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Fiscal Cliff: Time to Call Their Bluff

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cliff-hanger by Commonwealthbaptistchurch.org

The "fiscal cliff" has all the earmarks of a false flag operation, full of sound and fury, intended to extort concessions from opponents.  Neil Irwin of the Washington Post calls it "a self-induced austerity crisis."  David Weidner in the Wall Street Journal calls it simply theater, designed to pressure politicians into a budget deal:   

The cliff is really just a trumped-up annual budget discussion. . . . The most likely outcome is a combination of tax increases, spending cuts and  kicking the can down the road. 

Yet the media coverage has been "panic-inducing, falling somewhere between that given to an approaching hurricane and an alien invasion."  In the summer of 2011, this sort of media hype succeeded in causing the Dow Jones Industrial Average to plunge nearly 2000 points.  But this time the market is generally ignoring the cliff, either confident a deal will be reached or not caring. 

The goal of the exercise seems to be to dismantle Social Security and Medicare, something a radical group of conservatives has worked for decades to achieve.  But with the recent Democratic victories, demands for "fiscal responsibility" may just result in higher taxes for the rich, without gutting the entitlements. 

The problem is that no deal is going to be satisfactory.  If we go over the cliff, taxes will be raised on everyone, and GDP is predicted to drop by 3%.  If a deal is reached, taxes will be raised on some people, and some services will be cut.  But the underlying problems -- high unemployment and a languishing economy -- will remain.  More effective solutions are needed. 

Be Careful What You Wish for: Fiscal Hostage-Taking Could Backfire

 Taxpayers and governments that are pushed too far have been known to resort to more radical measures, and there are some on the table that could fix the problem at its core.  Here are a few that are receiving media attention:

 1.  A financial transactions tax.  While children's shoes and lunchboxes are taxed at nearly 10%, financial sales have so far gotten off scot-free.  The idea of a financial transactions tax, or Tobin tax, has been kicked around for decades; but it is now gaining real teeth.  The European Commission has backed plans from 10 countries -- including France, Germany, Italy and Spain -- to launch a financial transactions tax to help raise funds to tackle the debt crisis.  Sarah van Gelder of Yes! Magazine observes that the tax would not only help reduce deficits but would hit the highest income earners, and it would cool the speculative fever of Wall Street. 

Simon Thorpe, a financial blogger in France, cites figures from the Bank for International Settlements, showing total U.S. financial transactions of nearly $3 QUADRILLION in  2011.  Including other sources, he derives a figure of $4.44 QUADRILLION.  Even using the more "conservative" $3 quadrillion figure, a tax of a mere 0.05% (1/20th of 1%) would be sufficient to raise $1.5 trillion yearly, enough to replace personal income taxes with money to spare. 

2.  The trillion dollar coin trick.  If Republicans insist on the letter of the law, Democrats could respond with a law of their own.  The Constitution says that Congress shall have the power to "coin money" and "regulate the value thereof," and no limit is put on the value of the coins Congress creates, as was pointed out by a chairman of the House Coinage Subcommittee in the 1980s. 

I actually suggested this solution in Web of Debt in 2007, when it was just a "wacky idea."   But after the 2008 banking crisis, it started getting the attention of scholars.  In a December 7th article in the Washington Post titled "Could Two Platinum Coins Solve the Debt-ceiling Crisis?," Brad Plumer wrote that if Congress doesn't raise the debt ceiling as part of the fiscal cliff negotiations, "then some of these wacky ideas may get more attention."

Ed Harrison summarized the proposal at Credit Writedowns like this:

  • The Treasury mints a $1 trillion coin, or whatever amount is desired.
  • The Treasury deposits the coin into the Treasury's account at the Fed.
  • The Treasury buys back bonds.
  • The retirement of bonds is an asset swap, no different from QE2.
  • The increase in reserve balances is not inflationary, as Credit Easing 1.0, QE 1.0, and QE 2.0 already have shown.
  • These operations by the Treasury create no new net financial assets for the non-government sector.
  • The debt ceiling crisis is averted. 

Plumer cites Yale Law School Professor Jack Balkin, confirming the ploy is legal.  He also cites Joseph Gagnon of the Peterson Institute for International Economics, stating, "I like it.  There's nothing that's obviously economically problematic about it." 

To the objection that it is a legal trick that makes a mockery of the law, Paul Krugman responded, " These things sound ridiculous -- but so is the behavior of Congressional Republicans.  So why not fight back using legal tricks?" 

3.  Declare the debt ceiling unconstitutional.  The 14th Amendment to the Constitution mandates that Congress shall pay its debts on time and in full, and Congress does not know how much it will collect in taxes until after the bills have been incurred.  The debt ceiling was imposed by a statute f irst passed in 1917 and revised multiple times since.   The Constitution trumps it and should rule.  

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Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books including the best-selling WEB OF DEBT. In THE PUBLIC BANK SOLUTION, her latest book, she explores successful public banking models historically and (more...)
 

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"Fiscal cliff" means austerity, means making ordin... by Ernie Messerschmidt on Thursday, Dec 20, 2012 at 11:25:23 AM
I agree Ernie.  A huge part of the total volu... by Derryl Hermanutz on Thursday, Dec 20, 2012 at 10:43:28 PM
Thanks Derryl, well said!... by Ellen Brown on Thursday, Dec 20, 2012 at 11:09:35 PM
Most of the other proposed solutions have aspects ... by BFalcon on Friday, Dec 21, 2012 at 11:58:51 PM
Yes, well put, Derryl. We should be doing the indu... by Ernie Messerschmidt on Thursday, Dec 20, 2012 at 11:38:30 PM
und Gott mitt Angela Merkel!... by Nelson Wight on Friday, Dec 21, 2012 at 4:50:13 AM
Ben will print and make interest loans to the fede... by Lance Ciepiela on Thursday, Dec 20, 2012 at 7:22:28 PM
and landing safely (apologies in advance for the d... by Daniel Geery on Thursday, Dec 20, 2012 at 7:30:59 PM
Yikes! Thanks for sharing.... by Ellen Brown on Thursday, Dec 20, 2012 at 11:15:02 PM
The plutocrats who are behind the "fiscal cliff" h... by Derryl Hermanutz on Thursday, Dec 20, 2012 at 10:55:19 PM
fly. Buy into the fear, paranoia, and schizophreni... by Swamper Tom on Thursday, Dec 20, 2012 at 11:51:37 PM
However, you stubbornly overlook the glaring fact ... by Paul Repstock on Friday, Dec 21, 2012 at 10:20:58 AM
Are workable and they are far more just than the c... by Paul Repstock on Friday, Dec 21, 2012 at 10:27:12 AM
and a vision of what can be. Ellen has presented t... by Daniel Geery on Friday, Dec 21, 2012 at 12:46:30 PM
Agreed, but that's my point in writing.  Thes... by Ellen Brown on Friday, Dec 21, 2012 at 11:31:35 AM
"The Fed allows Congress to spend all they want ... by Lance Ciepiela on Friday, Dec 21, 2012 at 12:57:21 PM
It is import... by coyote on Friday, Dec 21, 2012 at 10:37:52 AM
Aren't we, the liberal-progressives, the good guys... by Nelson Wight on Saturday, Dec 22, 2012 at 4:49:12 AM
The only difference why today is particularly bad ... by coyote on Friday, Dec 21, 2012 at 10:38:16 AM
"Today", is specifically worse, because it is the ... by Paul Repstock on Friday, Dec 21, 2012 at 10:59:17 AM
Agreed.  The stock market is heavily manipula... by Ellen Brown on Friday, Dec 21, 2012 at 11:14:08 AM
Not to mention that Wall Street and the fat cats f... by Textynn N on Friday, Dec 21, 2012 at 8:37:33 PM
Generations of wealthy families moving through the... by Textynn N on Friday, Dec 21, 2012 at 8:26:55 PM
Before this fake crisis is over, they may go over ... by Robert Cogan on Friday, Dec 21, 2012 at 2:56:14 PM
Photo from blogspot.com"It is well enough that peo... by Deborah Dills on Friday, Dec 21, 2012 at 4:07:23 PM
To the US Congress, and the President, the Federa... by Lance Ciepiela on Saturday, Dec 22, 2012 at 8:54:32 PM
But they have to take a chunk of the old people's ... by Textynn N on Friday, Dec 21, 2012 at 8:07:55 PM
is the only answer.  State banks NOW... by Textynn N on Friday, Dec 21, 2012 at 8:42:54 PM
Brilliant.   As we have come to expect ... by Tom Hagan on Friday, Dec 21, 2012 at 10:02:47 PM
Brilliant.   As we have come to expect ... by Tom Hagan on Friday, Dec 21, 2012 at 10:05:04 PM
Love the visuals! Thanks Tom!!... by Ellen Brown on Friday, Dec 21, 2012 at 11:44:52 PM
What about the human cliff? Humans are being pushe... by Swamper Tom on Saturday, Dec 22, 2012 at 1:07:01 AM
What about the human cliff? Humans are being pushe... by Swamper Tom on Saturday, Dec 22, 2012 at 2:35:23 PM
Pursuing your point that a debt ceiling may run in... by Siegfried Othmer on Saturday, Dec 22, 2012 at 3:00:04 PM