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What Fiscal Cliff? It’s a fiscal-crack-in-the-pavement.

There is an economic crisis out there, but it isn’t the Fiscal Cliff.

The best summary of the economics I’ve seen comes from Mark Steyn.

The bipartisan Super Committee of Super Friends was supposed to find $1.2 trillion dollars of deficit reduction by last Thanksgiving, or plucky little America would wind up trussed like a turkey and carved up by “automatic sequestration.”

Sequestration sounds like castration, only more so: It would chop off everything in sight. It would be so savage in its dismemberment of poor helpless America that the Congressional Budget Office estimates that over the course of a decade the sequestration cuts would reduce the federal debt by $153 billion. Sorry, I meant to put on my Dr. Evil voice for that: ONE HUNDRED AND FIFTY THREE BILLION DOLLARS!!! Which is about what the United States government currently borrows every month. No sane person could willingly countenance brutally saving a month’s worth of debt over the course of a decade.

I suppose it’s possible to take this recurring melodrama seriously, but there’s no reason to. The problem facing the United States government is that it spends over a trillion dollars a year that it doesn’t have.

I never thought the Australian economy would look good in comparison but figure that we’ve got a population smaller than California and we’re spread across a land almost as big as the whole US. We are the first world quarry next door to China, Japan, and Korea. Sunny, lucky, and fast asleep at the wheel.

Mark Steyn points out that everyone is spending more than they are getting, but the US is better at it.

Generally speaking, functioning societies make good-faith efforts to raise what they spend, subject to fluctuations in economic fortune: Government spending in Australia is 33.1 percent of GDP, and tax revenues are 27.1 percent. Likewise, government spending in Norway is 46.4 percent and revenues are 41 percent — a shortfall but in the ballpark. Government spending in the United States is 42.2 percent, but revenues are 24 percent — the widest spending/taxing gulf in any major economy.

Big western governments are all drunken spenders, pork barreling their way to electoral bliss by quietly printing the money and loudly pretending they might reach a surplus.

Australia had a bonanza treasure-chest to start with (plus a $20bn surplus) and record terms of trade for the last few years. We could have been saving it up big time, with almost no effort. Instead, in a boom, even the worlds greatest treasurer needs more than five years to Ruin Us.

Go Wayne Swan.

The real crisis is hidden under the fake ones

Bread and circuses anyone? The US Official federal debt is $16 trillion dollars, and if that’s not a big enough drama for Hollywood, the blockbuster is unfunded future liabilities which are somewhere between 80 to 200 trillion dollars, and increasing by two to four “$T” per year. The money coming in to “pay” those bills is about $2.5T a year.  There is no arithmetic that makes that work.

If cutting debt by a tenth of a trillion over ten years is a cliff, then balancing the US accounts is a Galactic Black Hole.

Will the crowd realize the debts are too large to be repaid? The question is not “will the West default”, but what type of default will it be?

The only math that rescues us from beyond the event horizon is one where the numbers themselves are transmogrified. “One” becomes “one tenth”, or “one-to-the-minus-ten”. The transform called inflation finds the payments and wipes out the debt. It steals wealth from the people who save. It even steals from investors who make profits, but whose profit-margin is less than the inflation rate. So that’s how we’re going to default.

The fiscal cliff is a circus

The clowns will prance,  acrobats will backflip, the crowd will cheer dutifully, and the world will be spectacularly rescued from a 6 inch free-fall over a microscopic cliff.

Only a few near the fire exit will notice the approaching black hole.

And are governments going to cut real spending? Voters know the bankers were bailed out in 2008 and have been told the fundamentals are strong. They will want to be bailed out too. How did that austerity plan work out for Greece or London? Only a few people died.

When big-spending put us into the poo, the answer is not to spend bigger. But when faced with a hangover, it’s all to human to reach for the hair-of-the-dog. Welcome to the world of economic cirrhosis.

It could be worse, you could be in the EU

The US may be broke but it’s exhibiting its great strengths of  being more open and transparent. The Europeans are in an even more dire financial mess, though it’s hard to get hold of the figures to prove it beyond reasonable doubt (their ratio of total debt to GDP is much higher, and their GDPs are growing more slowly, so it looks grim). Their banking system is cloaked in secrecy, but almost certainly in much worse shape than the US banks (the US banks went into the GFC with leverage ratios of 30:1, the European banks with 50:1). But the Euro is a socialist paradise, leading the world in replacing national democratic governments with big bureaucratic solutions, right? So let’s not carp on about them: remember, when in doubt, ask: “what would Tony Jones do?”

UPDATE: Cheifio, as always, has insight – he does not want “a deal”. Read his take on the Fiscal Scare, dealing with bullies, the Bums Rush, The False Choice, the Threat.  See also his comment below at #15.

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