo’s $1T+ deficits) enabled by the FED’s every running “printing press” yields the Un-starvable Beast. You can eliminate taxes altogether and Gov’t will continue to spend, since deficits don’t matter and the National Debt is just an illusion to these folks.

        There is no good ending in sight for where we are headed …. ensure you allocate you portolio’s wisely and have a good percentage in highly liquid commodities and a fair amount of High Velocity Lead (HVL) – aka Ammo.

  • fred

    LD,

    I read that President Obama’s ongoing Hawaiian vacation will cost the American tax payer over $7 million.

    I wonder if the grandstanding back and forth on airforce one for fiscal cliff primetime was included in the cost?

    Come to think of it, multiply the back and forth for all the other members of Congress; it’s no wonder airline stocks are on fire!

    Money to burn, right?

    • LD

      I will give the President a break when it comes to his vacation time and travel.

      Those in Congress should be required to fly on commercial flights.

      • Obsvr-1

        perhaps, but to fly back to DC to facilitate a joke on the American People should have been on his tab.

        These incredibly stupid deals could have been executed over conference calls and eMail.

  • Randee

    Larry,

    Admittedly I have not been a reader for long, so maybe I missed it. But you seem so sour on the U.S. economy (and the rest of the world economy for that matter) let me ask you how you are invested? I am guessing that you and your government-hatin’, worry wart readers have nothing, or next to nothing, in the stock market. Which is a shame. While I distrust Obama and despise the U.S. Congress and the SEC, etc. I do realize that historically, while our moronic leaders have fumbled and bumbled, the U.S. stock market has climbed that wall of worry, and this realization has made me a wealthy man. Do you ever look with envy upon those who are getting rich while you sit on the sidelines? I understand we have a $16 trillion debt and a fiscal crisis; we have ALWAYS had tremendous fiscal challenges to overcome in this country. I just thank god everyday that my family wasn’t as pessimistic about the future of this country and invested with Warren Buffett in 1966. And that I have kept the momentum alive by continuing to invest, especially in dark times like 2002 and 2009.

    • LD

      Randee,

      In the disclaimer at my site, I write the following:

      I recommend that you consult with a licensed, qualified professional before making any investment decisions. Under no circumstances will the author or service provider be liable for any loss including but not limited to direct, indirect, incidental, special or consequential damages (including loss of revenue or income, pain and suffering, emotional distress) that result from the use of, or the inability to use, the materials in this blog, or as a result of the risks inherent in the financial markets.

      I would never comment on my personal financial holdings but will offer the following:

      I believe very strongly in diversity, long term investing, understanding risks in every regard, the power of compounding, saving, and that money itself is not a goal. Money is merely a means.

      I personally believe that neither the industry (Wall Street), the media, nor Washington is strongly compelled to be transparent and fully forthcoming with the American public on a host of issues. That lack of meaningful transparency strikes me as increasing the risk profile for all of us. I try to bring attention and transparency to a host of issues here. Each and every reader can obviously judge for himself/herself what they think of my writing. I am quite pleased and humbled by the overall traffic here and the number of subscribers to my site. Neither you nor anybody else could spend ten cents here in support of this blog.

      You write as if you actually know me. You don’t. If you care to learn more about me, you can read my bio at the About link above.

      Envy? Recall how often I have written that envy is a vice not a virtue.

      Sitting on the sidelines?

      See you at the finish line but I have a strong sense that we are not running the same race.

      • Randee

        In a capitalist society we are all running the same race, Larry. I too believe in diversity, but also on taking regular calculated, educated chances. I believe that money provides peace of mind and freedom to do what one wants to do. Sadly, in America today, most will never get to this point, and will live paycheck to paycheck until they draw their last breath.

        See you at the finish line. I’ll be waiting with a cold drink in my hand.

        • LD

          Good luck.






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