Fiscal Cliff

[ZackDaniels]

This is going to be a running narrative in the news for the rest of the year and so I figured I'd give a summary of what is being discussed. I'm trying my best to keep opinions out of this and give a 'just the facts' summary.

How did we get here?
Last year when the debt ceiling was about to be hit and Obama and Congress got into a yelling match about if it would be allowed to raise or not. Ultimately the compromise was Obama would get his debt ceiling raise, but only if the Budget Control Act would be allowed in.

The Budget Control Act (BCA) is full of dramatic cuts that neither side wants, including deep cuts to the defense budget. These cuts are the 'sequesters' you may or may not have heard thrown around in the media. When conceived even those for the BCA didn't actually want it to go into effect. The whole point was to create a timeline for congress and the administration to act and figure out a more sane deficit reduction plan or else.

Point?
The BCA goes into effect Jan 1, 2013 and we still don't have an alternative plan with at least $1.2 trillion in cuts that would nullify it. If nothing comes to pass this November or December we go over.

What happens if we go over?
A lot and a little. The budget and program cuts go into effect, but tax code is largely annual and so if any agreements in 2013 specifically null out pieces of the BCA they'll retroactively effect for the entire year. This may be what ends up happening as a lot of congressmen have taken Grover Norquist's pledge to not raise taxes for any reason. The agreement isn't binding but going against the pledge isn't desired for obvious reasons. Going over includes automatic tax hikes across the board to answer for the more revenue part of the (revenue - spending = ?balanced? budget) equation. Agreeing to something after Jan 1 is in effect a tax cut instead of a tax hike, and as a result keeps true to the pledge even though the result is the exact same figure... politics at it's finest.

Assuming we go over and nothing is corrected the US is looking at roughly $400 billion in increased taxes and $100 billion in decreased spending.

The give and take comes from the following targeted pools:

Note: The BCA is a 10-year-plan. This image shows 2013 only. There is more than this on the table to answer for the rest of that deficit shown but this is what would go into effect immediately.

What options are there?
1. Do nothing and take the plunge. Then fix what doesn't work over the course of 2013.
2. Draft up an alternative budget that meets the 1.2 trillion less drastically and naturally cancels the whole thing. Congress has 2 months to get this done and has virtually no headway on it to this point.
3. Draft up an agreement that kills or postpones it.

The debates and news items you're going to be seeing a lot of will probably focus on 1 and 3. Option 2 is pretty much a lost cause at this point.

 

[ZackDaniels]

Debt vs. Deficit
It's hard to understand this stuff without first knowing the key differences in these two terms. Pundits and chain e-mails and all kinds of other things confuse these two things all the time and it's obnoxious.

Deficit is the amount of money in the budget that is being spent that the government doesn't acquire from straight revenue (taxes). It acquires this via borrowing money, and it borrows money in ways that are all kinds of different from the way a household does.

Debt is the amount of money owed to itself, it's citizens, and other nations. Debt is not at all similar to personal debt that you and I get from mortgages, credit cards, etc. It's much more like corporate accounting than personal budget. For example when we have $1000 in the piggy bank, and we decide to dip into the piggy bank fund we don't consider it 'debt'. Corporations and Governments need a way to track that so they can be sure they put it back, and so they call it debt.

Here's a rough break down (ordered from least to most owed):

The $2.67 trillion in SS are interest free 'IOU' notes to the SS program, from money taken out of its surplus and granted to other programs over the years. Nothing at all like high interest credit cards a household may owe and be scared about. In theory it may never even need to be paid back, but that assumes SS stays solvent and won't ever miss the money missing from it's coffers. That's unlikely.

The $1.63 trillion in Treasury debt are from investors buying Treasury bills, notes, and bonds. You too can own a piece of America's debt by buying a US Treasury Savings Bond they make great Christmas gifts!

This is another significant way Government debt is different from household debt. A government has tools to adjust the inflation rate, and a household does not. When you buy a bond for $1000 you're effectively loaning the government $1000. They add that to their debt, and in 25 years at 2% interest you will be paid back $1,464.13.

The investor wins because they got a rate better than stuffing it in their mattress. The government wins because in 25 years the inflation rate was more than 2%, which means that $1,464.13 in 25 years is still worth less than the original $1,000 was. Households don't get to make money on their debt, but governments do.

 

[ZackDaniels]

Opinions ahoy!

The two extremes
Extreme liberal economic policy : Since a government sets inflation rates and ultimately makes money on its debt it should only really worry about making its interest payments. Sell bonds and other things to willing people and have low to no taxes, but spend away! Investors will willingly finance the government machine instead of mandatory taxes and that's good for all! No taxes and lots of spending anyway. No Exceptions.

Extreme conservative economic policy : Revenues should pay it all, and if we can't afford it with taxes we should raise taxes and/or cut spending. Simple as that. Let investors invest in things that are not a government. No savings bonds, no borrowing from other programs, and especially no borrowing from other countries! No Exceptions.

The middle - That's me!
Worrying only about interest leaves a government prone to economic contractions where they may not be enough willing investors to borrow from and make their payments. If these guaranteed safe investments can't pay out the confidence in the system is ruined and there are serious consequences, with little to no natural revenue to deal with it. [Doomsday scenario goes here]

Worrying only about static cash flow and having a balanced budget year after year leaves a government only as stable as its people. Unemployment goes up then taxes go down and programs important and unimportant alike immediately get underfunded, ineffective, and collapse. This includes having an unfunded military, state governments, and social safety nets like unemployment. Increased civil unrest, foreign opposition, and decreased ability to deal with it. [Doomsday scenario goes here]

There needs to be a balance between the two. So when the economy goes tits up and tax revenues drop we have options to sustain growth, limit contractions, and invest in the people. When an almost unprecedented economic event happens like it did in 2007-08 expect to see a deficit as big as the problem warrants. For the love of god though try to borrow safely and spend wisely. Don't just borrow what's needed against uncontrolled foreign currency that won't work for us, and don't just write no-strings-attached checks to specific markets.

With this point of view in mind I'm totally confused on why we're even talking about reducing the deficit right now. It's a problem better solved when we're in better shape.

 

[85 MAX-fan]

"With this point of view in mind I'm totally confused on why we're even talking about reducing the deficit right now. It's a problem better solved when we're in better shape."

Thats the problem. We are on auto pilot to the moon. We won't get to being in better shape with the socialism in place here. The spending is out of control. Now you can make a life's work out of theorizing and postulating the cause and effect of all of the "government fixes" for our country's debt and our economy. I really don't understand why you would waste your time though, THE GOVENMENT CAUSED THE PROBLEM. They have no interest in correcting it. Even if they were smart enough to fix it, it will never happen. Our debt skyrockets, our standard of living declines, and half the county doesn't understand or care, and most of the rest argue about evil corporations, Mexico, China, and Bush being at blame. As Regan, as well as other true conservatives (notice I didn't say Republican) said: Government is the problem.
With socialist health care full throttle now, this is really gonna get even more stupid, and at an even faster rate.

 

[ouchez]

I say lets jump off the cliff! Seems like the best overall solution,,a great enema it will be, stop holding that shit, get it out and you will all feel alot better down the road.

Maybe if we get real lucky it may spell the end of the 2 major political parties.

O

 

[rebar]

I say lets jump off the cliff! Seems like the best overall solution,,a great enema it will be, stop holding that shit, get it out and you will all feel alot better down the road.

Maybe if we get real lucky it may spell the end of the 2 major political parties.

O

+1 Iv been waiting for rock bottom stock prices..

 

[ouchez]

Zack,

Thanks for the great graphs!!

O

 

[Maxine]

+1 Iv been waiting for rock bottom stock prices..

Just be prepared to pay with something other than the US dollar as it will be near worthless. Gold, Silver and other much needed goods that will fuel a open market and black market barter system. Think chickens, eggs and other livestock as well as so many of the little things we all take for granted in our daily lives.

None of our politicians has the "stones" to make the tough decision's to try and fix this broken system of ours. Nor would any such person have much support to do so, as the general public would not be willing to make the sacrifices needed...think riots and revolt similar to what they are seeing in the bankrupt EU countries, but on a much...much larger scale.

Part of me say's lets drive right over the cliff...then be forced to make the tough decisions to fix shit properly. The realist in me thinks otherwise...knowing the politicians would not "waste" the prime oportunity of a major tragedy to sneak through more and more of their socialist crap.

 

[MtnMax/Magniac]

The realist in me thinks otherwise...knowing the politicians would not "waste" the prime oportunity of a major tragedy to sneak through more and more of their socialist crap.

Or even declare martial law and forego elections indefinitely, giving us a full dictatorship. :bang head:

 

[RaWarrior]

First off, Zack, that was a great explanation. You seem to really be able to cut through the massive amounts of crap out there. The graphics are awesome too. Helps an extremely complex problem easy to at least understand the basics of.


It obvious that spending is out of control in this country....pretty much everyone agrees on that. But when any cuts to the military, education, social security, or whatever are even mentioned, there's an uproar of protest. OK, the other alternative is to increase revenue....which means more taxes. Nope, don't want that either.

So it's a catch-22. As Zack said the gov't either needs to spend less and/or take in more, but both of those result in compromises people are unwilling to accept....either cuts to programs they support or rely on, or more direct out of pocket costs in taxes. Most people would classify that as bad or worse. Or the third option....procrastinate. Put it off, figure a few more years can't really make things that much worse than they already are, and by then someone will come up with a better plan.

 

[85 MAX-fan]

But when any cuts to the military, education, social security, or whatever are even mentioned, there's an uproar of protest.

Thats too bad. Some of our country still believes there is a social security fund. They argue and at times become enraged blaming political parties for "cutting it". Problem is there is no fund. It has been spent. The longer people wait to admit reality the worse this will get.


OK, the other alternative is to increase revenue....which means more taxes. Nope, don't want that either.

I disagree. Capitalism growing creates real wealth. This would generate additional revenue, but to the statists this will not happen as they need to spend evermore, and blame the evil corporations when it doesn't work. They sell the lie to the masses. They grow rich on your back, and retire with pensions greater than 90% of the rest of us. And we pay for them to sail off into the sunset while we work until we drop.


So it's a catch-22. As Zack said the gov't either needs to spend less and/or take in more, but both of those result in compromises people are unwilling to accept....either cuts to programs they support or rely on, or more direct out of pocket costs in taxes.

Again I disagree. Time and again we hear that with just another small tax increase, or for the public to simply do their "fair share" it will solve the debt problem. Then they spend more. More is lost, stolen, donated, mistakenly redirected.
We are promised that when we simply give the government control over gambling, drugs, our health, retirement, or our safety, they will give us back our security and our hapiness. Those that disagree are labeled as hating the elderly, wanting babies to live out of garbage cans, and anti union or anti american.


Can't you see THEY are the problem?
Can't you see the only one that deserves to control your future is you?

The politicos that created those graphs and simplified explanations have convinced you to pour gasoline on a fire to put it out.

 

[ZackDaniels]

Most people would classify that as bad or worse. Or the third option....procrastinate. Put it off, figure a few more years can't really make things that much worse than they already are, and by then someone will come up with a better plan.

This really isn't as bad as it sounds. We're very likely looking at a few years of lower unemployment % and a large increased workforce on top of that. Lot of vets coming home, more people on SS falling off than people coming on, and a larger than usual wave of new grads as a lot of people are wrapping up their 'fuck it I can't find work, going back to school' degrees.

As a bonus to the naturally expected growth in 2014 health care costs will begin being forcibly controlled, and if they actually drop there will be absolutely massive revenue increases as a result. Most employer based health plans right now are paid out in a 'pre-tax' column, and are immune from most taxes. If the same money gets put in the normal income column as a result of lower insurance costs there is more money in everybody's pocket and a larger tax base as well.

We're pretty much looking at a lot of increased tax revenues without actually doing anything. Add to that the fed isn't looking to raise the rates significantly for the next few years and it's silly to pay much back at the moment. It makes more sense to pay it back in a few years when the money is worth less as interest rates were way lower than inflation rates. I haven't heard any good reason to put a serious plan into action right! now! that doesn't amount to doomsday scenarios or that it looks like a whole lot of money.

Our national debt was almost twice as much as it is now following WW2. We've been in worse shape before, and our conditions for recovery then were not nearly as dynamic as they are now. The debt crisis is largely a political boogeyman in my opinion.

 

[ZackDaniels]

Capitalism growing creates real wealth. This would generate additional revenue, but to the statists this will not happen as they need to spend evermore, and blame the evil corporations when it doesn't work. They sell the lie to the masses. They grow rich on your back, and retire with pensions greater than 90% of the rest of us. And we pay for them to sail off into the sunset while we work until we drop.


Can't you see THEY are the problem?
Can't you see the only one that deserves to control your future is you?

The politicos that created those graphs and simplified explanations have convinced you to pour gasoline on a fire to put it out.

Capitalism in its raw form results in monopolies, price fixing, high risk for short term reward, and a lot of other nasty things. It needs some subtle adjustments and this country hasn't had a proper capitalist economy in any of our lifetimes. The mortgage crisis, credit crisis, and a lot of other things that resulted in this recession were direct results of business gone berserk.

It's nice that they're the problem and all but short of tax revolt what do you propose to do about it?

Those graphs were created by economists.

+1 Iv been waiting for rock bottom stock prices..

The AMT and capital gains taxes increasing are going to really rip into any gains you see on those rock bottom stocks though. I hope you make a boatload of interest to compensate.

 

[85 MAX-fan]

Capitalism in its raw form results in monopolies, price fixing, high risk for short term reward, and a lot of other nasty things. It needs some subtle adjustments and this country hasn't had a proper capitalist economy in any of our lifetimes.

Really? What country do you use as the basis for this statement? The purist form of capitalism the world has ever known (The U.S.) created real wealth, the highest standard of living the planet has ever know, creativity, inovation and a technological hurricane. Just who do you propose to trust with the "subtle adjustments" you speak of? The geniouses that fabricated the housing "crisis", like Barney Frank, Fannie May, Fredie Mac etc? The politicians that turned the US onto the road of a fiat currency? The government that sells the Ponzi scheme of social security as a viable "safety net?? The very "adjustments" you speak of have restricted wealth building and transferred the hard earned money of millions to dead beats and thieves. The farther we get from constitutional restrictions on government the more of our futures are flushed down the toilet. Wealth robbed systematically over the last 40 years makes the "evil corporations and monopolies" look like childs play.

The mortgage crisis, credit crisis, and a lot of other things that resulted in this recession were direct results of business gone berserk.

Wrong. Government removed key restrictions and oversights while taking your tax dollars and redistributing them to flunkies that were gauranteed to never be able to pay it back. To allow the banks that lent the money to survive (or because they were in on the money grab) politicians allowed them to package that bad debt and dilute it, then sold it to the publc for them to swallow the bullet. People cry that the evil banks are to blame but the govenment owned over 50% of the toxic debt, and forced you to pay for it with the threat of criminal penalties. Then the same politicians screamed and shouted that the banks did it! Divide and conquer

It's nice that they're the problem and all but short of tax revolt what do you propose to do about it?
I don't particularly believe that "it's nice that they're the problem". I find it sad people fool themselves into thinking that we should trust total strangers to give us safety, and gaurantee us a cradle to grave utopia.
I propose we stop lieing to each other about continuing the fools errand of spending more money we don't have to fix the problems this very behavior created. Stop demanding we empower idiots to run our country and begin to vote for this money grab to stop. Ever here the saying ( I'm paraphrasing) that a democracy can only survive until the people realize they can vote themselves raises? Stop allowing the political shysters to manipulate common sense with bullshit. That's why we have a vote. We don't have a revenue problem we have a spending problem. You don't need a tax revolt, instead everyone can put their vanity away, admit that socialism and Marxism has never, and will never work, and vote out any statist regardless of party.

Those graphs were created by economists.
Hired to manipulate data to prove whose point? I don't need an Ivy league degree to understand devaluing our currency and strangling "Big Business", making Ponzi schemes public policy, and signing others names to debt they aren't responsible for cannot last.


The AMT and capital gains taxes increasing are going to really rip into any gains you see on those rock bottom stocks though. I hope you make a boatload of interest to compensate.

The more government has tried to loot the medical system the worse our "healthcare sytem" has become. And now the same fools that pushed us to this point are in total control of it. You expect costs to stabilize or fall? since when has any price controll ever worked? Take a look at the rise of our national debt along with the real value of the dollar over the last 50 or 60 years and tell me, do you honestly believe the politicians that created this mess should run the medical system???? To them its a cash cow to pump money and even more importantly power, directly into their control. Basic human naure. Absolute power corrupts absolutely.

 

[poppop]

http://www.youtube.com/watch?v=p_Ic_OvIPtU&feature=g-userWant this

 

[poppop]

http://www.youtube.com/watch?v=8dOUtsVKwUQ&feature=g-user Look at what we are becoming.Look at what is happening.Im trying to be a prepper,BUT i got 5 lil grandkids and parents.That believe im over reacting.This fiscal cliff wasn't created by us.It was to save big banks big corp,big auto.I dont pay my neighbors debt,Do you?The goverment blows we pay more taxes.Hope you watch the videos.Shouldnt be a debate.Should we wake up.Some of the less fortunate are hurting now.Jobs have left the south about as fast as the leaves left the trees.Wish you all well.

 

[Dr.n2o]

Merry CLIFFmas to all and Happy new year !

 

[Traumahawk]

And we march further towards the cliff like a bunch of lemmings.

 

[ZackDaniels]

What happens if we go over?
A lot and a little. The budget and program cuts go into effect, but tax code is largely annual and so if any agreements in 2013 specifically null out pieces of the BCA they'll retroactively effect for the entire year. This may be what ends up happening as a lot of congressmen have taken Grover Norquist's pledge to not raise taxes for any reason. The agreement isn't binding but going against the pledge isn't desired for obvious reasons. Going over includes automatic tax hikes across the board to answer for the more revenue part of the (revenue - spending = ?balanced? budget) equation. Agreeing to something after Jan 1 is in effect a tax cut instead of a tax hike, and as a result keeps true to the pledge even though the result is the exact same figure... politics at it's finest.

Guess what happened? :rofl_200: Nice job taking a retarded pledge and letting it prevent you from acting responsibly in office, and having it mean exactly nothing to the people's bottom line in the end. Of course the unemployment extension that expired for many down on their luck people in the last quarter was halted until now because it was pending fiscal cliff decisions. Hey congressmen, thanks for taking out of work families in the middle of a recession and fucking them over even harder for a couple months to save your own face. It was a much appreciated Christmas gift.

I can't wait for this lame duck congress to get the hell out.

 

[texas-ss-tornado]

http://www.youtube.com/watch?v=MeE9_WLOFvI