A Large and Neglected Problem, Less than 60 Days to Solve. The Country and World Could be Hurting, page

Even before Inauguration Day, we have to solve what seems to be an impossible problem. The roar of the election debates have covered it up, politicians aren't talking about it, and the developed world is frightened.

MercoPress, from Uraguay, sends us a reminder.

The leading world economies pressed the United States on Sunday to act decisively to avert a rush of spending cuts and tax hikes, warning that the so-called ‘fiscal cliff’ is the biggest short-term threat to global growth.

A divided US Congress, whatever Tuesday’s results, needs to reach a tax agreement to prevent a looming real global recession

Unless a fractious Congress can move swiftly to reach a deal after the US elections on Tuesday, about 600 billion in government spending cuts and higher taxes are set to kick in from January first and could push the US economy back into recession.

“If the United States fails to resolve the fiscal cliff it would hit the US economy hard as well as the world and the Japanese economy, so each G20 country will urge the United States to firmly deal with it,” Bank of Japan Governor Masaaki Shirakawa said before a meeting of Group of 20 finance ministers and central bankers.

European delegates at the G20 meeting in Mexico City were particularly keen for details on the US plan, according to those present at preparatory talks.

Canadian Finance Minister Jim Flaherty said that in terms of short-term risks to the global economic outlook, the US fiscal cliff outweighed Europe's debt crisis.

South Korean Finance Minister Bahk Jae-wan forecast the global economy could suffer during the first quarter of 2013 because of uncertainty about the fiscal cliff.

“Global growth remains modest and risks remain elevated, including due to possible delays in the complex implementation of recent policy announcements in Europe, a potential sharp fiscal tightening in the United States and Japan, weaker growth in some emerging markets and additional supply shocks in some commodity markets” said a draft declaration from G20 meeting. (emphasis added)

en.mercopress.com...

Pretend for a moment that we can find a solution, will we accept it?

If Romney is elected he will have to face the Senate. Harry Reid has already said that the Senate will not accept Romney's ideas.

If Obama is elected, why should the Republicans do anything to bail him out? It is, after all, his economy, his plan, and the Republicans will be hurting after a really nasty campaign with no desire to help Obama.

If we go to another recession, who will we stick the blame on? The President? If it's Obama, the press will say it's the House's fault. If it's Romney, they'll say he failed to work across the aisle. I don't believe it will be blamed on the previous administration (Obama) even though blaming Bush worked so well.

So, where do we go? What solution is there? Or, do we get hit with one more recession which may very well finish off our economy?

With respect,
Charles1952

reply to post by GoalPoster

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Dear GoalPoster,

You're exactly right. It looks like a giant game of "Chicken" with the whole world between the onrushing cars. For this one reason, I'd like one side to win big and take control of the government. But nobody thinks the House will go Democrat. A Republican House is a given.

With respect,
Charles1952

reply to post by charles1952

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Charles, I have a feeling, when all the dust after tomorrow settles. There are going to be some big upsets some people weren't really ready for. I think people are fed up with the current players in Washington, mass voting will shuffle the
deck. There will be some players who never thought in a million years, they'd lose an election, sitting out in the cold.

If this feeling does play out. It will be a wake up call to those still standing, to play nice, or get kicked out of the game.

That is what we need. A major shuffling of the political deck. Breaking of the stalemate with a swift kick to the groin, by an angry voting public.

Des

reply to post by charles1952

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does this include the bush tax cuts?
because if it does the offset from the extra taxes collected will allow for a positive tax intake when compared to expenditure,

what you call a fiscal cliff is actually the very thing holding back over seas investors from investing in your economy.
the bush tax cuts have caused a real imbalance in revenue vs expenditure.

while the short term pain is going to hurt,
the long term reducing of servicing debt costs will actually out pace the lost flow in the economy

a recent report from the congressional budget office shows clearly that tax breaks for the top teir earners, does not correlate with higher investment, or higher tax revinue income,

and shows no positive effect on job creation,

the reduction in mil spending and the increase in tax take, come of the servicing costs of future debt and reduces the cost of borrowing in the short and long term.

remember it is the same bankers making record profits that are now saying the fiscal cliff is doom

your friend
xploder

reply to post by Destinyone

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Dear Destinyone,

I think I'll borrow that feeling of yours, it's a hopeful one. If they don't play nice, the 2014 elections should be very interesting. That might be what the third party people should be working towards, the electorate will be furious if we can't salvage this, and I can see third partiers getting a real presence in Congress.

With respect,
Charles1952

reply to post by XPLodER

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Dear XPLodER,

Thanks for the questions, I haven't seen you for a while. The idea of the "fiscal cliff" isn't actually mine, may I post a brief description of it?
bonds.about.com...

Among the laws set to change at midnight on December 31, 2012, are the end of last year’s temporary payroll tax cuts (resulting in a 2% tax increase for workers), the end of certain tax breaks for businesses, shifts in the alternative minimum tax that would take a larger bite, the end of the tax cuts from 2001-2003, and the beginning of taxes related to President Obama’s health care law. At the same time, the spending cuts agreed upon as part of the debt ceiling deal of 2011 will begin to go into effect. According to Barron's, over 1,000 government programs - including the defense budget and Medicare are in line for "deep, automatic cuts."

That same article offers three alternatives.

In dealing with the fiscal cliff, U.S. lawmakers have a choice among three options, none of which are particularly attractive:
•They can let the current policy scheduled for the beginning of 2013 – which features a number of tax increases and spending cuts that are expected to weigh heavily on growth and possibly drive the economy back into a recession – go into effect. The plus side: the deficit, as a percentage of GDP, would be cut in half.
•They can cancel some or all of the scheduled tax increases and spending cuts, which would add to the deficit and increase the odds that the United States could face a crisis similar to that which is occurring in Europe. The flip side of this, of course, is that the United States' debt will continue to grow.
•They could take a middle course, opting for an approach that would address the budget issues to a limited extent, but that would have a more modest impact on growth.

Now this, of course, is not a thorough analysis but it's a good start.

As an aside, remember that the new House and Senate don't get sworn in until January 3rd.

With respect,
Charles1952

reply to post by charles1952

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while the short term pain will hit every one hard,

They can let the current policy scheduled for the beginning of 2013 – which features a number of tax increases and spending cuts that are expected to weigh heavily on growth and possibly drive the economy back into a recession – go into effect. The plus side: the deficit, as a percentage of GDP, would be cut in half.

your link,

if you calculate the increase in tax revenue from the reinstatement of the bush tax cuts,and reduce overhead debt burden, lower "projected" total interest bearing debt, and calculate the lower rates at interest over time (ie lower interest borrowing costs)
and the decrease in expenditure of mil spending,

you quickly half the deficit, but as a side effect lower the GDP,
the GDP drop takes time to set in whereas the interest rates would drop imediatly and lower both short term borrowing and long term borrowing costs.

this means a better credit rating which brings further savings in carried interest costs,
at the point where the GDP starts to suffer to much,

you borrow at the lower rates heavily and put the savings back into the productive sector, which has fast acting short term effect on GDP, (build road internet or maintenance of infrastructure assets)

rinse and repeat,
many investors wont give lower rates (long term rates) to the us while the higher earners can siphon of profits without tax rates that increase the GDP, and without the healthy flow on effect called "consumption"
everybody sees short term deflation.



so it becomes circular, unless the higher earners pay down long term debt, outside investors will not help,

outside of china and "austerity becomes ever more austair"

xploder

reply to post by XPLodER

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Dear XPLodER,

Thank you for your explanation and thoughts. I might not be following them completely, though. It seems that you're saying that the fiscal cliff may be a short term problem, but basically it's no big deal.

For me, an appeal to authority comes to mind. If the G20 boys are worried, it seems reasonable for us to be worried also.

I also wonder about your debt and interest assumptions. I didn't bother to look at numbers, but even with all the cuts and increased taxes, we'd still be adding to our debt at the rate of $500-$800 billion a year. I'm not sure that we would be able to borrow at a lower rate after admitting to the world that we were going to have to keep borrowing forever. Some creditors, some day, would be left holding the bag, and I think we might see a risk premium being added to our base borrowing rate.

but as a side effect lower the GDP,the GDP drop takes time to set in whereas the interest rates would drop imediatly and lower both short term borrowing and long term borrowing costs.

I'm not sure I follow this, either. I could imagine a significant GDP drop the moment it's put into effect. Government spending, one part of GDP, takes an immediate hit. Riase the tax rates and investment might go down. I would expect that, since an additional 2% will be taken out of everyone's paychecks, consumption will go down.

you borrow at the lower rates heavily and put the savings back into the productive sector, which has fast acting short term effect on GDP, (build road internet or maintenance of infrastructure assets)

But didn't we try that with the stimulus program? You remember, shovel-ready jobs and green energy factories? Why would it work this time? And you're suggesting that the government borrow money and give it to private companies? That might not be politically feasible, especially since there have been cuts in Medicare, a very popular program.

But I'm sure I'm misunderstanding you. I'll appreciate any clarification.

With respect,
Charles1952

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