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Jeff Nielson is the writer/editor of Bullion Bulls Canada. He came to the precious metals sector as an investor in the middle of last decade, and quickly decided this was where he wanted to focus his career. Jeff's background includes four years of Economics at the University of British Columbia, before he went on to earn his law degree from that same institution.

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The Two ‘Faces’ of U.S. Debt-Ceiling Deal

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Originally posted at BullionBullsCanada.com

Mercifully, it appears that the U.S. debt-ceiling farce has finally ended – with an anti-climactic “thud”. It is only fitting that the two-faced regime which negotiated such an agreement should present us with a scenario which has two distinct interpretations. However, before getting into how this deal came to be, it’s necessary to spend a moment doing a reality-check on the actual terms of the deal.

In any rational assessment, this can only be defined as another complete failure for the hopelessly dysfunctional U.S. government. While the talking-heads in the mainstream media will do their best to spin this as “the best compromise available”, the mere failure to commit suicide cannot be construed as a “victory” when this deadbeat economy teeters on the brink of bankruptcy.

The ability of the Federal Reserve to (supposedly) “fund” the U.S. government via its magic printing press ends permanently once hyperinflation officially drags the worthless greenback to zero. As I have detailed previously, in unofficial terms the “fundamental” value of the U.S. dollar has already reached zero.

With the “Emperor” (i.e. B.S. Bernanke) clearly wearing no clothes, each time the Federal Reserve cranks-out a new truck-load of Bernanke-bills (backed by nothing) to “pay” the bills of the U.S. government for one more month, the probability increases that the the sycophantic masses will finally notice this chronic nudity. And by “sycophantic masses” I’m naturally referring to the “experts” in charge of our global monetary system.

Because this absurd “deal” does nothing to reduce the steady stream of those truck-loads of Bernanke’s confetti, in any/every meaningful way it is a complete failure. As is always the case with governments which only wish to pretend to be engaging in fiscal tightening, this deal is heavily “back-loaded”, meaning that any noticeable reduction in the deficit doesn’t commence until 2016, while virtually nothing is being done until 2013. When a chronic deadbeat solemnly proclaims his intent to start acting responsibly two years from now, this impresses no one.

Indeed, in the first year of this “deficit-reduction” a mere $200 billion is being trimmed from the latest, massive increase in U.S. debt. Given the $1.6+ trillion size of the current deficit, this is nothing more than “a rounding error”. With the relentlessly (and intentionally?) “optimistic” revenue projections which this regime has engaged in, by the time the first year of this supposed deficit-reduction is finished, the “unexpected increase” in the size of the U.S.’s annual deficit could easily exceed the total amount of “deficit reduction”. Translation: in the first year of this “deficit fighting”, the U.S. deficit will very likely increase rather than decrease.

This becomes more probable by the day. With this credit-junkie economy now (apparently) deprived of additional stimulus and more of the Fed’s “easy money”, it had already sagged noticeably simply in anticipation of being deprived of its next “fix”. When the withdrawal-pains really begin to set in, we will see this debt-crippled economy once again plummeting like a rock.

Given that the “optimists” in the U.S. government have (as always) proclaimed their expectation of a “stronger second half” for 2011, the actual numbers for this revenue-starved economy are sure to be a “disappointment”. This makes the mere failure of this new deal the best-case scenario. The worst-case scenario is that this feeble attempt at “deficit fighting” will be abandoned before “the ink is even dry”; with either more government stimulus, more Fed money-printing – or both.

In short, the totally juvenile posturing which has taken place in the U.S. government over the past six months – preventing these corrupt stooges from doing anything useful during that period of time – will likely have a shelf-life no longer than the latest “victory strategy” for the war in Afghanistan.

The indictment of how the Republocrats arrived at this deal is equally scathing. Interpretation #1 is that this was an exercise in pure cynicism. Any/every credible economist has already concluded unequivocally that it will never be possible to even substantially reduce the massive U.S. deficit without significant increases in revenues (i.e. higher taxes).  More specifically, as I regularly point out in my own writing, the U.S. government is currently experiencing its worst revenue crisis in history.

With the bottom-80% of the U.S. population already squeezed dry, that leaves “tax increases for the rich” (and/or the multinational corporate deadbeats) as the only, possible source of additional revenues. However, the Republocrats have already been instructed by their Masters that no such tax increases would be allowed. Thus, this last six months of (quite literally) “political theater” has been undertaken solely to prevent the rich from suffering even the tiniest dent in their wealth-hoards.

The role of the Republican half of this tag-team was a simple one (commensurate with their abilities): “no tax increases for Americans”. The reality that only the top-20% have anything left to tax is a “subtlety” beyond the comprehension of the “Republican base”. The fact that the vast majority of Americans have supported tax increases for the rich in recent polling is irrelevant to Republicans – as they only need the support of their “base” to retain their own jobs in the vast majority of the U.S.’s severely gerrymandered electoral districts.

The “role” assigned to the Democrats was a more difficult one, given that it involved openly and intentionally betraying their own “base”. At least the Republicans are able to pretend that they are serving the interests of their loyal flock of sheep. The Democrats have no such political cover. Their complete and utter capitulation in this pseudo-negotiation cannot be hidden: no tax increases of any kind for the rich, despite the clear “message” from their own supporters.

What this means is that from the first day this entire debt-ceiling farce began, it had already been decided that no agreement would be reached until (literally) the day before default. Thus, the lame excuse which would be put forward today by the limp-wristed “leadership” of the Democrat Party is that they were “forced to capitulate” – because the hopelessly and obviously deluded “Tea Party” zealots in the Republican Party were genuinely prepared to “crash” the U.S. economy if they didn’t get their own way.

Fortunately, The Daily Show’s ever-astute Jon Stewart immediately stripped that excuse from this collection of two-faced weasels. Stewart pointed out that if the Democrats were incapable of “standing up” to the Republicans in a debt-ceiling show-down (because of some sort of genetic “spine deficiency”), that they could have simply used a previous “golden opportunity” to secure a debt-ceiling increase – without being required to 100% capitulate on future taxation policy.

When was this “golden opportunity”? A little more than six months ago when the Democrats previously engaged in 100% capitulation to the Republicans on taxation policy – by extending the massive windfall-to-the-wealthy known as “the Bush tax-cuts” (and again betrayed their own supporters). Stewart pointed out that unlike the latest capitulation (where the Democrats can point to the increase in the debt-ceiling), when the Democrats capitulated on the Bush tax-cuts they obtained absolutely nothing in return.

With the fast-approaching U.S. debt-ceiling already an issue when Obama broke yet another campaign promise on the Bush tax-cuts, it is absolutely impossible for the Democrats to claim that they had “forgotten about” that deadline the last time they rolled-over-and-played-dead. In consistently caving-in to Republicans any and every time the subject of “taxing the wealthy” arises, Obama has revealed himself to be nothing more than the two-bit actor from Shakespeare’s “Hamlet” – whose own, unconvincing denials evoked the immortal phrase “the lady doth protest too much, methinks.”

If this first interpretation of the Republocrat deal on the debt-ceiling reeks of corruption, deception, and cynicism, the second interpretation is simply frightening. The only other possible way to view these events is that the capitulation by the Democrats on the debt-ceiling was not merely an “act”. Rather the clueless ideologues in the Republican Party were not bluffing as they held the debt-ceiling “gun” to their heads, but were fully prepared to pull the trigger.

Understand the dynamics here. This is the same Republican Party in which virtually every one of their “stalwarts” fervently believes that the U.S. can “balance its budget” with nothing but spending-cuts – despite the fact that all leading economists have concluded this is mathematically impossible.

Clearly not one of these numerical simpletons would have the slightest idea of the actual consequences of simply refusing to increase the U.S. debt-ceiling. Despite their complete ignorance on the result of their own actions, and “stern warnings” from literally all over the world of the idiocy and recklessness of such an act, these zealots were prepared to risk the complete destruction of their own economy – simply to blindly pursue their own ideological dogma.

Readers are free to pick their own, favorite interpretation. Was this simply another example of the spineless, devious hypocrites which the Democrats have devolved into; or, does the Republican Party now represent the most dangerously incompetent group of mental-midgets to ever obtain “high office” in a Western democracy?

Readers are also free to select “all of the above”.

There Are 7 Responses So Far. »

  1. I don’t entirely agree with all of the above, nor with “obviousness” of taxing the rich.

    Firstly, there is (in my view) a plus side to yesterday’s deal: if nothing gets done, then there will be steep defense cuts. Sadly, this probably means SOMETHING will get done in the “super committee” sausage-factory, to avert such a socially-useful outcome.

    Secondly, I don’t see what the big hullabaloo is for “taxing the rich” to “fix” the deficit/debt situation.

    Going by 2007 numbers, I see the top 1%’s share of personal income is 17%. Let’s assume it has grown to 20% today. Then by the BEA’s most recent personal income figure (about $13 trillion), the top 1% are bringing in $2.6 trillion.

    Seems like a lot to work with, but remember we are talking marginal tax rates, so even if the marginal rates go up a lot, the net tax increases will be relatively small. Assuming we pull off a 5% net tax increase for the rich, we bring in an annual $130 billion a year. 10% doubles it to $260 billion.

    But we’re trying to close a $1.3 trillion (and possibly rising) deficit. Even if we raise taxes on the rich at the $260 billion level, we are talking about still having a $1 trillion+ deficit remaining.

    Much steeper tax increases, and we are probably looking at severe capital flight (heck, that might happen even at the 5% tax hike or lower levels). Look at what has happened in multinational corporations.

    Letting the Bush tax cuts expire, by the way, just brings in about $150 billion a year.

    Combine these and we get $400B+ a year from shaking down the rich. OK. That’s nice for starters…

    (As a side note, wonder if the stock market can really take losing the “privileged” capital gains position that it has had for a decade now. Trying to grab that $150 billion a year may result in the fragile stock market crashing, and thus less overall capital gains to tax.)

    I wouldn’t shed many tears if taxes are increased on the rich and the Bush tax cuts expire, but frankly, there is no one “single item” that can be focused on to right the ship. We need to cut just about everything across the board, even if we do raise taxes on the rich. I don’t see this being discussed. Each side thinks their sacred cow can be left unbutchered, if only the other side sacrifices theirs.

    I think a lot of the partisan theatrics have to be viewed in this context. There really is no solution, absent of extreme “austerity” + becoming a “high tax” country, or outright money-printing.

    I suspect we’ll see quite a bit of the latter.

  2. Admin, this is all “arithmetic”.

    First of all, you’re talking about INCOMES, and I’m talking about WEALTH. “INCOMES” are literally the “tip of the iceberg” for the ultra-wealthy.

    For the average billionaire, annual incomes represent somewhere around 1% of total wealth.

    If we simplify things, let’s suppose that for the “moderately affluent” that incomes represent 10% of total wealth, for the middle class incomes represent 50% of total wealth, and for the poor they represent 100% of total wealth (it’s not perfect but it’s close).

    It should be IMMEDIATELY obvious that if you have an INCOME taxation system, where the billionaire is only assessed taxes on 1% of his wealth, while the poor are assessed on 100% of their wealth, and the middle-class are assessed on 50% of their wealth that ALL THE WEALTH FLOWS INTO THE POCKETS OF BILLIONAIRES over time.

    Now here’s our “reality check” to verify this theory. Our SOVEREIGN governments are NET DEBTORS – to the tune of $10’s of TRILLIONS of dollars.

    WHO is holding the IOU’s on that $10’s of TRILLIONS in (hidden) wealth???? It sure ain’t the POOR or the MIDDLE-CLASS…

  3. OK, so add up all the notional WEALTH of all the billionaires in the US… tax 100% of it. You get a one-time crack at that. What does that achieve? A $500B reduction in the deficit? $1T? That’s still less than 1 year at the current burn rate.

    You see my point, I hope. Confiscation can’t possibly be the answer. The problem is the tilt of the power structure towards preserving existing wealth/power. That can’t be solved by empowering it further, even if it is putatively to “soak the rich”. Any nominal benefit will be eaten up by inflation of the cost structure, because the system simply does not balance.

  4. Admin, I’m talking $10’s of TRILLIONS and you’re talking $1/2 trillion??

    Don’t tell me you BELIEVE those supposed “lists” of “the world’s richest people”? How many ROTHSCHILDS do you see on that list?

    There is $10’s of TRILLIONS just in the IOU’s they are holding. Then there are the massive holdings of real estate and any/every other hard asset imaginable.

    And did I ever use the word “confiscate”? That’s how THOSE thieves operate. All I said was EXPOSE IT TO TAXATION for the first time in history.

    My proposal has ALWAYS been for a “flat wealth tax”. The wealthy have WHINED for DECADES that we need “a flat tax”. And I think it’s time they got what they asked for!

  5. Jeff,

    You are making the classic economic blunder that Hazlett warned us about 50 years ago. You are looking at the direct effects of taxation/confiscation of static wealth, but you are not examining the indirect effects.

    Case in point, when the US implemented a luxury tax in the 1990, it not only produced disappointing revenues, it destroyed the ship-building industry in the northeast. The tax was rescinded in 1993 due to the damage it was doing to the people who manufactured the “luxury” items.

    So, before proposing your across-the board wealth tax (seems like the estate tax already covers your flat wealth tax anyway), you might consider what damage the wealthy can do to our economy when the government, at your suggestion, eliminates their right to hold private property.

    Additionally, have you considered that the real estate tax is already a wealth tax, albeit at the local and state level?

  6. Jeff, anyone whose wealth you cannot even see, is not going to allow that wealth to be taxed ;)

    It’s nice to dream, I suppose. But I’d rather see *less* government, so their means of self-enrichment can be attacked at the source.

  7. Brainpowerinuse, no, no “blunder” with my calculation. You are talking about a CONSUMPTION tax.

    Just like “income taxes” DISCOURAGE us to increase our incomes, “consumption taxes” discourage us to consume.

    There are no “disincentives” of any kind associated with wealth taxation, in fact the OPPOSITE. With no INCOME taxes or CAPITAL GAINS taxes we are encouraged to MAXIMIZE incomes. With no consumption taxes, we are ALSO encouraged to consume.

    And for the VERY wealthy who are just HOARDING vast amounts of money, they are encouraged to PUT it to USE, or watch it SLOWLY be taxed away over time. A wealth taxation system has the greatest amounts of “carrots” and the least amount of “sticks”.

    Admin, fortunately INSURANCE information is very useful for helping us to identify some aspects of wealth, and banking records the remainder.

    As for not being “practical”, I offer the ONE alternative to SALVAGE our economies without complete economic implosion, and THEN the chaos looting which would follow.

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