I have been reading that thinking for some time now about the vaunted "Fiscal Cliff" confronting our Congress. It is the time when the Bush Tax changes expire and the rates return to Clinton rates, and, at the same time, certain cuts in spending, pursuant to the negotiations, which led to pushing the problem down the road, resulted in an interim agreement to a "sequestration" of certain budget cuts to kick in at the time of the tax cut expiry. At this point, there is nothing but endless posturing on the parts of the leaders of the House and Senate, and also the White House, in an effort to control where the new negotiations will take us.
This is all a show. It's sad, because this is the Neoconservative game which has drawn in the progressives to a fight that is ridiculous. The entire premise of having to reduce and/or eliminate the Federal Debt and Deficit is based upon the amazingly fallacious idea that the government must run its budget as a household would, or will ultimately default and find it difficult or impossible to borrow the necessary funds to operate by selling its bonds. Even the credit ratings agencies have chipped into the battle, stating that if the government fails and/or refuses to take the appropriate steps, they will necessarily have to reduce America's credit rating, which would result in it having to pay more interest on the bonds in order to sell them, and thus increase its debt profile. This issue is after all, what has confounded the Eurozone in its striving to have member nations cut their budgets and raise revenues at a time when their credit is in the trash, thus leading into recession and, and dramatic increases in unemployment, as belts are tightened to the point where the governments there can no longer afford their social programs at all. Five European nations, Ireland, Italy, Greece, Portugal, and Spain are leading the problem, each with major negative economic results from the austerity measures enforced by the European Central Bank (ECB).
This is where the clear headed thinking comes into play. The Eurozone nations are not like America. They are all operating from a common currency, the Euro, and have no control over deficit spending because of that. They don't have their own reserve currency. They cannot print money, which, defacto, must be printed by the ECB. They must, like our individual states, find a way to balance their budgets. The fifty states in America must all balance their budgets or fail to pay their obligations. The Federal government does not have to. As we all know, the current deficit is in excess of $16.2 trillion, and growing. How did it get to be so big? There are lots of things which contributed to this, among them, the cost of the Iran and Afghan wars (which the Bush administration did not include in their budgets), the Medicare Drug Prescription (Part D) programs, and a failure, in general, to pay attention to the need to find a balance in our spending and taxation. Now, ask yourself a few questions:
First, how come we have such a remarkably large debt, and yet our bond ratings have remained stable, our currency has remained stable in world markets, generally, and the only talk of "default" is associated with a Congressional mandate to maintain a debt "ceiling" above which we cannot spend? (Which obviously is essentially meaningless, since it has been raised every single time it needs to be to allow for more spending.) If the US were a household, nervous creditors (our bond holders) would have long ago taken us into bankruptcy. They not only haven't done this, or even talked about it (after all, how can you put a country into bankruptcy anyway), and continue to purchase our bonds without even requiring a higher interest rate in order to do so. There must be a reason for this.
This is where the story becomes interesting. The major reason why our currency has remained so stable, and why our bond interest has stayed so low, is very simple. Every owner of our bonds (our creditors) knows that the Federal Reserve can create money to pay them off any time it wants to. That is the key difference. So, let's be clear. We have a fiat currency over which we have complete control; that currency is the world's chief "reserve" currency; and the US has never, in its history, defaulted on a bond payment.
The Federal Reserve controls our money. It prints (creates) what is needed for the economy (money supply), and generally manages the value of the dollar by a combination of processes, between interest rates and money supplies, in order to effectively manage the value of the currency and assure that the economy can run. Back in 2008, when our banking neared collapse with the failures of Bear Stearns and Lehman Brothers, Congress voted to approve the Troubled Asset Relief Program (TARP) to bail out the banks and create the necessary assurances so that panic didn't set in and so that the banks could remain solvent while they worked through all of the nearly worthless holdings related to the mortgage crisis. TARP authorized the expenditure of $700 billion dollars, which was lent to the banks which were in trouble, and this now has been mostly repaid (some of it was used to reorganize Chrysler and GM), and is now essentially in our rear view mirror. This, however, did set a dangerous precedent, that is that all banks would be essentially guaranteed by the Federal Government, at least those that are systemically important such that a failure of an institution so large (the top five are worth now more than $10 trillion combined) that the failure of any of them could cause a failure in the general economy with credit and all financial transactions. The thing that most people don't realize is that, since 2008, the FED has purchased several trillion of these banks bad assets, as well as run three programs of what is called Quantitative Easing. QE, now in its third iteration, is where the FED "lend" large amounts of newly minted capital to the megabanks to place in their reserves, and with the primary purpose of causing them to open their credit business more and more, and thus generate more business activity and create a stronger, more active economy. The banks can't spend this "reserve" addition, but they can use the total amount of reserves as a basis for do more credit business (making loans), as they must maintain a certain safe ratio between loans and reserves. The combination of these asset purchases by the FED and the QE programs total many trillions of dollars. And yet, there has been little serious inflation, something which the FED watches closely and must deal with. So long as our economic growth, measured by GDP (Gross Domestic Product, a total of all economic activity within a standard), has remained anemic, that is around 1 - to 2 percent, there is no pressure to create inflation, and especially since general productivity has been growing significantly recently. Something else that most of us don't realize is that the FED has also participated in several banking rescues Europe over the past four years.
So, this is where the issue lodges in my craw. We don't have inflation, generally, the FED has been creating new money without apparent limits for now, and the government has continued to run deficits and increased debt without affecting the ratings or cost of borrowing. So, why are we presently discussing the Fiscal Cliff? It is a myth promoted by the austerian Neocons to promote their agenda. Their agenda is simple. Their goal is to create as many programs and as much legislation as possible to feed their election donors through giveaways, as tax breaks, and through legislative shenanigans to move money to the top in any way possible. The manufactured panic over the national debt is a ruse, a lie, a deception, of the first magnitude. One of the biggest lies in the balanced budget debate is that if we increase the tax rate on the wealthy, we will be suppressing business activity in the area of small business. That is an amazing lie, since only a tiny minority of true small business owners make more than $250,000 a year.
What makes this all much worse is that the major media (which made ungodly profits from election spending by the oligarchic sponsors of the recent elections) loves that lie, and refuses to try to poke holes in it, even when it knows that it's a lie. There are only six corporations which control the entirety of the main stream media, and they make all of their profits by selling advertising to the other oligarchs. They are raising no red flags, and, unless I am mistaken, are fanning the flames of panic over the Fiscal Cliff like nobody's business.
So, the bottom line is that Congress and the White House are engaged in a fine kabuki theater of manufacturing red herrings to distract us from the truth, and these lies are going to have painful and even deadly outcomes for many thousands of our population, as social programs are raided to send money to the richest, and the average citizen is asked to carry more and more of the burden of supporting the super wealthy elites and their life styles. This is a tragedy of truly monumental proportions, and ensures our general trend into third world economic status. America has such an amazing heritage of caring for its people, and that is being completely destroyed in one generation.