What is really the Fiscal cliff about

On December 21, 2012 by Phil Champagne

By Phil Champagne, Managing Partner at Wren Investment Group

I’m amazed at the terms they came come up sometimes, but what is more amazing is how far they can be from the reality. Just like those bills like “The Patriot Act”, it sounds like very patriotic when in reality it is nothing less than the reduction of freedom on the American public in the name of national security.

The fiscal cliff is no different. According to wikipedia, the fiscal cliff means

In the United States, the fiscal cliff is a term used to refer to the economic effects that could result from tax increases, spending cuts and a corresponding reduction in the US budget deficit beginning in 2013 if existing laws are not changed by the end of 2012. The deficit—the difference between what the government takes in and what it spends—is expected to be reduced by roughly half beginning in the first days of 2013. This sharp decrease in the deficit in such a short period of time is known as the fiscal cliff. However, the Congressional Budget Office estimates this sudden reduction will probably lead to a mild recession in early 2013.

So they are saying that this sharp reduction in deficit is known as the fiscal cliff. Let me get that straight, in other words, what they are saying is that if the United States government gets closer to a balance budget this will be a fiscal cliff? Why is everything upside down in DC? If a corporation or an individual gets out of an annual deficit – or reduces it – we would not call this a fiscal cliff, we would view it as just the opposite: avoiding a fiscal cliff.

It would be more appropriate to call this a fiscal cliff: an increase of the debt ceiling along with avoiding any cuts to the government spending to address the deficit. But we are unfortunately already in the fiscal cliff. All this talk of raising the debt ceiling is the same as lowering the desert floor a few hundred feet lower so the coyote can fall longer before hitting it. It will still hurt badly when he will hit the ground, its just that it will be more painful when he does.

Because it is believed governments can control the amount of revenue they can get via taxation and the fact they control the currency that is used by the public where they can print it at will (another form of taxation), it is often perceived that governments are not subject to regular law of economics applied to corporations and individual. Unfortunately that is a mistake. By increasing taxes, this removes “oxygen” out of the economy, reducing the country’s economy and consequently not getting as much as expected from the taxes. Since currency inflation (printing) is also a tax but on capital, it too has the same general impact. No country has ever escape their fiscal cliff, the coyote always hit the ground at some point. This applied to Argentina several times, it applied to Russia in the late 1990s. What’s in the forecast with this latest round of QE4 with a near $1 Trillion of printing schedule for next year is more price inflation. If you want to prepare for this, preserve your capital with gold and silver and preserve your income by acquiring real estate. You can contact us if you are interested in participating with us and our team. The real solution would be drastic cuts, close to $1 Trillion, but any real cuts coming from Washington DC is impossible to imagine so reduction will happen on the expenses, only increases as usual.

 

Leave a Reply

Your email address will not be published. Required fields are marked *