The deficit spending binge can only lead to severe currency devaluation, conflict over ever more scarce resources or both
Reuters report that efforts to bring the Republicans and Democrats together on the infamous “fiscal cliff” negotiations will continue up to the deadline of today (31st December). The “cliff” refers to the automatic tax increases and spending cuts hastily put together 18 months ago as an agreement to allow the “spending ceiling” to be raised. The US has a chronic over-spending problem and its running rate of budget deficit is about $1.2 trillion per year. The fiscal cliff was designed to implement automatic spending cuts and tax rises which would reduce the deficit in half during 2013.
“[The Republicans] say that their biggest priority is making sure that we deal with the deficit in a serious way,” President Obama told Sunday’s edition of NBC’s Meet the Press. “But the way they’re behaving is that their only priority is making sure that tax breaks for the wealthiest Americans are protected.”
“Americans elected President Obama to lead, not cast blame,” responded John Boehner, Republican speaker of the House of Representatives. “The president’s comments are ironic, as a recurring theme of our negotiations was his unwillingness to agree to anything that would require him to stand up to his own party.”
The argument for doing a deal hinges on expectations that significant cuts and tax increases now will send the economy back into recession. There is dubious evidence in support of this as the constant stream of overspending has hardly improved the US economy, which remains in the doldrums. Others argue that going over the cliff is a step in the right direction. The so called “Keynesian” imperative of spending in difficult times, even to the extent of running up budget deficits, runs counter to what Keynes originally advocated of short term deficits following successful periods of surplus budgets (chance would be a fine thing today). The deep structural deficits the US is now maintaining show no signs of being seriously tackled, and unfunded liabilities including Medicare, Medicaid, veterans support and other pensions threaten to explode the multi trillion deficit to over 60 or 70 trillion dollars (more than the whole world’s economy).
Whilst commentators focus on the short term likelihood of the US spending cuts leading the rest of the world into prolonged recession, of greater concern should be the Lemming like copying of this failed deficit spending binge which the major economies of the world are also following. The likely outcomes of these policies are severe currency devaluation, open conflict (war) over ever more scarce resources or both.