In the last couple of weeks, I have been using a phrase on Facebook that many people wanted me to clarify. The simple fact that people are unaware of the financial cliff we are facing is more concerning to me than having to explain it.
To make a long story short, unless major things happen in Congress between now and December 31st of this year, we will be faced with a financial crash that will make the recession of 2008 look like a picnic. In fact, many economists are predicting an outright depression if something isn’t done soon.
To preface this explanation, I suggest you read this. I will wait…. It isn’t a complete explanation of all the processes that will result in a major financial meltdown, but it covers the main points (except one which I will get to later).
For those that didn’t read that link, (Shame on you…), let me break it down as concisely as I can – something very difficult for me.
The Six Kisses of Death -
1) The Bush Tax cuts and several temporary tax breaks expire.
On Dec 31, 2012, the Bush era Tax Cuts will expire. In the long run, this is actually a good thing. The Bush Tax Cuts gutted our government’s revenue and is the single largest contributing factor to the current debt crisis we have now. Understand, I am not blaming President Bush the Second, though I think he was the worst President this country has ever had. No, the problem was Congress. They passed that abortion, effectively setting our country up for bankruptcy. The President cannot initiate Tax Cuts. Those have to be done in Congress. Failure to let those tax cuts to expire will increase our national debt by over 5 TRILLION dollars over the next 7 years. On the other hand, letting them expire will increase the tax burden on everyone and those that are NOT in the top 5% of the nation financially, cannot handle that burden at this point because the average American Citizen has LOST over 40% of their net worth since 2007.
2) The Debt Ceiling fight.
Once again, John Boner (House Speaker) has promised a tough fight if the Republican demands are not met. This is no different than the last time Congress fought over the Debt Ceiling – a fight which cost American investors over $6 Trillion dollars in investments and resulted in the first time ever US credit downgrade. This is shear insanity. If a tough fight ensues, the American Economy will tank – AGAIN – and it is completely avoidable if only these stuffed suits in Congress would work together instead of working against each other. Personally, I think Boner should be hung on the Capital Building Steps as a Traitor to his country, along with every other stuffed suit in Congress that thinks our economic well-being is a bargaining chip for political gain.
3) Mandatory Spending Cuts.
One of the ways that Congress has operated in the last year is that our economic welfare has been held hostage to partisan posturing. One of the results of those partisan battles was agreements to MASSIVE spending cuts – usually targeting policies and agencies that benefit the middle and lower classes – while leaving the policies and agencies that benefit corporations and the wealthy alone. When these were passed, almost every major economist in the US said that these cuts – as written – would not only impede the recovery from the recession of 2008, they were likely to cause a “double dip” recession. The agreements were still made and the first large cut goes into effect January 1, 2013 to the tune of over $1 Trillion dollars. This will entail large scale cuts in services and public employees, making an already overburdened unemployment rate even worse and reducing the level at which the government is in a position to help those unemployed people. A recession is the least of our worries and this is likely to result in a full scale Depression.
4) The Social Security Holiday and the extended Unemployment benefits expire.
One of the moves Congress made in an attempt to stem the harshest part of the recession was to pass a Social Security Holiday – reducing the amount of money taken out of a wage earner’s paycheck for Social Security. Congress also – grudgingly – passed a number of measures to extend unemployment benefits for those trying to get back to work but were unable to find a job in a rapidly shrinking job market. Both of those measure will expire December 31st, decreasing the take home pay of those actually working and removing the lifeline to those that have not been able to find a job. Once again, this will hit middle to low income people the hardest and since they are ones already hurting, a recession is inevitable.
5) No working Budget.
This is the issue that was NOT brought up in the CNN article (though why they left it out is beyond me given the situation). As of this post, no full budget has been passed in over 2 years. Instead, continuing resolutions have been passed, giving the Government temporary authority to spend money with certain restrictions. If I read the last one passed correctly, the current temporary budget is set to expire this year. Each time this has been done, there was always a lengthy battle in Congress, followed by a last minute agreement – usually involving spending cuts that effect the lower and middle classes while holding the upper class and defense budget “holy”. There is no reason to believe that this won’t happen again this year – at the very least until after the elections on Nov 6th.
6) The Average Person is 40% poorer than they were in 2007.
You read that right… the average net worth of the American Citizen is now 40% less than it was in 2007. In fact, the average wage has DROPPED since 2007, so people are actually making less now than they were before the recession. These are hard numbers. Given this simple fact, any one of the 5 situations above could result in a “double dip” recession. If all five occur at once, a recession will be the least of our worries. Our economy will, quite literally, go over a cliff with no foreseeable bottom.
Given that no substantive move is likely to occur on ANY of these issues until after the election in November, it is reasonable to assume that one or more of these economy damaging events will occur. In fact, given the track record of the current Congress, it is likely that they all will occur at the same time and the result of any compromise – if a compromise is reached at all – is going to be a measure punting the issue down the road to the new Congress after the first of the year. At the very least, we are likely to see another downgrade in our credit rating, a partisan fueled bloodletting that accomplishes nothing in Congress, a probable volatile Stock market (and likely, a stock market crash) and a further erosion of the wages and net worth of anyone making less than $1 million dollars. Further, we are likely to see an even larger decline in public employment at both the Federal level and at the State level – adding to an already taxed unemployment problem.
Given the likely outcome of this situation, I have no idea why anyone would want to be President of the United States. I certainly would not want to be known as the man at the wheel when the American Economy crashed.
Does this all sound gloomy? Of course it does. It is also as real as it gets. The Fed is out of tools to stop another recession from happening. Congress seems incapable or unwilling to do what it needs to do to fix the problem and people are too focused on the upcoming to elections to realise the trouble we are heading for at light speed. There is little good to be seen here even for an optimist like me.