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Wednesday, January 9, 2013

The Formula Makes The Debt Ceiling Debate Meaningless

Confusion and uncertainty will remerge as the headlines focus on the debt ceiling debate over the coming weeks.

If politicians use the debt ceiling to contain big government, already anemic economic growth will implode rather quickly. We have talked about this for years both here and on, infinite liquidity in terms of fiscal and monetary policy are no longer options but rather necessities. Failure support the market with both translates to economic suicide for the West.

Failure to raise the debt ceiling in the coming months means failure to pay interest on past debt and international default. The Chinese and Japanese both showing a tendency to play ball with the US (cooperate with their own agenda) won’t forgo interest payments on existing debt without extreme compensation. Failure to appease means the old economic game as ended; this means immediate monetary and economic consequences that even the American public will recognize.

For those that believe raising taxes can right America’s economic ship, please consider the following:

Jim’s formula describes how raising taxes generates consequences that reduce economic growth.  Slowing economic growth, in turn, lowers income and the taxes collected on it over time. This dynamic, negative feedback loop is the reason why total revenues as a percentage of gross domestic product (TRGDPR) have only twice exceeded 5% since 1921.  These brief episodes are circled green in the chart below.

Total revenues as a % of GDP (TOGDPR), however, have exceeded 5% on numerous occasions for extended periods. Spending money to gain the popular support of the people has been used since the birth of human civilization and explains why the structural gap between spending and revenues (red box - chart) will not disappear without serious reforms and economic consequences.

Chart:   Total Revenues and Outlays As A % of GDP (TGDPR & TOGDPR) and Averages Since 1921 (TRGDPRAVG & TOGDPRAVG)

Headline:  U.S. Tax Bonanza May Be Tapped Out

Windfall (wĭnd'fôl,): an unexpected, unearned, or sudden gain or advantage.

All the talk about the fiscal cliff and the inadequacy of the last-minute deal to avert it obscures one fact: It probably provided the government with tens of billions of dollars in unexpected tax receipts.

The bad news: This bonanza didn't come free. It may have robbed the Treasury Department of significant future revenue. Its daily reports may soon begin to make that clear.

Source: more


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