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