posted by King Minos in Money / Career

Fiscal Cliff: What It May Mean

November 13, 2012

The so-called "fiscal cliff," in effect, represents, already, "kicking the can down the road." (If the can is not now kicked FURTHER down the road, then the U.S. economy faces further contraction along with job losses, escalating tranfer payments, and recession;)**

As a result of THAT, only one credit rating agency downgraded U.S. debt; and if anything, that "non-event" translated into even lower rates on U.S. borrowing!

The elephant in the room remains a mostly unheralded and perhaps mysterious financial development associated with the onset of the Great Recession: International investors believed financial crises and institutions ABROAD meant sub-par protection for safe-keeping capital reserves THERE; so they added their treasure to the already awesome store sleeping within U.S. Treasury securities! (This made the value of the USD remain high AND kept U.S. gov't borrowing rates low or declining EVEN AS U.S. debt levels increased by leaps-and-bounds!)

A more normal course for national currency values and interest rates is probably that of Greece where high debts and political gridlock meant significantly higher rates to borrow. The conventional wisdom remains that rates in the 6 percent range, for borrowing, mean highly indebted nations are on a sure road towards devaluation; restructuring; and really, popular renunciation and repudiation of foreign debts;

The thing to think about may be more subtle, however; historically, as long as debt restructuring can be handled in an "orderly" fashion, then the ramifications for a nations' citizens and nations-states', themselves, remain much muted, or at least, "under control."

As the King sees it, one of two things may happen:

1. GOP reps, still stung by the Presidential defeat, hold fast and provoke an actual partial U.S. default on paying bond-holders; this should ratchet down the U.S. credit rating and cause a significant rise in bond rates but not a rise that might enter the "unsustainable" (6-7 percent) range; then, the President would have to "compromise" and accept more spending cuts than tax increases;

2. GOPers and Romney Citizens out there yield to a new, queer form of internal political abandonment; they allow, pretty much, Congressional democrats and the President to sit down and decide among themselves which way to go on spending cuts and revenue enhancements. As Republicans and half the country "tune-out" and "drop out" it is likely real fiscal crises will begin burning brighter and brighter among municipal, state and the federal government s; this, in fact, would be the doomsday debt scenario;

Another way to imagine #2, above, would be to consider the EU and ECB response to a spendthrift member locked in political gridlock and unwilling either to cut government spending or to assess and collect the taxes needed to pay for that spending;

First, there would be large interest rate increases paid to U.S. lenders along with "outside" creditor demands to get the fiscal house in order;

"Austerity" policy plans might bring all the stakeholders -- disability, SS, SSI, RSDI, food stamps, medicaid, etc. -- out in the streets to rally against cuts in their particular benefits; political populists, likely, would argue in favor of repudiation of both foreign debts and the perceived foreign "interference" in U.S. domestic affairs;

Here, one would expect an unheralded "disorderly" unwinding of U.S., state and local debt obligations; lenders would run for the hills (this should bolster the bonds of OTHER nations who have their fiscal homes in order, btw!)

This would undermine, too, faith in the USD; could provoke hyperinflation; civil disorder; mass immigrations; etc.

Like Ghost-Busters, except the Sta-Puff Marshmallow Man gets loose in YOUR neighborhood, and no one really knows how to "cross-the-beams," and dispatch the marauding bond vigilantes.

Be careful what you wish for!

Note: This post was removed from a thread started by "sweept" because that thread was not in the "money career" section; his initial thread drew some interesting responses and I refer anyone interested to his contribution; Glasses

**I wrote this thread thinking about the so-called "fiscal cliff" as it relates to the recently finished U.S. Presidential race; in some ways, the "cliff" sounds like one more GOPer, conservative "warning" of what will happen to the U.S. economy ... should Obama be re-elected!!!

Along these lines, perhaps the Obama voters are all like, "Yeah, you already told us an Obama re-election would doom America, and that you /Romney supporters/ were planning to move to another country!"

So far so good ...

Here's the FACT: Resolving the fiscal crisis MUST contract the economy because it represents a movement away from spending borrowed money!

It will be as though a hapless American consumer decided once and for all to cut up the credit card! Belt-tightening! (Is this what Obama voters ... voted for?!)

Either taxes are raised -- which takes money out of folks' pockets so they cannot spend it in the economy -- or spending is cut which reduces economic activity because fewer dollars are spent by the government!

What if some taxes are raised, while some spending is cut?

Same thing. Smaller economy!

What if most tax hikes are aimed at the wealthy and corporations? They will flee the country taking their money and their jobs with them!

Isn't this that tired old scare story, once again?

YES. The King predicts resolving the "fiscal cliff" means the U.S. economy will at least temporarily head back into a period of economic contration and recession; then, government revenue proceeds will tank, again, while asset values (home prices; tech stock valuations; etc.) will resume their downward march.

Recession Ahead!! Shock

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