Washington Squanders its Gift of Time

By: John Browne | Mon, Dec 31, 2012
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As the clock winds down on 2012, the Fiscal Cliff is all anyone seems capable of discussing. Right now it appears that some sort of narrow deal has just emerged that will include raising tax rates on family income over $450,000 a year, increasing the estate tax rate, extending unemployment benefits for one year, and delaying spending cuts. But the prospect of higher taxes and the great uncertainty that has surrounded this fiscal fiasco has been acting like sand in the gears of the complex but sputtering U.S. economy. If additional taxes are not matched by real cuts in government spending, the economically crippling tax increases will serve merely to increase the size and intrusive power of big government. In other words, the pain will yield no gain.

But the damage to the U.S. economy will result not so much from the actual cuts and tax increases that the Cliff would involve, but from blatant dereliction of duty on display in Washington which will diminish national prestige.

To some, a loss of reputation may seem to be an ephemeral and ultimately insignificant economic cost. However, the spectacle of American politicians failing to agree on budgets, spending limits, or any type of fiscal discipline can affect the credit rating of the U.S. Over the longer term, a major fall in the credit rating is likely to increase U.S. interest rates. This would add further to the pressure on U.S. debt and render the U.S. Treasury bond market as one of the greatest financial bear traps in history.

Even more threatening than the Fiscal Cliff is the far higher and steeper Entitlement Cliff, which dwarfs the Fiscal Cliff in almost every dimension. America's massive baby boom generation began entering retirement last year. As increasing numbers of workers retire over the next decade, significant strains will be placed on Social Security and Medicare, America's entitlement monoliths. It is no understatement to say that if the finances of these programs are not brought into balance, the United States will be brought to its knees financially. Yet both parties in Washington appear content to ignore these problems. A very modest proposal by Republicans to trim Social Security expenditures (by cravenly tinkering with inflation calculations) was withdrawn almost as soon as it was introduced.

But in truth, anything short of a comprehensive resolution of the Entitlement Cliff threatens to sap the economic prospects of the United States for generations to come. At present, however, the U.S. dollar, despite its inherent fatal flaws, continues to be perceived by many as the 'currency of refuge'. In contrast, the euro, although protected somewhat by central banks, does not enjoy the full status of an international reserve currency. Therefore, the Eurozone has been forced by the financial markets to jump off the cliff and endure economic austerity.

This privileged position has conferred on Washington the vital element of time to organize viable revisions to its entitlements. As a result, plans could be made to coordinate the restructuring and reduction of government spending, borrowing and taxation. A wise government could be looking to make an orderly descent from the top of the cliff, making provisions for solid footing and safety lines. But alas, this opportunity has been left unexplored.

Though a short-term fix may have been reached, the Entitlement Cliff still looms large and descending down this precipice could seal the fate of the U.S. dollar. As a result, the ability of U.S. politicians to deal with entitlement spending will have global economic consequences of the highest order.

The shockwaves of miscalculations if made by American politicians could reverberate around the world, affecting international financial markets and threatening the continued viability of fiat currencies.

 


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John Browne

Author: John Browne

John Browne, Senior Market Strategist
Euro Pacific Capital, Inc.

John Browne

John Browne is the Senior Economic Consultant for Euro Pacific Capital, Inc. Mr. Brown is a distinguished former member of Britain's Parliament who served on the Treasury Select Committee, as Chairman of the Conservative Small Business Committee, and as a close associate of then-Prime Minister Margaret Thatcher. Among his many notable assignments, John served as a principal advisor to Mrs. Thatcher's government on issues related to the Soviet Union, and was the first to convince Thatcher of the growing stature of then Agriculture Minister Mikhail Gorbachev. As a partial result of Brown's advocacy, Thatcher famously pronounced that Gorbachev was a man the West "could do business with." A graduate of the Royal Military Academy Sandhurst, Britain's version of West Point and retired British army major, John served as a pilot, parachutist, and communications specialist in the elite Grenadiers of the Royal Guard.

In addition to careers in British politics and the military, John has a significant background, spanning some 37 years, in finance and business. After graduating from the Harvard Business School, John joined the New York firm of Morgan Stanley & Co as an investment banker. He has also worked with such firms as Barclays Bank and Citigroup. During his career he has served on the boards of numerous banks and international corporations, with a special interest in venture capital. He is a frequent guest on CNBC's Kudlow & Co. and the former editor of NewsMax Media's Financial Intelligence Report and Moneynews.com. He holds FINRA series 7 & 63 licenses.

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