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12-21-2012, 01:32 PM   #1
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Our Christmas Gift from Washington: Recession and Unemployment

Hey it's mamby pamby tree hugging huffsters.....

The deficit reduction talks, with or without a fiscal cliff, will absolutely lead to a decline in the level of demand for American goods and services. About this there is no controversy whatsoever. Even under the most optimistic of scenarios, wherein the President and Congress agree on some compromise level of deficit reduction, we will see a one to two percentage point reduction in real GDP growth and an increase of around one million unemployed. If we fall off the fiscal cliff, costs will be roughly double those. This is the kind of gift we need to return as soon as possible.

Why on earth would Washington deliberately throw the US into yet another recession when we haven’t even recovered from the last one? They are doing so because of the so called long-term costs of the debt. They (both the Democrats and Republicans, albeit to different degrees) believe that unless we reduce the debt and deficit now, we will pay a price in the years to come, a price that outweighs the higher unemployment their actions will cause today. They are, however, dead wrong. Not only are their fears either completely unfounded or irrelevant given current circumstances, but trying to cut the deficit now would actually leave us in a situation where we would need an even larger one to extricate ourselves from the deep economic slump it will create.

To explain this, let me briefly review the long-run costs typically used to support the current efforts at deficit/debt reduction and show how each is much ado about nothing:

1. Higher debt levels raise the possibility of US default
Let’s get this one off the table right away. The US cannot possibly be forced to default on debt denominated in its own currency. This is a cold, hard fact, not a theory or conjecture. This should not be any part of the discussion whatsoever. I have a much longer blog post on that here:

It Is Impossible For The US To Default - Forbes

2. Debt burdens future generations
Not true. Government debt is a private sector asset and government deficits create private sector surpluses. Think about it this way: if there were only two people in the economy and one spent more than she earned, giving her a deficit, what must be true about the other? He must have earned more than he spent and thus has a surplus. Now replace “she” with “federal government” and “he” with “private sector” and you’ll see. Nor is there a day of reckoning when federal government debt must be reduced to zero. Thus, it will NOT be necessary to tax future generations in order to finance today’s deficit. Reducing the budget deficit reduces the private sector surplus and reducing debt destroys private sector assets.

3. Debt makes us slaves to foreign interests........... ECT.

There is no long-term gain from reducing the deficit right now, only short-term pain. Unfortunately, it appears that we all need to brace for impact. Obama and the Republicans are about to shoot down the recovery and let it crash on top of the American people, just in time for Christmas. They might even take a pot shot at Santa’s sleigh while they are at it
John T. Harvey, Contributor

I want to explain how things work, not what you should believe.

Last edited by jeffkrol; 12-21-2012 at 02:09 PM.
12-21-2012, 11:25 PM   #2
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