Fiscal Cliffs Precede Fiscal Valleys

By: Barry_M_Ferguson

It is not the fall that kills us. It is the collision with the ground. It is not the ‘fiscal cliff’ that we should fear. It is the fiscal valley that lies beyond the fiscal cliff that will kill us. Can a fall from the cliff be prevented?

The answer is ‘no’. The ‘fiscal cliff’ is Fed Chairman Bernanke’s metaphor for the expiration of the Bush-era tax cuts. Congress must act to again extend the lower tax rates as they did previously or taxes rise starting in January of 2013. The fiscal cliff is therefore a tax increase on the American public. Get ready. The ground is approaching quickly.

Allow me to shine a ray of truth into the pitch black dungeon of government mendacity so readily accepted by the cognitively impaired followers of the ‘spread the wealth around’ crowd.

First. taxes are going to rise no matter what. If Congress does nothing, taxes rise. If Congress does anything, they will accept the regime’s proposal of higher taxes for the wealthy. Taxes go up either way. We will enter the Valley of Austerity.

Second, the Obama regime knows their constituency. These poor people actually believe the party line that 98% of us have nothing to worry about. Mr. Obama has preached that taxes should only rise for the wealthiest Americans or about 2% of the population. Send the kids out of the room for a moment while we discuss the truth. Okay, here it is. Rich people don’t pay taxes. They offset taxes by raising prices for goods sold through their companies or properties. The consumers pay the taxes through higher prices. The Valley of Austerity is cold and barren with no visible exit.

Third, we must consider the big picture. Tax revenue, wherever it comes from, must rise to pay for the increase in government spending that is currently around $3.5 trillion a year. The Treasury currently takes in about $2.5 trillion in tax revenue. Of course, Congress could reduce government spending but I think we all know that is not going to happen. Taxes must rise. Well, only for the wealthy like Warren Buffet who do not mind the increase. Yeah, right!

Fourth, government spending cuts cannot, and will not happen. Here’s why. We have already entered ‘the valley’. We ran off the fiscal cliff years ago. Government responded by starting wars and redistributing vast wealth to elite bankers. All of this was on the back of more debt. Of course, the populace would revolt if they knew the truth of the Valley of Austerity. So to keep the populace under control, they had to be distracted by an ‘economic recovery’. That recovery was evidenced by a rising GDP (Gross Domestic Product). The problem is that allowing the government to become a bigger part of GDP through spending does nothing but push us further and further over the cliff. Eventually, gravity kicks in. Of course, there is no way that the average American can understand this so let’s look at the real numbers. 

Supposedly the US economy totals some $15 trillion in GDP. We know that the US government spent $3.7 trillion of which a trillion or so was borrowed. The US government accounts for some 25% of GDP spending. Should the government resist tax increases and cut back the trillion in spending that they currently borrow, US GDP would fall by that trillion and post a figure of $14 trillion. That would be a GDP decline of 6.7%. Of course, we know that government spends everything they take in and then some. We also know that a reduction of government spending cuts would trickle down to other parts of the economy and GDP would likely contract even further. Not that the government would admit it but this scenario would imply a deep recession is at hand. That would be downright Greekish.

Spending cuts would likely do more damage to GDP than we can currently calculate. Again, GDP equals money velocity (MV) times money supply (MS). We know that the true story of our economy is that the current MV is at an all-time low. People can’t spend money they don’t possess. Government spending cuts would eliminate some of the deficit spending and therefore it would curtail money supply as necessitated by debt. The math would indicate a pretty severe GDP contraction. This does not even consider that the US government is going to run out of money at the end of December, 2012, and the overall debt of $16 trillion plus still oppresses real growth. No, the US ran off the cliff years ago. We are just waiting on the collision with the valley floor below.

Therefore, regardless of what we might hear from politicians, the fiscal cliff is simply a hefty tax increase. Spending will not be addressed. Taxes will rise. And here is the final point. Who benefits most with a tax increase? We would think that the largest holders of US debt paper need to see tax increases to further insure interest coupons can be paid on such debt. That large holder would be the Federal Reserve Bank. As we know, they are our masters and we only exist to serve them. The Fed will again benefit as our misery grows. Truth only hurts liars. Spread it!

Barry M. Ferguson, RFC
President, BMF Investments, Inc.
Primary Tel: 704.563.2960
Other Tel: 866.264.4980
Industry: Investment Advisory
barry@bmfinvest.com
www.bmfinvest.com
www.bmfinvest.blogspot.com

Barry M. Ferguson, RFC is President and founder of BMF Investments, Inc. - a fee-based Investment Advisor in Charlotte, NC. He manages several different portfolios that are designed to be market driven and actively managed. Barry shares his unique perspective through his irreverent and very popular newsletter, Barry’s Bulls, authored the book, Navigating the Mind Fields of Investing Money, lectures on investing, and contributes investment articles to various professional publications. He is a member of the International Association of Registered Financial Consultants, the International Speakers Network, and was presented with the prestigious Cato Award for Distinguished Journalism in the Field of Financial Services in 2009.

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