What is the fiscal cliff of US?

Discussion in 'Business & Economics' started by Saint, Nov 7, 2012.

  1. joepistole Deacon Blues Valued Senior Member

    Sure, the US could raise taxes and print money to lower it's debt by half or it could just eliminate the debt the US government owes to itself. About 26% to 50% of the US debt is debt the government owes to itself. The largest holder of US debt is the US government. Despite all the political ads you may have seen, China only holds about 6% of total US debt.
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  3. joepistole Deacon Blues Valued Senior Member

    There is only one fiscal cliff under discussion. Confusing the fiscal cliff discussion by muddying up the discussion with vague improbable and non-urgent externalities does nothing to add clarity or understanding to the discussion.

    The fiscal cliff is not permanent. It is a point in time event. If you are asking, are their always potential fiscal crises, the answer is yes. It’s called risk and it’s managed every day in the equity, commodities and currency markets.
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  5. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member


    Please Register or Log in to view the hidden image!

    Uncle Sam needs a parachute, I think. What will it be? Probable answer: Congress kicking can down the road.
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  7. joepistole Deacon Blues Valued Senior Member

    We will have to see how this goes. House Speaker Boehner (Republican) was sounding a bit more amenable this morning. But that has never been the problem. Boehner's inablity to lead his fellow Republicans in the House on this issue has been the issue.
  8. Carcano Valued Senior Member

    That would be 8 trillion dollars, which the Federal Reserve could simply create with a keyboard...however they would also have to gradually raise bank 'reserve ratios' to prevent devaluation of the currency.

    The reserve ratio is the percentage of deposits banks must hold, instead of lending out.
  9. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    Yes the Fed would try to "sterilize" 8 Trillion but not by raising the reserve ratio. I don´t think the banks have 8 Trillion and if the newly issued 8 Trillion were new deposits into Fed´s accounts in "12 participating banks" and then just went back to the Fed there would be no point to this "Indian giving" game.

    IMHO, US is now (or soon) at point where Fed can no longer prevent more rapid than it wants "devaluation of the currency" when its value is compared to value of real assets (farm land, gold, iron ore, oil, apples, wheat, etc.) but the Dollar / Euro ratio can remain about what it is as all major nations, but China, race each other to see which can destroy value of its currency fastest.
  10. Carcano Valued Senior Member

    The point is to pay off HALF the federal debt...with the new money ending up in sequestration instead of circulation...just like the notion of sequestering newly formed CO2 below ground, where it cant alter the balance of biosphere gases.

    Government manipulation of reserve ratios is FAR better than distorting free market interest rates.
  11. Saint Valued Senior Member

    Why other country cannot do as the Fed did?
    Can Greece do it?
  12. Carcano Valued Senior Member

    Greece doesnt have its own currency or its own central bank.
  13. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    I don´t think you have much understanding about who are the holders of the debt you would be paying off with the newly printed 8 trillion.
    Here are some facts for you consider and then tell me how you could get the money paid to them back. (Taken out of circulation to prevent run-a-way inflation.)
    Banks hold only $307.2 billion or less than 4% of the 8 trillion debt to be paid off by printing press money so even if when paid off the banks were were required to send 100% of it back to the FED, 96+ percent of the 8 trillion pay off must be pulled out of circulation by some other means. You don´t want to crush the economy with the great increase of interest rate necessary to sell 8 Trillion of new bonds, so how will you get that 96+ percent back out of circulation?

    Also consider that foreigners and foreign institutions hold $5.135 trillion and US can not tell them to deposit it with the FED.
    (This data from same link as the quote above.) Note also that Social Security payments to the retired are indexed to inflation (by the CPI) so the SS would be paying much more out into public hands if there is inflation - this would be a self-accelerating process as that greater flux of SS payment makes more money in circulation, which makes more inflation ... etc., etc. ... til paper money is only good for starting fires or toilet paper. IMHO, a simple default would be disastrous, but less damaging. US could issue new red colored "Were sorry bucks" and try to start over.
  14. Carcano Valued Senior Member

    Money supplies function like water levels Billy...when you add a bucket of water to the center of a pond it affects the water level minutely at thousands of different points around the pond's perimeter.

    And just like those individual water molecules bumping into each other, new money changes hands and crosses borders dozens of times before reaching sequestration. Yes, it takes time...this is why I say that reserve ratios would have to be raised gradually according to a feedback loop of incoming stats.
  15. joepistole Deacon Blues Valued Senior Member

    Most countries can expand the money supply as the Fed has done in the United States. But member states of the European Union have surrendered that right to the EU per treaty. So no Greece cannot print more money to solve it's debt problems if it wants to remain a member of the EU. Greece could withdraw from the EU and print its own currency. But there are some very severe disadvantages to withdrawing from the EU.
  16. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

  17. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    You did not tell how you could get more than 96% of the newly printed money out of circulation.

    You seem to think it makes a big difference if only, $7,700,000,000 new dollars are set free to circulate instead of 8,000,000,000. It doesn´t - either or even only 1,000,000,000 newly printed dollars circulating will cause terrible inflation. Recall that banks hold only 300.000.000 of the debt to be paid off . So that is all you can recover by requiring them to deposit it all back with FED as mandatory reserves.)

    I´m sorry but your bucket of water analogy does not hold water.
  18. Carcano Valued Senior Member

    You are assuming that new money received by other holders of debt will never find its way to US bank deposits...a critical mistake.
  19. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    No, I´m not assuming that. I am assuming you want banks to have money to lend. I.e. banks are the intermediaries between savers and borrowers. Banks are NOT sponges to soak up deposits and send them to the FED. - Performing that function would both destroy the banks (have no income from loans) and the economy.
  20. Fraggle Rocker Staff Member

    It is a date early next year at which the debt ceiling is reached. At this moment the government will no longer be able to spend more money than it collects in revenue. A law was passed last year prohibiting the government from raising the debt ceiling without authorization from Congress. So when it is reached, the new law will automatically require all government expenditures to be reduced by an arithmetic formula, in order to balance the budget. This is not as easy as it sounds (and it doesn't sound very easy) because much of government expenditures are contractually mandated, such as payments to health care providers for Medicare services, as just one really large example. For the government to not pay its bills in full would be a breach of contract, and no one would ever trust them in the future.

    Neither. In the short run, only Congress can do it by raising the debt ceiling. In the long run both Congress and the President will have to find a way to balance the budget by reducing expenditures and/or increasing taxes.

    Raising taxes on the wealthy won't really solve the problem, much as everyone wishes it were that easy. There's just not enough potential revenue there, even if you raised them back to their 1950s level. They'll have to raise taxes on everybody, including corporate taxes.

    You can bet that this country will finally start looking at its sacred cows, like the fact that churches pay ZERO taxes, even though they run some very lucrative businesses. It's time to stop paying subsidies to (mostly corporate) tobacco farms, at the same time we're paying for advertisements urging people to stop smoking. There are lots of things like that in the tax code, and they really add up to a lot of money.

    As for cutting the military budget, of course I support that because I'm a pacifist. We've spent several trillion dollars on wars during this century, and they have been ENTIRELY wars of opportunity. Somehow Obama gets the blame for the national debt, when it was Backward Baby Bush who decided to fight all these wars without paying for them, simply borrowing the money from China. Maybe he figured eventually we'd just make war on China so we wouldn't have to pay them back, I don't know. It's hard to read the mind of a person with pre-senile dementia.

    Anyway, much as this senior citizen hates to admit it, Social Security, Medicare and other expenditures for retirees is a much larger part of the budget than the military. And it's growing every year, with the greying of the population. Sure we could simply reduce the benefits to my generation, but remember that we all vote and most of you are too busy, lazy or apathetic to bother, so you'd never get that law passed. What we need is to reduce the cost of health care, which is as much as double the European level, and health care in Europe is just as good as ours if not better in some cases.

    The total cost of health care in the USA is nearly three trillion dollars! If our health care industry were a separate country, it would have the world's fifth largest economy.

    Our health care costs are inflated by a phenomenon I often rail against: the lawyer glut. There are too many attorneys in America so when anything bad happens to anybody, they show up in their hospital room and convince them to sue someone, anyone, everyone. As a result our doctors practice "defensive medicine," and order thousands of dollars of expensive tests before performing surgery, so if something goes wrong nobody can say they cut corners. This is why medical care is so expensive in the USA. It isn't the doctors and nurses and orderlies and hospital janitors making all that money: it's the lawyers and bureaucrats.

    It really is time for America to take Shakespeare's advice: First kill all the lawyers.

    That's an awful lot of money. It simply can't be done quickly. We have to balance the budget by... what's the date now, March? There's no way we could pay off half of our national debt in four months. Too many creditors, too many accounts, too much work for too many people.

    We only have the one, but they move it.

    That is possible. They'll probably compromise and raise the debt ceiling at the same time we increase taxes and decrease spending, so the problem is not solved.

    In the short run the problem won't be solved until the national debt is down below 80% of GDP, and right now it's way over 100%. Different economists give different numbers, but it absolutely can't be much higher than 80% in the long run because so much of our productivity will be spent on interest that the economy will go into a tailspin.

    In the long run the problem won't be solved until the national debt is way down below 50%. That will give us plenty of leeway for deficit spending if a disaster strikes, while still leaving plenty of U.S. government bonds out there for banks to buy as safe assets.

    That would cause catastrophic inflation. Remember Germany in the 1920s? Eventually they had postage stamps denominated in billions of deutschemarks. It would destroy the country. Everyone would be hoarding gold.

    It has its own central bank. That's the problem with the Euro zone. They have a common currency but no central bank for the entire union. That was a really dumb idea and they now realize it. Each country is allowed to craft their own economic policy, and when they go in opposite directions it causes chaos.
  21. Carcano Valued Senior Member

    Yes, banks ARE sponges that soak up a percentage of deposits as set by the government...the only question is to what degree.

    Raising the percentage will function to sequester new money flowing into the economy...but must be done in accordance with a feedback loop of incoming stats.

    The central bank of your beloved China does this often enough.

    The 8 trillion dollars would never be released all at once...nor should reserve ratios be raised all at once.
    Last edited: Nov 10, 2012
  22. joepistole Deacon Blues Valued Senior Member

    What you are referring to is The Budget Control Act of 2011 that was passed last year and required automatic spending cuts if a congressional super committee could not agree upon a deficit reduction plan. Obviously the super committee failed so now the mandatory and draconian budget cuts embedded in the Budget Control Act will become mandatory in 2013 if Congress does not change the law.

    This Fiscal Cliff is much more than just the Budget Control Act of 2011. The fiscal cliff is a term first coined by Fed Chairman Bernanke and refers to a series of laws that hit the economy at the same time.
    - Debt Ceiling Increase
    - Expiration of the Bush Tax Cuts
    - Expiration of the Payroll Tax Roll Backs
    - Expiration of Medicare Doc Fix
    - Reversion of the Alternative Minimum Tax to 2000 Levels
    - Expiration of Federal Unemployment Benefits
    - New taxes
    - The Budget Control Act of 2011

    So basically, middle class taxpayers are going to get hit with significant tax increases coupled with significant decreases in government spending, none of which is good for the economy. Failure to increase the debt ceiling would cause an unprecedented national default in rather short order. It should be noted here that President Obama has already reduced the federal deficit by 600 billion dollars over the course of the last 3 years. But the federal deficit remains high at 1.1 trillion dollars.


    As previously stated, this is something created by congress and can only be fixed by congress. Under our Constitution, Congress controls the nation’s purse strings. A president cannot make law, making law is the responsibility and duty of Congress.

    Republicans in the House and Senate have repeatedly attempted to shirk their responsibility for the budget and shift it to the president. But the Constitution has not changed; congress is responsible for passing a budget and is the only body with the legal authority to authorize federal spending (i.e. budget) and make law. That is why Congress is referred to as the legislative branch of government. The president can veto the budget, in which case Congress has two alternatives. It can change the budget/law or override the president’s veto.

    This is an argument used by conservatives to justify exempting the wealthy from increases in taxation. The facts are that everyone will need to make some sacrifices in order to fix the nation’s fiscal ills. But we need to fix the fiscal woes in a way that will not damage the economy. We don’t need or want to repeat the same failed European austerity policies. Taxes on the wealthy are an integral part of solving the nation’s fiscal woes. And per the recently released study by the nonpartisan Congressional Research Service, there is no evidence that increased taxation on the wealthy will have any detrimental effects on the economy.

    A rational solution to the nation’s fiscal problems must first ensure that the economy continues to grow. Our fiscal problems are long term, not near term unless we screw things up with European style austerity or fail to raise the debt ceiling.

    I have to agree with you here.

    I have to agree with you up to this point.

    The problem is not lawyers. The nonpartisan Congressional Budget Office did a study a few years ago and found that at best, legal fees account for no more than 5% of the nation’s healthcare expenditures. The real problem with the US healthcare system is lack of competition. Industry insiders control prices by controlling supply. They don’t have to compete based on price, so they don’t. A single payer system as we see in Canada and in other industrial nations is a much more efficient and effective model. But the single payer model is an anathema to Republicans.

    This is all nonsense. What is important is the nation’s ability to service its debt. There is no arbitrary number out there that says a nation cannot have more than “x” amount of debt. Currently the US has no problem servicing its debt. Longer term, when the economy recovers and interest rates rise, servicing the debt may become more problematic. But federal tax revenues should increase with economic expansion. What is important is that investors feel that the existing government can govern. That was not all that apparent last year when the Tea Party threatened to cause an intention default on the national debt.

    In the past the U.S. has had much higher levels of real debt (e.g. WWII) that was brought under control by raising taxes and continued investment in infrastructure - the exact same plan President Obama has and continues to advocate.

    First, it would not be like post WWI Germany with hyperinflation. Germany didn’t have a central banking system for starters. And two, the effect of monetary expansion on inflation depends on timing – when and how fast the monetary supply is allowed to expand. Nations are not constrained by human life spans.

    Well that is not true, the European Monetary Union does have a central bank and its president is Mario Draghi. President Draghi has frequently been in the news this year, most recently a few days ago when he announced that European economies were contracting and subsequently resulted in a several hundred point decline in the US equity markets. What the EU does not have is a strong central government and they have taken steps to strengthen their central government this year. But they have been slow in enacting reforms. Greece does not have a central bank. Greece like other EMU member states signed away its right to control monetary policy when it joined the EMU (European Monetary Union) and is totally dependent on the EMU central bank for monetary policy.


    I think you are confusing monetary policy (i.e. the money supply/creation or destruction) with fiscal policy (i.e. how money is collected and spent). And for a man who is supposed to have a degree in business I find that rather odd. Central banks like the European Central Bank (ECB) are responsible for monetary policy and only monetary policy. And Saint’s question was about central banks and monetary policy.

    Each member EU state is responsible for its own fiscal policy (i.e. spending & budgeting) just like each state of the United States sets its own budget, borrowing money, raising revenues and spending money. Greece is now comparable to any of the states of The United States. Colorado cannot print money. It cannot control the money supply and neither can Greece. Only the federal government (i.e. The Fed) can create money in the United States. And only the ECB can create or destroy money in European Union (United Kingdom exempted, they retain the British Sterling). Colorado, like every other state in the union, is totally dependent on the federal government to manage monetary policy. Colorado, like every other state in the union, raises revenues through debt and taxation and spends those revenues, and so it is with Greece and other member EU states.

    Here is a difference, it is clear Colorado doesn’t have the right to leave the union and there are processes/laws for managing a profligate state. Wither Greece can leave the EU is much less clear. In the EMU (European Montetary Union) there are no processes for undoing the European Union or managing a profligate state. And that has been the locus of much angst in recent years.
    Last edited: Nov 10, 2012
  23. Carcano Valued Senior Member

    They do have a central bank...its called the ECB.


    Greece also has a central bank, but it cant do anything except act as treasurer and fiscal agent for the government.

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