Thoughts on the fiscal cliff and the end of the Republic

[gwendally]

This wasn't called "the Bush era tax cuts expiring cliff".  That's because that was only one of the things hitting all at once.  It got the most attention, I think, but what made it a "cliff" was that there were so MANY fiscal problems all piling up into one big stumbling block

Comments

[bart_calendar]

The problem they are going to have trying to devalue the dollar is that there is no good alternative currency

[bart_calendar]

[tobor_1138]

Understandable. I'll be a rude awakening for them when, in the future, renouncing citizenship will come with garnishment of future wages to the motherland, as opposed to a one-time 90% confiscation today.

[jordan179]

Exactly how will the United States be able to enforce tax collection from former citizens living abroad?

[coercedbynutmeg]

I've been having a shit fit about #8 for about 3 years, and Husband and I were in a state of "laugh until we cry" about it two nights ago. Our emergency/vehicle replacement/housebuying fund has almost $100K in it, and over 2012 we averaged $40 per month in interest. It makes me want to SCREAM. In 2006-7 we were getting more per month in interest even though our account balance was far far lower. Now a million-dollar nest egg doesn't even kick off enough interest to pay the rent. Damn.

What happens to trust fund babies now?

[gwendally]

Trust fund babies whose trusts are constructed to kick off less than $250,000 a year remained unscathed, with a total top bracket of 15%. If they manage to keep their taxable income less than about $70K then their tax rate is 0%.

Sure is nice to have Obama on your side, isn't it?

[coercedbynutmeg]

That is ri-fucking-diculous. There needs to be a serious overhaul on taxing unearned income. I don't begrudge old retired people enough from their own investments to live on, but trust funds, inherited wealth, and the loopholes that make fund managers get paid in capital gains instead of regular wages are a bunch of horseshit. They should be taxed at least at ordinary rates (if not higher).

In the meantime, how do I get a trust?

[ford_prefect42]

You put money that you paid regular taxes on into a trust, then the trust pays you back over time. That's why it *isn't* ridiculous. Because the money is being taxed *again* on top of the taxes that were paid when the money was earned originally.

[kayjayuu]

Can I signal-boost this post? For one, I've never understood the AMT until you put it into plain terms. While I'm sure many on my flist will handwave and remain in denial, this information needs to be passed around.

[gwendally]

Yes, it's public. I may screen comments if they get personal, though.

[miss_manners]

But these reduced borrowing costs cannot continue forever, and at some point in the foreseeable future the fiscal mess will hit the monetary mess and debt service on the United States debt will pass 100% of our annual tax revenue.

Debt service and non-discretionary spending already do exceed 100% of tax receipts. If memory serves they now have for over a year.

At this point the Federal Gov't is insolvent. If the Fed wasn't buying over 80% of bonds we'd have a failed bond sale (they now hold over 90% of 10+ year obligations).

The Federal Gov't will default by 2020. Perhaps not on bonds but either on bonds or Medicare/Medicaid (I suspect the later by not doing doc fixes and having enough docs leave the system that while coverage is there it cannot be used and thus not be billed).

[crazyburro]

If the fed weren't buying bonds (think it was more like 50% last year) the federal government would be paying higher interest rates in the categories the fed is buying. It most likely wouldn't have a failed sale yet, since strangely people still consider treasuries "safe" (and hence a half trillion were still sold overseas in the last 12 months to October - http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt... )

[ford_prefect42]

for the record here, the fed often "buys" treasuries through intermediaries. Most notable and lamented in this regard is goldman sachs, but there are others. So the reported fed holdings of t-bills may not wholly represent reality.

[miss_manners]

In real terms, this is why Jimmy Carter's inflation led to capital investment in manufacturing going oversees; why pensions are no longer funded by companies; why retirees live almost entirely on social security now. When saving is punished capital isn't created and there's no benefit in saving your money to spend in old age; better to consume it now than see it eroded by inflation.

This may not succeed as well as hoped. In the late 70s the US had to issue Yen and Marc denominated bonds to have successful bond sales. The US people may not know that but people who buy Treasuries do.

I suspect the default won't be on bonds but entitlements when the crush comes.

I honestly don't think it will be rioting in the streets (more than we already have) or random bands of brigands doing home invasions (more than we already have). Here I disagree. Greek style riots will occur in gov't dependent neighborhoods like the ones I've lived in most of this century (and even now live across the street from...I'm on the gentrification boundary

[crazyburro]

There wasn't that much borrowing under the Carter administration so that it would make debt issuance difficult - Reagan ran partly on Carter's deficits, and then by 1983 they had tripled.

The Carter administration actively attempted to manage exchange rates, so the Carter bonds were used to stabilize the US$ (remember, there was relatively high inflation) by getting foreign investors. They were issued in SFr and D-marks, in a coordinated fashion with those central banks. They were not having trouble selling debt domestically and indeed the Carter administration's deficits were far lower (by about 3x) than the Reagan administration's.

(there are a bunch of sources for this - for example, see Henning, "Currencies and Politics in the United States, Germany, and Japan", pp 267-269, which can be found on google books - looks like the whole thing is available)