Take one fiscal cliff with water an hour before bedtime; you’ll feel better in the morning

The media seems obsessed with the coming fiscal cliff. Even TV shows are running count down clocks showing how short the time is until ‘we fall off the cliff’. As if that’s a bad thing!

The fiscal cliff is about the effect of a number of laws that (if unchanged) will result in tax increases, spending cuts, and a reduction of around 50% in the US budget deficit beginning in 2013. The Congressional Budget Office (CBO) estimates the sudden reduction in borrowed spending will likely lead to a recession in early 2013 with a strong recovery after 2013.

This effect, which is sometimes called the expiration of the Bush tax cuts, is largely the result of the Budget Control Act of 2011, a bipartisan compromise between Republicans and Democrats. It was intended as a sort of sword of Damocles, hanging over the public body to force Congress to do something to solve the USA’s binge public spending habit.

The fiscal cliff is bemoaned by those interest groups who are feeding at the public trough. This would include all manner of Americans (47%, as Mr. Romney so kindly pointed out). The military, seniors, welfare, education, and many others would be affected.

But….if you’ve had the opportunity to interact with Federal government programs you almost certainly have encountered programs which have enormous bloat and waste associated with them. I’ve seen government programs that perform ‘negative work’ – we would be better off if they were eliminated.

Special interest groups bemoan that falling off the cliff would drastically reduce the military capability of the United States. What isn’t said is that the USA spends 43% of the entire world’s military spending. China’s figure is 7%, with both Russia and the UK around 3%. Is there any waste here?

If you believe that it’s OK to spend more than you earn, year after year, then you probably should hope that politicians come to some agreement on avoiding the fiscal cliff. However if you think that government should (more or less) balance its books, then I suggest that you might look at the looming cliff as a GOOD thing.

The fiscal cliff debate is about going back to the higher tax rates that were in effect during the Clinton era. Those times, economically speaking, were pretty awesome. That era benefitted from the emergence of the Internet. But if and when we go over the cliff, I believe that the US economy will benefit from something even bigger.

First of all the US dollar will get much stronger as investors around the world realize that the US is going to be running a much smaller budget deficit. A stronger dollar will result in lower prices for imported goods, reducing or eliminating inflation. The fundamental economic force driving the Clinton era was the emergence of Federal surpluses instead of deficits.

Secondly, as the Paris-based International Energy Agency (IEA) has predicted, it appears that the US will emerge as the world’s number 1 energy producer over the next ten years. The IEA has predicted that the fracking revolution in this country will cause the US to surpass Russia’s gas output and Saudi Arabia’s oil output by the end of the decade. The elimination of the expenditures that now go overseas for imported oil and oil products will almost totally eliminate the trade deficit that the US currently runs.

To summarize, deficit spending reduction and the trade deficit moving from a minus to even or plus will cause the dollar to strengthen enormously, enriching all Americans. The energy revolution that is coming will create hundreds of thousands of new jobs for Americans. The removal of the huge tax that Americans pay now for foreign energy will result in that money being spent in the USA. This will create hundreds of thousands of new jobs. The strong dollar will pull in investment from all over the world, lowering interest rates naturally, rather than artificially as through programs like the Fed’s QE3. All of this will create a new economic boom from 2015 on.

Today the stock and economic markets are sluggish. The sooner we eliminate the uncertainty of what’s coming, the sooner we can make the adjustment to a less bloated government and get on with the next boom. We just have to suck it in and go on a diet for a while. The rest of the cards will fall into place through the engine of free enterprise capitalism. Short term pain, huge long term gain. Fiscal cliff, I love you.