Gold News

Fiscal Cliff: Things Are Speeding Up

But in which direction...?

ITALIANS have a word for what may now be happening in the financial markets, writes Dan Denning for the Daily Reckoning Australia.

It's a musical word. But sometimes you have to go outside the vocabulary of economics to describe what's going on in the world. Now is one of those times.

The word is 'accelerando'. In music, it means a quickening of tempo. If you want an example, treat yourself and listen to Hungarian Rhapsody Number 2 by the composer Franz Liszt. Or, if you watched Tom and Jerry cartoons as a kid, try this. You can't listen to either version and not have a smile on your face at the end.

For our purposes it's the quickening of pace towards a fast finish that we're interested in. The US election is finally over, thank goodness. The Communist Party of China (CPC) is holding its 18th National People's Congress. You'll finally have some clarity on the political leadership of the world's two largest economies.

With that clarity, we'd expect events to pick up some speed. But in what direction? And towards what end? Ahh yes. That's the hard part.

Why don't we start with the dreaded and overused term 'fiscal cliff'? It refers to the automatic tax hikes and spending cuts that will come into effect in the United States on January 1 2013 if the President and the US Congress don't agree to some deal ahead of time. The stock market seems to have concluded that the re-election of the President has accelerated us to the edge of the fiscal cliff even faster.

But would that be such a bad thing? Well, for Australia and China it probably would be. The US Congressional Budget Office reckons that if US politicians do nothing and drive the clunky US economy over the fiscal cliff, it will put the country in recession. A recession in the US isn't going to be good for anyone.

However the CBO also reckons that a recession now would only be the short-term consequence of going over the fiscal cliff. The longer term consequence would be surprisingly beneficial, as far as cliff-diving is concerned. The CBO says that triggering the automatic tax hikes and spending cuts would reduce the government budget deficit to $200 billion by 2022 and to 58% of GDP, from around 70% now.

Or course the whole thing is a charade anyway. Even under the best-case scenarios, the CBO isn't talking about how to run a balanced budget. It's only talking about smaller annual deficits. The hope is that if the economy can grow faster than the annual deficits, the debt as a percentage of GDP will grow smaller. Then everyone can forget about actually paying it off.

The financially illiteracy of the public has also accelerated, if this math is to be taken seriously. It shouldn't be taken seriously. All of these reports are complex justifications for expanding government in life. This is only possible through the perpetual expansion of debt.

By the way, Australia is no different. It's just a matter of scale. Today's Financial Review leads with an article about expanding the reach of the goods and services tax. When faced with a budget that won't balance, it's always easier to raise taxes than cut spending. You raise the taxes on the people who are a political minority, while not cutting spending to the people who vote for you. This is modern democracy in action.

What will be interesting now is how quickly this world-wide expansion of government debt and spending accelerates. It's got the political go-ahead from voters. The first steps are in place – raise government 'revenues' anyway you can (GST, carbon tax, higher marginal tax rates). The last steps are more draconian and desperate.

But really, how different is this world from any other time in history? The King/Sovereign/Parliament/Pope/Congress/President is desperate for money. They scrounge it any way they can. The plebeians/serfs/voters try to make the best of the trade – willing to be bribed with benefits in exchange for not revolting.

Time to Buy Gold?...

Best-selling author of The Bull Hunter (Wiley & Sons) and formerly analyzing equities and publishing investment ideas from Baltimore, Paris, London and then Melbourne, Dan Denning is now co-author of The Bill Bonner Letter from Bonner & Partners.

See our full archive of Dan Denning articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

Follow Us

Facebook Youtube Twitter LinkedIn



Market Fundamentals