Permanent Fiscal Cliff Scam

November 26, 2012
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The base line consensus case (which I accept) is that the fiscal cliff is resolved (just barely) by year end, most likely with a temporary extension of the 2001 and 2003 tax cuts, a continued phase down of Emergency Unemployment Compensation (EUC) and a “temporary” delay of the spending cuts under sequestration. The assumption assumes that the $120bn payroll tax cut expires at year end and that new taxes that were enacted as part of the Affordable Care Act (ACA) are implemented on schedule.

Total fiscal austerity under this scenario would be a mere $162 bn, and this would shave 1% off GDP. This illustrates just how dependent and addicted the US economy is to runaway deficit spending. There seems to be major confusion about what averting the (permanent) fiscal cliff is.  To “avert”,  policy makers must, over the next 12 months, do the unthinkable: widen the deficit, not narrow it. In fact widening the deficit is already baked in, the product of expensive new Obamacare entitlements that I covered last week. In addition New Jersey has requested $30 bn in Sandy aid, and New York is requesting $30 bn as well.

Interestingly, the expectation (per Goldman Sachs Research) is that the fiscal cliff issue “will be addressed” during the lame duck session.  I think the propaganda has refined the issue more around can kicking. The only real question is when will the next permanent fiscal cliff be placed, the end of March, or the end of June or some variation in between.

Given that most of the so called fiscal cliff is being can kicked into 2013, right when a new wave of entitlements arrives in 2014, it might make more sense to focus on other cliffs such as the expiration of large deposit FDIC insurance: or TAG [The End of FDIC insurance for Large Bank Deposits] . In a sistema where government guarantees prop everything, the removal of any large component of these guarantees will have fall out. Do a google search on TAG, this has been a strangely quiet topic of late. Legislative action will be required to extend it. Congress is scheduled to adjourn December 14.

Beyond the corporate welfare and cronyism, the issue of government dependency is obvious in the political equation. I would anticipate that this number was even larger going into the election.

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