Saturday, December 22, 2012

The Best Explanation of the Fiscal Cliff

Comes from Doug Casey during an interview with Louis James (via My bold.

L: Okay; let's start with a definition, as usual. What is the fiscal cliff anyway?

Doug: Well, of course, fiscal cliff is really a misnomer. Part of it's good, and part is bad for the economy. The term refers to the simultaneous expiration of the Bush tax cuts and automatic spending cuts mandated by the Budget Control Act of 2011 that go into effect next year. Many pundits say this will cause the US to go into a recession. Well, we're already in the Greater Depression. But here's what would happen. The higher taxes would suck more capital out of the productive economy and divert it to the government – that's very bad. And lower government spending would help unravel distortions and misallocations of capital that spending was causing – which is good. In the process, some people would have to find new jobs, and some businesses dealing with government handouts would go bust. Painful, but necessary, and we need to see lots more of both.

However, it's not the US economy that's facing this alleged cliff; it's the US government. It just goes to show how hopeless the situation is, when people equate the government with the economy. They're two entirely different things. The only way to revitalize the US economy is a vast reduction in taxes and a vast reduction in government spending. Instead, these idiots are arguing over how much to raise taxes and how little they can cut spending. Of course it will be a disaster.

[...] The economy would be just fine if the government disappeared. The problem is the US dollar, which has no intrinsic value and is backed by nothing but confidence. The dollar is a complete fiat currency, and its accelerating debasement has the potential to destroy the economy. The economy itself is the aggregate of all the people, businesses, inventory, manufacturing plants, mines, farms, transportation networks, research facilities, and accumulated capital of all the participants.

The economy grows when people produce more than they consume, and save the difference. They then have capital to put into new ventures, create new jobs, develop new technologies, and so forth. No government is needed to make this happen – rather the opposite.

But the average American, who is completely ignorant of economics, thinks the government is a magic cornucopia. As proof of that statement, I offer the fact that Obama is president, Romney was offered as an alternative, and dingbats like Boehner, Pelosi, and Ried control the Congress.

L: So, what does get the economy going?

Doug: People can't just sit at home because they lack confidence; they'd starve. They have to work, create, build, invest – deploy their capital, whether that be financial, intellectual, or the simple time they can sell to employers. The alternative is dissipation and eventually death.

If the economy isn't growing, it's not because the government isn't spending enough to "stimulate" it. Government spending comes from: taxation, which is a burden on the economy; borrowing, which is a future burden on the economy; or printing money – inflation – which is an especially dishonest, hidden form of taxation makes people think they're richer while they're being impoverished.

No. If the economy isn't growing, it's because the government has burdened it with heavy taxation, smothered it with excessive regulation, distorted it with false information (the Fed's manipulation of interest rates), and replaced real money – gold – with paper.


  1. When Doug Casey speaks, I listen. I admire all the greats who do the best to live what they say. I can't go more than a day without reading EPJ.

    Many, if not most Americans would like to work hard and live their lives. The government is destroying their ability to do this. They'd rather have half the population on food stamps, and the other half working makeshift (makeshift to us), useless government jobs.

    "Lifelong learning for lifelong labor." Keep them occupied with useless corporate training divorced from reality. Keep 'em busy with sexual harassment reeducation, policy and procedure, sensitivity training and other values destroying "activities."

    Relegate beneficial human activity under the intentionally pejorative term "capitalism", to sully peaceful, free-market exchange that enables true growth and development.

    Sometimes I think of growing up in America and what's been involved for me, and millions of others.

    Hollywood sometimes does something valuable. This scene inspires me:

    1. I like Doug Casey too. And I don't mean to quibble here, but I think he messed up here a tad when he starts out saying,

      "The higher taxes would suck more capital out of the productive economy and divert it to the government"

      Strictly speaking, it's government spending that is the sucking culprit (Walter Williams is great on this).Currently, all their spending isn't covered by tax receipts so they have to borrow to fund the deficit (and largely print money to do that). This extra borrowing and money printing would be reduced with higher tax receipts. So, in theory, "capital sucking" would not change until total government spending changes.

      I do love DC on the whole -- although not ready to dive into any of his Argentina real estate just yet. I thought he was great and very level-headed about poo-pooing the gold price manipulation theorists. He's right, I think. Over the long term the "manipulators" have been pretty inept at keeping the price at $35/ounce.