posted by King Minos in Money / Career

Fiscal Cliff Resolutions v. Impact

December 4, 2012

Some data including the unemployment rate, may indicate, already, the U.S. economy has suffered from at least 6 years of what some call the Great Recession, others refer to as the Second Great Contraction, and the King calls a Depression. Obama and Congress' attention to fiscal issues is not likely to change the course of the American economy.

Simply put, the only leadership on the economy continues to emanate from the Bernanke Federal Reserve: They have lowered rates on borrowed money to near zero, and continue to make large purchases of U.S. bonds and Mortgage Backed Securities. Still, with a latent uptick in home prices, nationwide, there are some signs their "higher, deeper" monetary policy has some effects.

In fact, it is very doubtful anyone in the White House, including the President, or anyone in the Congress, would challenge Fed policy or otherwise change course; this is because they do not know enough about economics to understand what is wrong; and of course, even if they did understand, they would have no clue how to fix it. So, regardless of how the fiscal cliff thriller ends, the U.S. economy SHOULD imitate the Japanese economy, and see many more years of anemic growth and ever-higher levels of debt; it is worth noting that the Japanese fiscal and monetary response to their own asset crisis was dictated by the same Fed and Treasury officials now hard at work trying to "help" the U.S. economy.

What immediate short-term effects may come from a resolution of the fiscal cliff?

1. The U.S. credit rating is improved if Congress approves significant tax hikes, along with ostensibly "temporary" fiscal stimulus; the U.S. economy joins Japan and the EU in recession.

2. The U.S. credit rating may decline further should there be no agreement on tax hikes, or spending cuts; it's unlikely this would increase borrowing costs because the U.S. is still seen as a "safe harbor" for global capital seeking comfort and security; the U.S. economy joins Japan and the EU in recession.

One might imagine, then, "more of the same." Assuming the world doesn't end according to Mayan myth, then more relevant fears would be world war; and the rise of fascism in states such as the U.S. As is, government at all levels, seems willing to roll up its sleeves and "help" to pick winners and losers, and hand-out appropriate punishments to those in bad odor with the progressive White House, including expropriating assets from the wealthy and "bad" businesses including big oil, big coal, etc.; but not big solar power or "good" big banks that respond to Fed edicts!. Of course, the relationship between Obama and citizens is not unprecedented; it looks a lot like that one between FDR and the beleaguered citizens of Depression-era America. THAT didn't end in fascism; at least not in the U.S.!

What is really wrong?

Over a relatively short period of time the U.S. economy has transformed from a producer economy to a consumer economy. Make no mistake about it, holiday advertising is the difference between life and death for many in the retail sector; and the difference between having a job, and not having a job, for the people who work there. Additionally, consumer spending, especially at this point, can only be revived by very low interest rates and very good repayment terms; there are many automobile sales, today, that simply would NOT happen without a gusher of credit pumped into this sector. The latent rise in home prices, too, is evidence of a "blow the doors" off effort by the Fed, and creditors to re-stoke a bubble in housing finance. (Creditors, again, are willing to do so because they collect their fees "upfront" and leave the mess to whomever buys the securities including, of course, the Federal Reserve!)

Of course, these new bubbles -- remarkable as they are in an otherwise deflationary environment -- are NOT sustainable. This means home prices never found bottom, and will rise up again, before being flattened once again; and of course, with that creative destruction will come more massive unemployment, mitigation payouts (FS, UCB), higher debt, and economic and political uncertainty.

How come the Fed hasn't learned anything? Well, it's not exactly like that. What it is is this: This is the only thing they can do to prevent political turmoil. That's it! They aren't really trying to save the U.S. economy or boost the U.S. standard of living; instead, they are trying to offer political support to the ruling elite; and of course, protect their little quasi private niche at the Fed!

How's it all end?

Money will be tighter in the future. Whether or not U.S. citizens continue to use the USD or some neo-derivative remains to be seen. Growth will be slower. The ability to change professions or even move-up will be much more limited.

All-in-all, citizens living today have experienced a very interesting economy that seemed, in America, and around the world, to suggest anything was possible! (THAT suggestion, alone, should have caused wise men to cower.) Even with liberal concerns about the impacts on the environment, the global economy powered forward carrying with it new masses of hyper-consumptive citizens in thrall to some sort of weird credit blob carrying them painlessly, ever-onward. Of course, the conservatives and everyone else were along for the ride as well!

The upshot might be a global realization of some very old values and knowledge; at many times in history, citizens were more circumspect, more provincial and more clannish. Whence the great credit bubble is finished-up, most folks are apt to find, anew, what is important, and what is possible; and what should be hoped for; and what should NOT be hoped for!

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