The Beginning Of The End
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The Good, The Bad And The Ugly From The Fiscal Cliff Deal

The Good, The Bad And The Ugly From The Fiscal Cliff DealThe fiscal cliff deal contains more bad news than it does good news.  Yes, the tax increases on the middle class could have been much worse, and we should be thankful that Congress at least did something for the middle class.  Unfortunately, they didn’t do enough.  Every American worker is going to pay higher taxes next year as a result of this deal.  The fiscal cliff deal represents the biggest tax increase in 20 years, and it is also projected to increase the U.S. national debt by an additional 4 trillion dollars over the next decade.  In the final analysis, U.S. government finances are still wildly out of control and we are all going to be paying higher taxes.  Not a whole lot to be excited about, and nothing has really been fixed for the long-term.  Our politicians have kicked the can down the road once again, but someday they will run out of road and all of this debt will absolutely crush us.  And of course a lot of our politicians didn’t even really know what they were voting for.  The fiscal cliff bill was more than 150 pages long, and our Senators got the bill into their hands just 3 minutes before they voted on it.  So none of them actually read the bill.  But that is the way things work in America today.  The blind are leading the blind and everyone is mindlessly hoping that everything will turn out okay somehow.

For a few moments, let’s take a closer look at the fiscal cliff deal.  There are some good things in there, there are some bad things in there, and there are some things about the deal that are downright ugly.

The Good

-One of the best things about the fiscal cliff deal is that income tax rates did not rise on the poor and the middle class.  This is great news for millions of families that are struggling to make ends meet each month.  A significant rise in income tax rates would have been crippling.

-The Alternative Minimum Tax will now be permanently adjusted for inflation.  This is something that I had screamed about in previous articles.  If an AMT fix had not been passed, approximately 28 million households would have been hammered with the Alternative Minimum Tax on their 2012 earnings.

-Millions of unemployed workers will continue to receive extended federal unemployment benefits.  We probably cannot really afford to keep doing this, but at least now there won’t be millions of unemployed workers that suddenly have their only source of income shut off.  The next trick will be to find jobs for all of those workers.  Unfortunately, millions of our jobs continue to be shipped to the other side of the world.

The Bad

-Payroll taxes are going up for every American worker.  The fiscal cliff deal allows the 2 percent payroll tax cut to expire, and so now the average U.S. household bringing in about $50,000 a year will pay approximately $1,000 more per year in payroll taxes.  As a result, it is being projected that U.S. consumers will have $115 billion less in disposable income to spend in 2013.  Happy New Year American workers!

-The fiscal cliff deal did nothing about the new Obamacare taxes that went into effect on January 1st.  Many of these taxes will hurt the middle class.  To see an example of a receipt where a consumer was charged the new “medical excise tax” in Obamacare, just check out this article.

-The carried-interest deduction loophole remains intact, so incredibly wealthy hedge fund managers will continue to get away with paying very little in taxes.  If the rest of us are being taxed into oblivion, then they should share in the pain with the rest of us.  Of course I personally believe that the income tax should be abolished entirely, but none of our politicians seem interested in that idea at all.

-Income tax rates will increase for high earners.  This will hurt a lot of small businesses.  Many small businesses that earn more than $400,000 a year will now be faced with making some really tough choices.  Some may have to lay off workers.  The top rate will now be 39.6 percent, but when other federal and state taxes are factored in, many small businesses will now be paying a top marginal rate of well over 50 percent.  That is absolutely obscene.

-A compromise was reached on the estate tax.  The exemption was scheduled to fall to just $1 million and the rate was scheduled to go up to 55 percent, and fortunately Congress decided to do something about that.  As I have written about previously, that would have been a disaster for many small businesses and family farms.  As a result of the fiscal cliff deal, the estate tax will only rise from 35 percent to 40 percent.  The exemption for individuals will be about 5 million dollars and for couples it will be about 10 million dollars, and those figures will now be indexed for inflation.  A tax increase is never a good thing, but if Congress had done nothing things would have been far worse.

-The fiscal cliff deal contains a lot of pork.  In particular, it contains provisions that extend specific tax breaks related to Puerto Rican rum, electric motorcycles, biodiesel and renewable diesel fuel, the film and television business, and motorsports entertainment complexes.

The Ugly

According to the Congressional Budget Office, as a result of this deal the U.S. national debt will be about $4 trillion higher a decade from now than it would have been if Congress had done nothing.

The deficit for fiscal year 2013 alone will be about $330 billion higher than it would have been if Congress had done nothing.

So this deal has made our debt problems even worse.

Right now, the U.S. has a debt to GDP ratio of about 103 percent.  We are already well into the “danger zone”, yet most Americans still don’t seem very concerned about all of this debt.

The fiscal cliff deal contained hardly any spending cuts at all.  In fact, there was a 41 to 1 ratio of tax increases to spending cuts in the deal.  The Democrats definitely won this round.  But of course they had most of the leverage.  If Congress had done nothing, the middle class would have been absolutely devastated by all of the tax increases, and the Republicans were desperate to prevent that.

But now that the battle over taxes is done, the leverage is going to shift over to the Republicans for the next big fight.

The battle over the debt ceiling is next.  If Congress does not act, the U.S. government will soon not be able to borrow any additional money.  This battle will be one of the stories that dominates the headlines over the next few months.

If the Republicans want to do something serious about spending, now is their chance.  The battle over tax rates is already over, and there is no election in November.  The Republicans could conceivably say “NO” to a debt ceiling increase if they want to.  If that happened, the federal government would only be able to spend the money that it already has.  It would not be able to borrow more.  That would mean that we would have to start living within our means.

What a novel concept.

Of course there is no reason to believe that the Republicans in the House will suddenly grow a spine.  They have folded every other time that the debt ceiling has come up.  It will probably be the same again in 2013.

And Barack Obama is already saying that there will be “no negotiations” over the debt ceiling this time.  He expects the Republicans to raise the debt ceiling for him without getting anything in return

“I will not have another debate with this Congress over whether they will pay the bills they’ve already racked up.”

But the U.S. government cannot spend a single penny or borrow a single penny without the approval of the U.S. House of Representatives.

If the Republicans in the House want to ever get serious about government spending, the upcoming battle over the debt ceiling is a golden opportunity.

They could stop the Obama administration from piling up crazy amounts of debt if they want to.  All they need is the courage to take a stand.

During the first four years of the Obama administration, the U.S. government accumulated about as much debt as it did from the time that George Washington took office to the time that George W. Bush took office.

The Republicans have had control of the House for about half of that time.  That means that they have been willing accomplices.

So will they take a stand?

That is very doubtful.  Over the past few years they have exhibited the intestinal fortitude of a frightened chicken.  They will probably huff and puff a little bit, but in the end they will probably give in to Obama once again.

But what we are doing to our children and our grandchildren is so immoral that it is hard to describe.  We are stealing more than 100 million dollars from them every single hour of every single day, and we plan on leaving them with the biggest pile of debt the world has ever seen.  We should be absolutely ashamed of ourselves.

Why can’t we just spend the money that we have?

What would be so wrong with that?

Unfortunately, that would mean such a painful downward adjustment in our standard of living that most Americans would freak out.  We are addicted to debt-fueled prosperity, and so we can’t stop stealing from future generations.  We need their money to feed our addiction.

In the end, this gigantic mountain of debt is absolutely going to destroy everything that our forefathers built for us.  There have been some people that have been warning about this for decades, but the American people did not listen.

Soon enough, we will all pay the price for this foolishness.

Obama And Boehner - The Debt Ceiling Battle Comes Next

Too Much Debt: Our Biggest Economic Problem

What is the biggest economic problem that the United States is facing?  Very simply, our biggest problem is that we have way too much debt.  Over the past 30 years, household debt, corporate debt and government debt have all grown much faster than our GDP has.  But no nation on earth has ever been able to expand debt much faster than national output indefinitely.  All debt bubbles eventually burst.  Right now, we are living in the greatest debt bubble in the history of the world.  All of this debt has fueled a “false prosperity” which has enabled many Americans to live like kings and queens.  But no nation (or household) can pile on more debt forever.  At some point the weight of the debt becomes just too great.  It is amazing that the United States has been able to pile up as much debt as it has.  Over the years, many authors have predicted that U.S. government finances would collapse long before the U.S. national debt ever got to this level.  So the mountain of debt that we have accumulated is quite an “achievement” if you want to look at it that way.  But the clock is ticking on this debt bubble and when it collapses we will say “bye bye” to our vastly inflated standard of living and we will discover that we have destroyed the economy for all future generations of Americans.

Household Debt

Sometimes a picture is worth a thousand words.  When most Americans think of the “debt problem” in this country, they think of the debt of the federal government.

But that is not the only debt bubble that we are facing.

Thirty years ago, household debt in the United States was approaching the 2 trillion dollar mark.  Today, it is sitting at about 13 trillion dollars….

We have been trained to pay for everything with debt.

We pay for our homes with debt, and mortgage debt as a percentage of GDP has more than tripled since 1955.

We pay for our cars with debt, and at this point about 70 percent of all auto purchases in the United States involve an auto loan.

We pay for higher education with debt, and the total amount of student loan debt in America recently surpassed the one trillion dollar mark.

Wherever we go we pay with plastic.

If you want a heated cat bed and a cute little cat sweater for your little kitty just put it on your Visa or Mastercard.

Amazingly, consumer debt in America has risen by a whopping 1700% since 1971, and if you can believe it, 46% of all Americans carry a credit card balance from month to month.

We are absolutely addicted to debt and we do not know how to stop.

State And Local Government Debt

Our state and local governments are also addicted to debt.

30 years ago, state and local government debt was approaching the 400 million dollar mark.  Today, state and local government debt is hovering around the 3 trillion dollar mark….

In the United States today, we don’t just have one “government debt problem” – the truth is that we have hundreds of them.  All over the country, state and local governments are facing bankruptcy because of too much debt.

For example, according to Fox News the city of Stockton, California is right on the verge of declaring bankruptcy.  In fact, an announcement could come as early as this week….

Stockton, Calif., is set to declare bankruptcy as early as this week, according to local officials, a move that would make it one of the largest U.S. cities ever to file for reorganization. 

On Monday, a state-required mediation with creditors to find a fiscal solution is scheduled to expire. Stockton’s City Council is then slated to meet Tuesday to decide whether to adopt a budget for operating in bankruptcy, a move widely considered the last step before the city formally submits a Chapter 9 petition to federal bankruptcy court. 

Federal Government Debt

Of course the biggest offender of all is the federal government.  30 years ago, Ronald Reagan was running around proclaiming what a nightmare it was that the U.S. national debt was reaching the one trillion dollar mark.

Well, now we are about to blast through the 16 trillion dollar mark with no end in sight….

Running up debt at a much faster rate than our GDP is rising is a recipe for national financial suicide.  Our politicians continue to steal about 150 million dollars an hour from future generations and everybody just acts like this is perfectly normal.

We are going down the same path that Greece, Portugal, Italy, Ireland and Spain have gone.

In fact, we already have more government debt per capita than all of those nations do.

Both political parties have been doing this to us, and it just keeps getting worse and worse.

Incredibly, the national debt has grown more under Obama in less than 4 years than it did under George W. Bush during his entire 8 year term.

Since Barack Obama entered the White House, we have accumulated more than five trillion dollars of additional debt.

We are on the road to national financial oblivion, and most Americans don’t seem to care.

Debt From Sea To Shining Sea

Now let’s add up all the debt in the country.  When you total up all household debt, business debt and government debt, it comes to more than 300% of our GDP….

In fact, if current trends continue we will hit 400% of GDP before too long.

As you can see from the chart, there was a little “hiccup” during the last recession, but now the debt bubble is growing again.

So how high can it go before the entire system collapses?

Total credit market debt owed is roughly 10 times larger than it was about 30 years ago.

How in the world did we accumulate 10 times more debt in just 30 years?

If we do that again in the next 30 years, our total debt will be more than 500 trillion dollars in the 2040s.

Unfortunately, that is the way that debt spirals work.  They either have to keep expanding or they collapse.

So will the U.S. debt spiral continue to expand?

Or will we soon see a collapse?

Sadly, this exact same thing is happening all over the world.  The government debt to GDP ratio in Japan (the third largest economy in the world) blew past the 200% mark quite a while ago, and almost every country in the EU is absolutely drowning in debt.

The world has never faced anything quite like this.  There is way, way too much debt in the world, but the only way we can continue to enjoy this level of prosperity under the current system is to pile up a lot more debt.

The western world is like a debt addict in a deep state of denial.  Some debt addicts end up with dozens of credit card accounts.  They will keep opening more accounts as long as someone will let them.  Most debt addicts actually believe that they will be able to get out of the hole at some point, but most never do.

Most Americans still believe that we are experiencing “temporary” economic problems that will eventually go away.  Most Americans still believe that even greater prosperity is still ahead.

Sadly, what the mainstream media and the two major political parties are telling them is a bunch of lies.

We have enjoyed the greatest prosperity that we will ever see in the United States, and when the debt bubble bursts there is going to be an immense amount of pain.

That is a very painful truth, but it is better to come to grips with it now than be blindsided by it later.

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