Europe and the Euro are a bit like living on the slopes of Vesuvius. In the past, the mountain spewed forth rich deposits of easy credit which have produced lush pastures, fat flocks, bounteous vinyards and affluent peasants. But, encouraged by nincompoop 'progressives' like Gordon Brown ('We have conquered boom and bust') these peasants were living in a fools’ paradise. The volcano threw up so much debt that it eventually buried those living on the lower slopes and is suffocating them all.
All eyes have been riveted on the desperate, failing attempts to rescue this foolish buried peasantry which thought that the good times would never end, to the extent that what has been happening in the USA has been pretty muchignored. But over there, disaster in the shape of the ‘Fiscal Cliff’ is just around the corner.
The Fiscal Cliff
The Fiscal Cliff is the unfortunate conjunction of several measures on a single date: New Year’s Day 2013. These measures involve the greatest increase in US taxes in history on the one hand and the greatest reduction in history in Federal spending on the other.
Taken together they will suck enormous amounts of money out of the US economy ($1.6 trillions by some estimates) in an effort to bring down the annual budget Deficit. This has been clocking up the National Debt at a staggering rate of up to $1.5-1.65 trillions annually from $19 billions in 1950 to over $16 trillions today. This compares to a total annual tax take of around $2 trillions, $2.5 trillions in a good year.
An incredible near 40% of everything the US government spends is borrowed money.
The Fiscal Cliff could add up to economic Armageddon. The Bank JP Morgan Stanley says that it will ‘push America head first into the fiscal meat grinder’. Chief among the measures involved are:-
Expiration of the two-year extension of the Bush Tax cuts
Across-the-board spending cuts ("sequestration") to most discretionary programs.
The expiration of federal unemployment benefits.
New taxes imposed by Obama Care
Reversion of the Alternative Minimum Tax thresholds to their 2000 tax year levels.
The Great Recession and ordinary Americans
Ordinary Americans have been hit hard by the Great Recession. The real median household income has been falling now for four years. Adjusted for inflation, it is already today the same as it was in 1967 - 45 years ago. House prices continue to fall. Food and fuel prices are shooting up. Income is moving away from the middle class, the backbone of the economy. Poverty is at an all-time record high. According to the USA Census Bureau, an incredible 46.2 million Americans are now officially designated as living in 'poverty' and thus likely to be in receipt of State aid.
Ordinary Americans following the Fiscal Cliff
Following the Fiscal Cliff, the outlook for ordinary Americans is grimmer than it has been in generations. The former Treasury Secretary Robert Rubin recently warned that the impact of the Fiscal Cliff could dwarf the last recession.The economy is already slowing as the doomsday date approaches.
The unemployment rate could increase by 50% to over 12%. This sounds containable until you realise that If the government measured joblessness today in the way it did 20 years ago the figure would actually be 22.8%. There would be another 10 million unemployed in the USA on top of the 23 millions already unemployed. There is likely to be a wave of bankrupticies as thousands of businesses go under. The stock market is likely to plunge to the depths. All of this adds up to a scenario of social unrest, increase in crime and political uncertainty.
Devaluing the Dollar as a Means of devaluing the Debt
Whatever steps may be taken to defuse the Fiscal Cliff, it will only amount to kicking the can down the road. There is no escape from the fix the USA is in. The country can never hope to pay off its national debt.
The USA has been able to get away with it by printing dollars, in the knowledge that the dollar is the world’s reserve currency – foreigners must or want to buy it for international trade purposes and so keep up its worth. But even so, thanks to inflation it is now worth over 30% less than it was as a decade or so ago.
Now, the Federal Reserve chief Ben Bernanke, having already created $1.8 trillion new dollars out of thin air with Quantitative Easing is resorting once again to the printing presses. He is going to print a further $40 Billions a month or $480 Billions a year- nearly half a trillion - in a further effort to stimulate the economy. Previous efforts on these lines have failed. This almost certainly means a rise in inflation to frightening, savings-destroying levels in the years ahead.
How much longer will the USA’s creditors – mainly China, Japan and the Arabs - be prepared to continue to hold a shrinking asset, the dollar? They are already moving out of it and trading in other currencies and baskets of currencies. China is moving to make the Yuan a world currency as an alternative to the dollar. When these creditor nations effectively sideline the dollar, prices in the USA will skyrocket. And how long will it be before the country is unable to pay the interest on its loans, never mind try to pay off the capital? Watch this space.
The End of the USA and more Troubles for Us
The troubles of the USA spell trouble (or, rather, more trouble) for the World, the EU and the UK in particular for all sorts of reasons. It spells the beginning of the end of the USA as the preeminent World Power with all the consequences that will follow.
The economy of the USA, for decades based not on increasing productivity of the kind it saw when it was transformng itself from a fundamentally agricultural country into an industrial one but on bubbles of false expectation (of the kind we have had in Britain), was key in driving the world economy post war. It is now going to be a lot poorer for many, many years than it has been. As a major trading partner of ours this is bad news for us. And we will not remain untouched by the social disturbances that are likely in America. We do tend to copy them, don’t we?