Chairman of the Federal Reserve Ben Bernanke coined the term “fiscal cliff” in 2012 and Robert Rubin, ¹ who served under Clinton’s two Administrations as Secretary of State, and was a Wall Street man explained that “fiscal cliff” referred to spending cuts and tax hikes that are being discussed in accordance with the Simpson-Bowles formula.  The bi-partisan Simpson-Bowles committee² on finance recommended that the ratio should be at least $ 2.00 of spending cuts for every $ 1.00 of revenue increase.

         However, Bernanke’s should have used “cliff” earlier, in 2008, when President Obama encountered a collapse of the banking sector, Wall Street, a housing crisis, and the demise of the motor industry, an American flagship.  Bernanke and Obama’s Treasury Secretary Timothy Geithner solved this unprecedented crisis by printing money, so that in each of the last four years the deficit exceeded $1 trillion.  The Treasury pumped money into the economy three times, with   Quantitative Easing (QE) 1, QE 2, and QE 3.

         Official figures on federal deficits are deceptive when the Bush2 deficits are compared with Obama’s; the former fought unfunded wars so that expenditures on wars are not in the budget, while Obama insisted on transparency in the accounting system, though his too was limited.

         Some critics suggest that “cliff” is not the best word since the effects of belt-tightening will be felt gradually.  “Fiscal slope” would be a better title.  ABC News seems fixated on taxes hence, “taxmageddon” for fiscal cliff.³   Whatever the interpretation, “cliff” suggests that the situation is desperate and the Fed can no longer print money.  “The stakes are high” warns Bernanke.

         Masters⁴ suggests that the recent era starts with Bush-era tax cuts, post 9/11 spending on wars, TARP bailouts, the Recovery Act, new entitlements, new policies pursued during the financial crisis and the subsequent downturn.

         During this era, Americans in all walks of life have been spending as if there were no tomorrow.  One indication is the rise of the national debt.

The Congress-set national debt ceiling of $14.295 trillion was reached on May 16, 2012.  With juggling, the nation could manage within this target until August 2.  The ceiling is currently at $16.2 trillion: public-held debt was $11.35 trillion and intra-governmental debt was $4.85 trillion.  Majority leader in the Senate Harry Reid wants the ceiling to be raised to $18 trillion, a sign of desperation.  Since 1962, the ceiling has been raised 74 times.  Treasury Secretary Timothy Geithner suggests the elimination of a ceiling - a dangerous and unacceptable idea.⁵

To pay for this debt, the US has to borrow from financial institutions and nations that have excess cash.  Foreign governments hold $4.4 trillion worth of debt in the form of financial instruments. China is the largest foreign creditor ($1.16tr). Next comes Japan ($1.11tr), oil producing countries hold $261 billion, and Brazil, fourth largest, holds $242 billion.⁶   Some sectors, like the Pentagon, do not think that borrowing is a disadvantage, while others feel that it is gross liability.

Pollock⁷ warns us that a “substantial amount of federal borrowing is not counted in the budget, like Agency Debt.  Examples of such debt include Fannie Mae, Freddie Mac, and other off-budget agencies, which rely on US debt. All this debt influences interest rates for these securities.

Every annual deficit adds to the national debt.  The annual deficit of $1.1 trillion is unsustainable.  The fiscal cliff seeks to reduce the deficit to $641b from $1.1 trillion in 2012, a decline of $487 b.  A reduction of the national debt is laudable, but this amount is not enough.

In addition, almost all states are bankrupt and find difficulty in paying the extended unemployment benefits that Obama legislated.  These “shadow bailouts” for just 32 states amount to $37.8 billion: California ($6.9 b), Michigan ($ 3.9 b), and New York ($ 3.2 b) are the largest three that needed help.⁸

Households also carry a lot of debt.  By July 2012, household debt amounted to $11.28 trillion, while the delinquency rate was 9%.  The breakdown is as follows: mortgages: $463 b; student loans, $914 b; and, credit cards and consumer credit balances equaled $672 b.⁹

National debt, annual deficits, bankruptcies of all 50 states, and household debt all lead Bernanke to claim that the “stakes are high.”  Mediation between the two parties has to be a priority.  Gridlock, as in the previous four years, is not in the nation’s interest. 

The US needs savings of $ 2 trillion annually so that the national debt can be halved by the end of the Obama era.  Half of it should come from the military and the other half from tax revenues and spending cuts. This target may seem impossible but it is achievable even though it might lead to a depression in the short run.  The very thought that the US has this target in mind will restore confidence in the global finance markets.  Obviously those laid off should have some kind of security net.  Let us examine what solutions have been proposed.