The Fiscal Cliff Means Nothing Over the Long Term

By Ray Pinard | December 26, 2012

This article is being written before a resolution to the “fiscal cliff” is announced for one simple reason. Regardless of the “resolution” to the short-term “cliff” issue, it is merely another patch on what appears to be a dismal future for individuals and business.

To solve any problem you must have the desire, motivation, and the will to act. We don’t have this in Washington. What is expedient politically rules the day, not what is right for our country. Any business managed like Washington would have filed bankruptcy 30 years ago and everyone would have been fired. Why do we keep reelecting these people?

We have $16 trillion in debt on the federal balance sheet. We have about $100 trillion in unfunded liabilities that sit in tiny footnote on the federal balance sheet. That’s $116 trillion as of December 25, 2012. The federal government takes in about $2.3-2.4 trillion annually. Let’s use the higher number, $2.4 trillion. This means the debt to income ratio of the federal government is about 48:1.

Over the past few weeks I conducted an informal survey on debt. What I learned is in general, families cannot carry a debt ratio of much more than 3:1. For businesses, a business must generate free cash flow in excess of debt service and capital investments if it is to generate cash for current operations and growth.

The only thing that is keeping the U.S. afloat at this time is low interest rates. The Federal reserve is keeping rates low by printing money in a down economy for one reason, if interest rates were to rise the interest component of the federal budget would explode, accelerating inflation and financial calamity.

By the end of 2016 it is expected we will add about $6 trillion to the federal debt and $50 trillion to unfunded liabilities. Add this $56 trillion to the $116 trillion mentioned above, and we get $172 trillion of debt. Let’s say federal revenues increase 20% over this same period, to $2.9 trillion. The resulting debt to income ratio in 2012 is 59:1. Oops! Wrong direction.

To do my part, I wrote to three of my Congressional representatives last week with my “E-Z Budget Solution” to the federal budget deficit. (You’ve got to have a catchy name for a bill in Washington). One Senator responded with a form letter. My other Senator I did not write to because it would be a waste of time. One Congressman’s Web site instructed me to call my senator because he is closing shop. The only person to respond was my district Congressman who called me three times to thank me for my email and discuss the contents and related matters.

E-Z Budget Solution

In summary here is the plan I suggested to my Congressman:

  1. A bill is passed in the House that includes the following, and not much more.
    1. The upper two tax rates remain as is. This satisfies President Obama’s requirement that upper income earners pay more than the lower brackets.
    2. The bottom three tax rates are reduced by 10%. i.e. 25% goes to 22.5%. This satisfies President Obama’s call for tax reductions for the lower brackets.
    3. Real federal spending is reduced at two times the rate of inflation, ongoing. If inflation for 2012 is 2%, the next federal budget, FY 2014, must be reduced 4% from the 2013 budget. This is real spending reduction.
    4. There will be no use of continuing resolutions to finance the government. Shut down the government if necessary. We will save money out of the gate.
  2. The House passes the bill and sends it to the Senate where Harry Reid (and President Obama, I’m sure) will decide whether or not to bring it to the Senate floor for a vote.
  3. Now the burden is on Mr. Reid and President Obama.

Sweet and simple. The bill would take about half a page by the time they put a title on it.

What if there’s no agreement

If Congress cannot agree to this plan, let’s go over the cliff. At least more people will be paying into the system, and real budget cuts will be forced.

I’m not being partisan here. I will be the first to say Republicans are as responsible for the position we are in. The problem is neither side has the desire, motivation, and will to act. It’s not politically expedient. In the meantime, Rome burns.

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