Why do they call it a "fiscal cliff"? In fact it is a policy in the right direction, although not using the best tools. So a "fiscal-cliff", or maybe better called "a debt-cliff", will occur if again no policy is implemented and everything remains in the "good old way". In this alternative, and presented as "salvation" scenario, the deficit will remain higher, the debt will continue to increase in an uncontrollable way and at the end - some day, USA will really go bankrupt. This will be a real cliff, believe me. In either scenario - Government default, or inflationary dollar devaluation, American people will have to pay the high price of political irresponsibility.
So in fact it is better for the country the "fiscal cliff" to happen.
Today we talk too much about the cliff and the short term impact of it. But in fact nothing of the short term potential damage is guaranteed and all prognoses are based on the very doubtful neo-Keynesian understanding of economy. In fact spending cuts does not necessarily lead to a recession, because it is not the government spending the main generator of GDP. In fact it may happen exactly the opposite. Generally when the government extracts more money to finance itself this leads to less money for private investing. Additionally, with government financial discipline improving, the private sector can increase confidence, invest and spend more, and de facto - pump the GDP up. If the deficits remain high, FED continues to finance it by printing money, and companies and households are not sure in the future, then they will remain cautious and this will continue to press the GDP down. This damage is consumed at the moment and it is much bigger than the potential (if at all it exists) benefit of the government policy of Keynesian deficits that happens in last 3 presidential mandates.
It is important also to remember how we reached here and why the "fiscal cliff" appeared on horizon. This legislation change that consists mostly of tax increases and less of spending cuts (5:1 ratio) was negotiated before the previous debt ceiling increase. In exchange for lifting the ceiling, the House Republican Majority required some future measures for reducing the deficit. So in a year time not to be needed another ceiling increase and this way till USA becomes the new "Greece". In fact this "contract" proved the leftish nature of both parties as they negotiated mostly tax-increases and very symbolic spending cuts. It became clear that the difference between the 2 parties is in what way to spend the taxpayers' money and not in what way to save it. They both dream of spending with Republicans more on Military and Democrats more on Social. The politicians that require real reforms - i.e. serious spending cuts (like Ron Paul) are still outsiders. So the result of previous debt ceiling increase was this condition - as of 2013 the deficit to start going down mostly by the means of taxing the people more.
Anyway this scenario is better than the alternative of keeping the deficit at more than $1 trillion a year, the debt to skyrocket and the dollar to devalue. Because as there is no enough investors to finance the debt, this forces FED to print money and buy the bonds.
In midterm there is no alternative to reforms. I mean deep reforms - lowering pensions, retiring later, disbanding serious part of the Military and less missions abroad, cutting Social payments and benefits, etc. There is no way to avoid this as US government structure is deeply imbalanced. But postponing these painful measures makes them to be more painful in future. We are not too away from the moment when repaying the old debts will become the main spending part of the Government budget. And then all the rest expenses will have to be reduced even more. The politics must say this truth to the people - the debt is the main enemy and it is the main and becoming bigger and bigger problem with the time. Solving the problem means solving the debt issue. Postponing the decision means enlarging the future problem.
So in a few days we will know what Obama and the Congress will decide. If the "cliff" happens, this will be a step in the right direction. Much other steps will be needed to avoid the incoming financial crash, but generally it will be a right step.
If any of suggested compromises is accepted, this will mean going back at the previous model - of new and new debt-ceiling increases. And this way - till the end of the dollar. After that the needed reforms will happen by itself... :)))
Dobri
December 28th 2012
