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Catching a Falling Financial Knife

Is the World Really Flat?

Politics / Fiat Currency Nov 30, 2012 - 01:18 PM GMT

By: Andy_Sutton

Politics

One of the really bad things about a period of crisis, especially when there is a vacuum in terms of real convictions, is that the void tends to be filled with anything and everything. I’m going to devote this week to some of the more absurd comments and theories that have emerged as they pertain to the whole idea of a fiscal cliff, and yet another debt ceiling battle in Washington. However, before we cover the absurdities and get to the ‘fun’ stuff, we need properly arrange the facts.


Background and Preamble

As of yesterday afternoon, the precise debt of ‘We the People’ is roughly $30.821 Trillion. You’ll notice that this number is considerably higher than the $16.306+ Trillion reported yesterday by the Treasury. This number represents the debt that your government has committed you to, plus outstanding consumer debt, plus outstanding mortgage debt, plus outstanding student loan debt. Some of these numbers are a month or two old because of reporting timeframes, so the actual number is a tad higher.

Since the government has no money, it is only logical that it can pay its bills exclusively by further extractions from the USTaxpayer – a creature who ought to be on the endangered species list because there are so few of us it would seem.

The number above represents what we actually owe today. Now, there are several much larger numbers that float around and basically they represent what we’ll owe over the next two generations should we not alter our course and continue to kick the can down the road. Many folks have poked fun at the idea of ‘unfunded liabilities’; however, it is the unfunded part that should be emphasized. These huge numbers are, for lack of a better description, bills that will come due based on our current policy, for which we have no matching revenues to pay.

Let’s turn this around to help everyone get a better grasp. If, for example, we had $211 Trillion in liabilities over the next two generations based on current policy, but had $250 Trillion in expected revenues, there would be no problem. If it all played out as forecast (a rather weighty assumption), we’d actually end up with a surplus. So it is not the scope of the numbers that should scare readers, it is the fact there is, as of right now, no way to pay any of these bills. That is the essence of the problem. The same is the case with the current debt. Since our leaders insist on spending more than the government takes in, the debt only gets bigger.

Secondly, and perhaps most importantly, there is absolutely no political will to change any of this. This is evidenced by the fact that during the ‘crisis’ in late July and early August of 2011, our leaders chose to adopt a totally ridiculous solution that would kick the can down the road just far enough to get them past the recent elections. What a pity if they’d actually have to suspend campaigning and fundraising to tend to the work of the people.

Columbus Was Crazy!

Which brings us to the discussion of the vacuum. Since we have no real leadership on either side of the aisle or elsewhere, this lends itself to give audience to the sort of people who, economically speaking, think the world is flat.  Our first exhibit is NYU adjunct professor Daniel Altman.

"Wealth inequality is making the pie smaller for all of us," Altman tells The Daily Ticker. It limits opportunities, which reduces productivity, and ultimately lowers "living standards for all of us in the long term."

On the surface this sounds pretty good, and there is actually a good deal of truth to it. There has been a massive shift in wealth going on here in the US and it’s been going on for quite a long time now, over a century at a minimum. The Great Depression, and the ongoing period of malaise have caused massive consolidations in wealth, which is one of the reason so many of us have tried to inject the likelihood that these events were manmade into the mainstream discussion. Any time there is that much money involved, it breeds corruption. This is not a conspiracy theory, but rather simply a by-product of man’s fallen nature.

Getting back to Altman, he continues…

He proposes to replace income, capital gains, estate and gift taxes with a progressive wealth tax that "would do much more to reduce [wealth inequality] than any other tax plan being considered in Washington."

So basically, he’s proposing the government act as Robin Hood, stealing from the rich and giving to the poor. In concept this sounds like a pretty good idea, especially considering the fact that this is basically what is going on now. The only real difference is that Altman is claiming to exclude more people from paying taxes than exists under the current structure of our tax code. He and many others are totally disregarding Jefferson’s warning regarding the populace and its ability to vote itself disbursements from the public Treasury. Instead of finding ways to make more people stakeholders in the future of this country by having them get some skin in the game, Altman et al are trying to create an even bigger dependent class.

The real danger here is not limited to the idea of wealth redistribution, socialism, or even the ridiculous assumption that the government is an efficient economic agent. Talk about thinking the world is flat!  No, the real danger in this type of proposal is that it completely fails to recognize how that would further engender class warfare. We already have the diet version of class warfare going on now as the ‘gimme gang’ as they’ve been so eloquently named is getting bigger and bigger and their demands are growing comparably. They want. Someone has to pay to give it to them. Altman, and unfortunately, the overwhelming majority of Congress feel it is their duty to give it to them.

What’s Behind Door #2, Johnny?

For the second example of ‘flat world’ thinking, we need to go all the way back to 2011 and look at the last attempt to ‘solve’ the fiscal/debt crisis. The first atrocity was the idea of a ‘super-CONgress’ and giving them a few months to agree on a series of budget cuts. Did anyone actually believe they’d be able to agree on anything? I hope not. Because they didn’t and now we get the ‘mandatory’ cuts or what is basically the equivalent of an economic kill switch to an economy hooked on debt and deficit spending.

But is it really that simple? Not quite. A closer look into the automatic deficit reduction plan as it currently exists shows that nearly all of the ‘cuts’ come from tax increases: roughly 85% or so, depending on which numbers you want to use. Approximately $100 Billion comes from ‘cuts’ in spending. But they’re not even actual cuts, they are just cuts in the levels of increases in spending. Say program Y was supposed to get a 10% increase in its budget. This plan cuts that increase to 5% and claims the budget is being cut. Talk about a sleight of hand. What a two-bit, three-card Monte being played out on the American people. To sum this ‘plan’ up, spending will stay pretty much the same, but the deficit will be lower because nearly a half trillion dollars will be taxed away from Americans. Money that would have otherwise been available to be deployed in the economy, invested, or even spent. Now it will be in the hands of government, which is the LEAST efficient of all economic agents possible. Sounds like a winner huh?

If this plan goes through unaltered, what is more likely to happen is that the taxes will be taken from workers and investors and we’ll still end up with a deficit that is similarly sized anyway because our government, and unfortunately most of the country, are spending addicts. Instead of being treated as a down payment on the future and as evidence of a commitment to reducing government in size and back to its proper role, the half trillion will be treated as a windfall and the drunken sailors in Washington will go shopping.

It’ll be the biggest Powerball jackpot in history, and we know what happens to most of those big lottery winners. They end up broke. No, the world isn’t flat. Columbus wasn’t crazy, and you don’t spend your way to prosperity. Nor do you beg, borrow, or steal your way there either.

The Moral Dilemma

Altman and others fail to recognize the moral decay in America that has given rise to this type of thinking. Think about the moral bankruptcy that would lead someone to believe that they’re entitled to reap the benefits of someone else’s work or gain their daily bread from the sweat of another’s brow.

This, along with the idea that the government should be the ultimate master of everyone’s fortunes, economic and otherwise, is also the kind of thinking that develops when there is a failure of leadership. When our leaders are on late night two-bit, cheap funny shows trying to one-up each other and using press conferences as a license to launch personal attacks on each other rather than discuss the important business of the country, you have a vacuum of leadership.

This is indeed a very dangerous period in American history and it has almost nothing to do with dollars and cents, but rather a lack of morals, leadership, and common sense.

By Andy Sutton
http://www.my2centsonline.com

Andy Sutton holds a MBA with Honors in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics. His firm, Sutton & Associates, LLC currently provides financial planning services to a growing book of clients using a conservative approach aimed at accumulating high quality, income producing assets while providing protection against a falling dollar. For more information visit www.suttonfinance.net

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Catching a Falling Financial Knife