2012 US Elections – 6 Billion spent for “Status Quo” – Economic Consequences

Four More Years
Four More Years

Obama’s an accomplished individual. Smart, cool, in control. But his standout quality is probably his ability to create euphoria. Create it, sustain it, ride it. Watch the people celebrating with him at his victory rally in Chicago and you could easily believe that the USA had just won a war or beaten a recession.

Unfortunately for Obama, reality doesn’t have much time for speeches. The economy was dire going into the election. Coming out of it, you can almost hear the engine failing.

Let’s take the first indicator of failure – the stock market. The market mood darkened in September and October, then dropped abruptly as news of Obama’s victory sank in. I don’t actually think that’s because Wall Street hates Obama. I think it’s more that as the election hoopla dies away, investors realise how little they can expect from the government, how bad the economic situation really is. And, for that matter, how bad the political situation is. The House remains solidly Republican, the Senate comfortably Democrat – and the whole divisive status quo guaranteeing gridlock for another four years.

Over the next few weeks, you’re going to hear a lot about the fiscal cliff. In January 2013, a whole lot of things happen together. George W. Bush’s tax cuts expire. A payroll credit expires too. Some automatic spending cuts are imposed across the board. (These last cuts, of course, aren’t thanks to some outbreak of sanity in Washington, but a bad compromise cobbled together in the course of 2011’s debt ceiling crisis.)

The fiscal cliff is huge, and real. Its impact is potentially around 5% of American GDP. By contrast, George Osborne’s fiscal tightening amounts to little more than 1% a year. If you want to get your head round what a comparable tightening would imply in the British context, then just imagine that the basic rate of tax increases by 10 pence in the pound overnight. Or that spending in the NHS is halved, again overnight.

No economy is strong enough to take that kind of punishment. The British economy is struggling to come out of a double-dip recession even with its own weak-as-milk pace of tightening – and, indeed, I think a triple-dip recession is highly probable. The fundamentals of the US economy are in some ways better than ours (less reliance on the finance sector, less proximity to European travails) but a 5% cut in economic demand overnight? The result will be crippling.

Although the US jobless rate has improved slightly in recent months, that’s only because dispirited workers have left the jobs market altogether. The US employment rate is a horror story. Piling a massive fiscal shop on top of those weak fundamentals, and you’re going to see a massive rise in unemployment. (If you look at U6 unemployment data for the US it’s hovering close to 15%, a shocking stat.)

You might think that the solution is obvious. If the fiscal cliff is so bad, then simply decrease the slope. Go for a slow-but-sure Osborne-style tightening so the budget deficit floats gently lower. And sure enough, there are plenty of economists, living comfortably in their ivory towers, who suggest just such a solution.

But that solution is not available. The IMF – hardly a sensationalist organisation – says that the elimination of America’s long run fiscal gap requires both a 35% increase in all taxes and a 35% cut in all entitlements. The fiscal gap is heinous, but it’s only the first step. It doesn’t even take America where it needs to go.

It gets worse. If fiscal policy can’t save America, how about monetary policy? Alas, and just like in Britain, monetary policy is all out of gas. Interest rates can’t go any lower. quantitative easing (QE) has reached its limits. (And, in any case, QE is little more than a way to rescue Wall Street at the cost of inflation for the rest of us.) The worst thing that could happen to America is that Ben Bernanke, the unelected Chairman of the Federal Reserve, tries to rescue things. The best thing that could happen is that he goes on holiday for four years, having left his Blackberry in the office.

The Princeton Professors Economic Experiment
The Princeton Professors Economic Experiment

In short, America’s problems are profound and there is no way to deal with them except one that imposes huge short-term costs on the economy and the people. I don’t think it’ll get quite as bad as it has done in Greece – the US economy has a lot, lot more about it than that – but most of the pain still lies ahead.

And in matters of finance, everything is circular. So the government needs to raise taxes and slash spending to sort out its debt problems. The result: a huge reduction in demand and heavy job losses. The result: countless homeowners being unable to service their mortgages and a huge rise in ‘jingle mail’, as homeowners send their house keys to the foreclosing banks. The result: an already weakened banking system sinking further under a tide of ill-advised boom era lending. And of course, as all this happens, the economy will shrink, which means that the US government has to slash spending yet further in a desperate effort to keep its deficit reduction efforts on track.

These words might seem apocalyptic, but I’ve been saying these things for a while. (My book, Planet Ponzi, has the whole story, and it’s out in paperback now.) What’s more, we’ve already seen disaster scenarios such as these come true in well-managed countries of the developed West. Spain had a much lower debt to GDP ratio than the US. It had better supervised banks and less casino-banking. But we all know the state that Spain is in: a death-spiral that even Germany may not be able to help with.

And the signs are everywhere in America. Go-go stocks have lost their lustre. Facebook trades at little more than half its IPO price. Apple, for so long a do-no-wrong stock market darling, is down more than 20% from its recent highs. Businesses are hoarding cash, because they don’t dare invest it, don’t dare return it to shareholders.

I don’t suppose Mitt Romney thinks of it like this, but you could argue that the 2012 election was a heck of a good one to lose. America has outrun financial reality for decades now. Debt-fuelled, government-funded. The future bought on the never-never.

But the debts are falling due. Reality is knocking at the door. And the fiscal cliff is only the start.

16 comments on “2012 US Elections – 6 Billion spent for “Status Quo” – Economic Consequences
  1. Roger Yates says:

    Can anyone explain to me why we all can’t tell the creditors to shove it? Fiscal cliff Schmiscal cliff? Shove the banks off it……

  2. anthony says:

    Well i guess that is it the dollar will collapse probably in the spring. I don’t think the American people or the Greek people made any bad or ridiculous bets. Let the bankers come up with the solution to the problem they alone created, and stop them from wanting people who are already stressed to pull them out again. I don’t get it we bailed out the too big to fails and they are just hoarding the money for themselves with no help to countries. So if the dollar looses its status then you must have gold or silver or you will have no money.
    The whole deal sounds fraudulent, and purposeful.

  3. MrJones says:

    @Roger Yates. I agree. You can count on one hand those who state this. Michael Hudson for one. For me that’s the only solution.

  4. jarrollin says:

    @Roger Yates Not that I’m out to disagree, or defend the banks… but I assume we’re all so inextricably connected to these big banks now that we’d all go over the cliff. One thing the derivatives are used for is the currency wars. Let the big banks that fight these wars slide, and there goes the USD. I think letting the banks go means havoc.

    But I really don’t know the answer.

  5. sean says:

    Max / Stacey,
    Hope you can interview Ben Gilroy of the new DirectdemoracyIreland.ie Party launched in Dublin yesterday. Launch Video: http://youtu.be/4lHUWzDryRY

  6. bproman says:

    zero plus zero equals two zeros.

  7. Sir Halibut says:

    he’s a “Change AGENT” doncha know?

    change YOU can believe in….

    nevermind what the change actually is….. just BELIEVE in it!

    (Neuro Linguistic Programming)

  8. Flopot says:

    Which is why a serious secession movement is a game changer, i.e. a threat by the people to secede unless their useless lawmakers and President actually side with the people against the corporations.

  9. Robert Mockan says:

    “The economy was dire going into the election. Coming out of it, you can almost hear the engine failing.”

    LOL! Actually the engine had already failed before the election. What we have now is the car in a ditch, and the engine in pieces spread out on the road behind it where it fell out of the engine compartment. Time to take that clunker to the scrap yard and get it crushed!

  10. Johnny says:

    The South can secede. GO. We are NOT stopping you.

    No blood this time, not even tears, just here’s the door.

    We’re tired of your hate and anti science and Rape Republicans and TeaBags in Washington destroying OUR country.

    Good-the-F-Bye!

  11. The Beat says:

    Well written, PP. Obama is a good orator, something that has been lacking in the US for a long time. We no longer elect someone to run America, we elect someone who will speak eloquently of the path forged by our owners. Bush was a dickhead, but unfortunately connected with a lot of dickheads in society. Now we at least get to smile while we are shoved down the cesspool of modern rape and pillage.

  12. ricecake says:

    Well China do spend any money on their political campaign at all.

    Saved them lots of money right?

    No! China had spent just as much and may be even more on their nationwide 维稳, meaning Stability Maintenance. (suppressing large social unrest. It occurs on daily basis up to 500 cases.

  13. Jayme says:

    “…35% increase in all taxes and a 35% cut in all entitlements.”

    What exactly does the IMF consider ‘entitlement’? It seems to me that the IMF has been mooching off entitlements since they were formed. If they have earned their living on providing economic advice to countries around the world and the world economy is imploding, I’d say either their advice wasn’t heeded, or it was useless. Either way, the IMF should be defunded as less than worthless.

    Peter Schiff & Marc Faber: The Real Fiscal Cliff Is Dollar Crisis! Buy Gold! Buy Silver! Own Real Things!!! We Have So Much Manipulation. It’s Money Printing Versus Weaker Corporate Earnings!
    http://beforeitsnews.com/economics-and-politics/2012/11/peter-schiff-marc-faber-the-real-fiscal-cliff-is-dollar-crisis-buy-gold-buy-silver-own-real-things-we-have-so-much-manipulation-its-money-printing-versus-weaker-corporate-earnin-2446484.html

  14. :Dman says:

    Change. Change? We don’t need his stinking strange ChangE!

    Fact: the word ‘change’ is a buzzword for the socialist path to kommunism. From their docs, not a supposition.

  15. thinker says:

    1] Military storm white house and pick up the Fasci for a year period.
    2] Block all airports and round up the CEOs and Executives at the Banks that get the big bonuses and leave the small fry execs in charge as they run the real day to day operations anyway.
    3] Track down all of these bankers’ assets and confiscate them. Distribute the funds raised to keep the economy going for necessities in the meantime.
    4] Segregate real assets from derivatives and leveraged ‘financial products’. Destroy the paper and tell all investors worldwide that they were stupid for having invested in toxic rubbish and trusting people in suits and ties in Wall Street and London….let their own Govt’s do their own bailouts to prop up any ‘Too Big To Fails’ on their own soil if they want to.
    5] Everyone remove their membership with World Bank and IMF and the UN and defund these bureaucracies and Federal Bureaucracies. Start again with States and Councils…Pay your tax directly to them and strip any Fed IRS goons naked and get them to walk back to Washington without clothes if they come near your state. Same with the TSA, but perhaps give them a little body cavity search before sending them back to see how they like it.
    6] Put the bankers and anyone implicated with colluding with them on trial and give them the death penalty…they killed 100’s of times as many honest people through induced suicide.
    7] Place the Fasci back on the wall and START AGAIN.

    If this doesn’t happen then BILLIONS WILL DIE and despots will run the world.
    If this does happen then only a BILLION WILL DIE and we get another chance.
    Either way, we are about to see a holocaust on this planet that NOBODY who is left will ever forget. All cooked up in the Square-Mile in London and Wall Street. The Globe is made of glass and the people ‘managing’ it are hurling hammers around for fun, pretty obvious now that AT BEST they are unqualified, AT WORST they are the highest level of dangerous criminal the world has EVER seen.

    Will the above fix happen? History says that it won’t and that we are about to see a New World Fascist Disorder of epic proportions where a very small minority manipulate a moderate minority who are empowered Martially to destroy the majority. The Brown Shirts are coming, and they know no national boundaries this time. Prepare Mentally, Spiritually, and as much as you can Physically…stop listening to liars on TV, they are crazy or paid off, these are the people who are committed to go down with the sinking ship because they know no other way, and they want you to join them. Skuttle the liferafts and leave these crazies to their status quo. To be part of the Status Quo now is to be contemplating suicide.

    See you in the post-apocalyptic world friend! if I/we make it! Good luck!

  16. SAO says:

    Change I’m afraid of. Not sure this puppet knows how to change his underwear.

Access The Max Keiser Podcast
Weekly Downloads, live Q & A Session and exclusive video posts from Max and Stacy

Subscribe Learn More
Buy Gold Online
Watch the latest Keiser Reports: