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Will The Obama Tax Cut Deal Save The Economy? NO!!

The American Dream
Sunday, December 19, 2010

All over Washington D.C., top Republicans and Obama administration officials are running around declaring that the tax cut deal that was just passed will save the U.S. economy. But is this even partially true? Of course not! Mostly, what the “tax cut deal” does is keep tax rates exactly where they already are. Now, many of us are extremely thankful that we will not be paying higher taxes, but the truth is that if these tax cuts were going to “save the economy” they would already be saving it. Yes, this tax cut deal will provide a minor short-term stimulus to the economy, but it will also add $858 billion (some say closer to $1 trillion) to the projected federal budget deficits over the next two years. You see, this tax cut deal contained “all candy and no spinach”. In other words, the tax cuts were not accompanied by corresponding spending cuts, and that is going to lead to big trouble in the long run.

Just think about it. In your own household, if you and your wife volunteered to take less pay from your employers and at the same time you went out and dramatically increased your spending, what would happen?

It would be a financial disaster of course.

Well, that is what the U.S. government is doing. They have decided that they are going to have tax cuts and they are going to significantly raise spending too.

That may be fine in a fantasy world where you can borrow an infinite amount of money at an interest rate that is next to zero, but in the real world that is a recipe for disaster.

Already the rest of the world has been showing signs that they are starting to lose confidence in U.S. Treasuries.  In fact, U.S. Treasury yields have spiked substantially over recent weeks.  The rest of the world was not amused at all by the “quantitative easing 2″ program initiated by the Federal Reserve in November, and now they are becoming quite concerned that we don’t seem to care much about controlling our rapidly expanding national debt at all.

As Zero Hedge recently pointed out, with all bond auctions done for the year we can calculate the final number for the U.S. national debt for the end of the year: $13,879,785,000,000.  That means that the amount of U.S. government debt held by the public increased by $1.568 trillion during the year.


So what is the debt increase going to be for 2011?

Will we actually hit the $2 trillion mark for the first time?

Will the total U.S. national debt be pushing towards 16 trillion dollars by this time next year?

Just think about how much of a mess this generation has made.  In 1980, the U.S. national debt was hovering around a trillion dollars and it was already considered a major national crisis.

Well, thirty years later the U.S. national debt is more than 13 times larger and our debt load continues to exponentially increase.

Is there any way that anyone can foresee this ending well?

We have gotten into a debt problem that threatens to not only plunge us into national bankruptcy but that also threatens to bring down the entire world financial system.

So does that mean the “tax cuts” are bad?


The truth is that the federal government already receives far, far, far more money than they should ever need.  Anything that starves the federal monster of cash is a good thing.

Also, many Americans are sick and tired of throwing their hard earned money down a financial black hole.  Personally, I would be very happy if the federal government cut my own personal taxes down to zero percent.  It is rather sickening to watch the government waste my money year after year after year.

If the government takes less of our money, that is a very good thing.

However, if the government takes less of our money but then racks up even bigger debts in our names and in the names of our children and grandchildren, that is a very bad thing.

Not that this “tax cut deal” is going to cut out taxes much….

*The various tax brackets are going to remain exactly where they were under the Bush tax cuts.

*The tax rates on capital gains and dividends are going to remain exactly where they were.

*There is going to be a bit of a Social Security tax holiday for two years, but many low income Americans were already receiving a Social Security tax holiday under previous legislation.

*The existing $1,000 child tax credit will be extended for two more years.

*The estate tax (or “death tax”) is going to actually be reinstituted for the very wealthy (5 million dollars and above).

*The HOPE college tuition tax credit will be retained.

*U.S. businesses will be able to immediately expense all business investments in 2011.

So is this really a “tax cut deal” or is it essentially “more of the same”?

If you guessed “more of the same” you are the winner!

The truth is that lowering taxes is not going to save the economy and raising taxes is not going to save the economy either.

We have reached a point where federal government finances have gotten so wildly out of control that they cannot be fixed under the current system.

Sadly, the truth is that the official government numbers, as horrible as they are, grossly understate the debt problem that we are now facing.

John Williams of Shadow Government Statistics has calculated that if the federal government would have used GAAP accounting standards to measure the federal budget deficit for 2009, it would have been approximately 8.8 trillion dollars.  In fact, John Williams is convinced that U.S. government debt is so wildly out of control that it is mathematically impossible for us to “grow” our way out of it….

The government’s finances not only are out of control, but the actual deficit is not containable.  Put into perspective, if the government were to raise taxes so as to seize 100% of all wages, salaries and corporate profits, it still would be showing an annual deficit using GAAP accounting on a consistent basis.  In like manner, given current revenues, if it stopped spending every penny (including defense and homeland security) other than for Social Security and Medicare obligations, the government still would be showing an annual deficit. Further, the U.S. has no potential way to grow out of this shortfall.

But the vast majority of Americans don’t want to hear the truth.  They just want to be told that some very smart people are busy working on “fixing” the problem.  They just want someone to tweak a few things so that we can all get back to enjoying the good times.

Well, that simply is not going to happen.

According to the Wall Street Journal, in order to repay maturing bonds and finance the massive budget deficit, the U.S. government will have to borrow 4.2 trillion dollars in 2011.

Considering that our national GDP is somewhere in the neighborhood of 14 trillion dollars, that is a big problem.

The truth is that we are getting to the point where we are running out of rich people and foreign nations to lend money to us.  That is one reason why the Federal Reserve has started monetizing U.S. debt.

Federal Reserve Chairman Ben Bernanke promised Congress that the Federal Reserve would never monetize the debt, but now that is exactly what is happening.

The rest of the world sees what is happening and they are starting to lose confidence in the U.S. dollar and in U.S. Treasuries.  In fact, many economists around the globe are openly talking about the impending “death of the dollar“.

The Ponzi scheme that the U.S. government is playing simply cannot go on forever.  At some point the house of cards is inevitably going to come down.

Do most Americans want to hear that?  No.  They don’t want to hear that things are going to eventually get much worse than they are now.  They don’t want to hear that we are in the midst of a horrific long-term economic decline.

What most Americans want is hope – even if it is manufactured.  And that is exactly what this “tax cut deal” is.

The Obama tax cut deal is not going to save the economy.  In fact, it is only going to make our long-term debt problems even worse.

But for the moment this tax cut deal will give millions of Americans false hope that things are going to get better.

So how far will false hope take us?

We’ll see.

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