Our Fiscal Cliff

In December, the American people face a critical combination of tax and budget problems that threaten to flatten the economy.

Last year Congress agreed to find cost savings that would reduce the federal budget. If they failed to do so, the law would require extensive, mandatory budget cuts to both social programs and defense spending. Typical of politicians, they failed to find the cost savings and now these mandatory cuts will go into effect in December.

At the same time, Congress passed a law to temporarily reduce the Social Security tax rate by two percent. On January 1st this law expires and taxes on earnings will go up.

If that is not enough, also on January 1st, the present tax rates, passed under President Bush, expire, and income taxes will increase to the levels that were in effect prior to 2004 when the current rates were enacted. That means a 50 percent increase in the tax rate for the lowest earners.

Have you had enough yet? Too bad because I am not finished. In addition to all of this, Congress has failed to pass a budget for this year, which began on October 1st. I will lay this one on the Senate Democrats who have absolutely refused to bring any budget up for a vote in three years, as their political strategy to keep spending high but the Republicans in the House are not blameless. They keep going along with temporary spending measures.

Do you need more? Yes, you do. Since there is no budget and no effort to bring spending under control, the government will once again “borrow” at least another trillion dollars this year. I say “borrow” in quotes because it is not enough any longer to just sell our Treasury bonds to the Chinese. We issue the bonds and then make our Federal Reserve buy them, so we are paying for our own debt. Of course, the Federal Reserve does not have money, so they print it. Printing money is like adding water to soup. You may have more soup but it tastes like water. In the same way, when the Fed prints money it dilutes the value of the money that is out in the economy. The money that is out in the economy is your money.   It is your bank accounts and house value, everything that you own and everything that you owe.  Everything costs more because your money is worth less. Take a look at gas prices and you will see this principle in action. The Federal Reserve calls this quantitative easing.

We are at the fiscal cliff but we are not the first nation to go over the edge. Take a lesson in recent history from, of all places, Nazi Germany. They did the same thing and they could only save their economy by conquering other nations with resources. Read the passage below.

In his seminal work Justice at Nuremberg, Robert Conot conveyed the following state of Nazi economics as described in the testimony of Hjalmar Schacht, Economics Minister and head of the Reichsbank (kind of a combination of Geithner and Bernanke).

“On January 7, 1939, Schacht (Nazi Finance Minister) told Hitler he was sitting atop an inflationary volcano that was about to explode the economy. During the first five years of the Nazi regime the amount of currency in circulation had increased from 3.6 to 5.3 billion marks. Although consumer goods production fell far short of keeping pace, rigid price controls, sometimes enforced by the SA, and covert manipulation that sacrificed quality for quantity kept the rise in prices under control. But the money required to finance the Anschluss, the Sudeten acquisition, and the preparation for war resulted in a near doubling of money in circulation, from 5.3 billion to 10.2 billion marks, in ten months.”

Beginning in March, and through the period of the Austrian and Sudetenland invasion and the actions connected therewith, the wage and price structure totally fell apart, Schacht stated. “The overemployment of the economy was accompanied by scarcity of materials and labor and by lowering of quality. At the same time the relative production of consumer goods for the daily needs lagged. The excess of orders and pressure for quick production have caused the failure of all planning by the authorities and force the manufacturers to corner material and labor which has caused an excessive price and wage racket because of the shortage of materials and labor. Especially in the field of daily requirements for the home and clothing, the lack of supply and above all the decline of quality is most evident. Children’s clothes, workers’ clothes and so forth, which formerly lasted for years now last for only months, but cost the same or even more than the previous good merchandise. The unlimited growth of government expenditures nullifies every attempt for an orderly budget and brings the government’s finances to the verge of bankruptcy despite a tremendous increase in taxes. Due to Treasury deficits running into billions, the Minister of Finance during the last months was continually placed in the position to declare insolvency or to cover the deficit in the Reich finances through inflationary means of using the printing press. Gold or foreign exchange reserves of the Reichsbank are extinct. The unfavorable balance of imports over exports is growing rapidly. The reserves, created through the annexation of Austria and the requisitioning of foreign securities and domestic gold coins are exhausted.”

“Schacht and the directors of the Reichsbank were of the opinion that “it is now time to put a stop to it.” The budget must be brought into balance. The treasury, which had run out of funds to pay current obligations and government employees, must stop printing money ad infinitum. The Reichsbank’s independence to control the money supply must be restored.”

All of the passages in italics are from Mr. Conot. I did not provide the emphasis. But see the parallels to our situation.

Out of control (Nazi) government spending greatly increased the money supply. This made the acquisition of materials more expensive and business reacted by substituting cheaper quality materials in their products. Now look at our government’s quantitative easing, which is increasing our money supply. Remember when your new car was mostly steel? How much of it is now plastic? When was the last time that you bought a 16 ounce can of soup in the grocery store and the contents were actually 16 ounces? The label probably says something like 12 ounces now. This is inflation as much as a price increase is inflation.

Schacht told the Nuremberg investigators that the uncontrolled (Nazi) government spending brought the government to the brink of bankruptcy “despite tremendous tax increases”. Our Federal spending is uncontrolled and we are facing bankruptcy and tremendous tax increases now.

We have given our representatives the last year off from work to pursue their real jobs, which is to get re-elected. They now have six weeks to solve our nation’s problems…even less with the upcoming holidays and the fact that the tax increases have already been programmed into every business’s payroll systems. We need them to now actually earn the generous salaries that we pay them and resolve our problems now. If not, we all suffer.

Next time: steps to solve our problem. Or, in the words of V.I Lenin, shto delets (the title of his seminal work, What is to be Done?). We take our inspiration from one bad tyrant to another because there is not much difference between them and the fiscal tyranny that our government is perpetrating on us.

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