The Fiscal Cliff

It’s amusing to see the media report our wise and prudent leaders in Washington have once again saved us from the dreaded “fiscal cliff”, and in honor of this great occasion a few words and charts are in order.

I say we went over the cliff long ago, arguably in 1971 when we abandoned the monetary discipline of gold, and to illustrate let’s look at a chart of the (now) $16.4 trillion dollar Federal debt. Just look at how it’s grown since 1971.

Federal Debt 16T

The rising parabolic arc of debt doesn’t look very cliff-like (it’s almost going straight up!) but what happens if we turn the chart upside down?

Federal Debt 16T flip

Okay, now that’s a cliff.

The sad reality is we’re past the point of no return and, despite all the debate and bluster, Washington knows it too. That’s why we only get compromises and no real action. Just imagine what would happen to GDP if the government stopped spending a trillion per year into the economy. Then imagine what would happen if, in addition to cutting a trillion in spending, they extracted a few billion more from the tax payers to actually make a principal payment on the debt. It would all be highly deflationary and if you invest the time to read Fed Chairman Ben Bernanke’s speech Deflation, Making Sure “It” Doesn’t Happen Here you’ll realize that deflation is the very last thing they want!

On a happier note however, readers of this blog know I’m an advocate of debt free money creation to solve the debt problem and sure enough, I’ve recently seen articles suggesting the United States Treasury issue debt free, trillion-dollar, platinum coins here, here, and here. While the tone of these articles are only half serious it’s wonderful to see the idea of debt free money creation entering the main stream and I’m encouraged by this quote from Gandhi:

“First they ignore you, then they ridicule you, then they fight you, and then you win.”

There are over 16 trillion reasons why our present debt-based monetary system must change. Hopefully, instead of humanity serving the needs of the monetary system (like we do now), a new monetary system will emerge that will serve the needs of humanity.

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