What should we do IF we go over the fiscal cliff?

Fifty Four Forty or Fight
Tippecanoe and Tyler Too.
A chicken in every pot.
If it Ain't Broke Don't Fix it.
Perdicaris Alive or Raisuli Dead!
Remember the Maine.
Lafayette we are here.
No Taxation without Representation.
.....

People came up with these slogans for reasons and whoever invented the term fiscal cliff had some media talent for sure!

Its about an meaningless as any other slogan, so take your pick about meaningless lines drawn in non-existent sand.

Quote: Wizard

The vast majority of spending is in the form of entitlements, namely Social Security and Medicare.

The best way to cut these is to phase in different benefit options for incoming people rather than cut people off who are currently on it.

But you can only do that with agreement and planning that it has to be done.

Essentially, you have to start boiling the frog before it even gets in the pot. You don't even want him to be around to know what it is going to get. Or something like that.

Quote: Wizard

Thanks. That was a good post. I'd be interested to hear you expand on the point above. So, you're saying that before we can print a dollar we have to borrow it from somebody. If so, why?

It is my understand we owe Japan and China each about $1.1 trillion. What would happen if we printed two $1.1 trillion dollar bills and gave them each one. That would wipe out 2.2 trillion in debt immediately, wouldn't it? Don't we already do that to a lesser extent with "monetary easing"?

This is one of those “Ask AZD the time and he will explain how a clock works” answers, but bear with me. To explain it we must first look at how a central bank works, how the Fed works, and what would happen if we printed 2 $1MMMM bills, assuming Mr. Burns didn’t steal them before delivery…….

PART ONE---JUST WHAT ON EARTH IS CENTRAL BANKING?

Picture the USA as one self-contained village with about 100,000 people and gold is the initial means of trade, and in fact there is a small mine nearby producing more gold all of the time. The ultimate supply of everything is finite except that food is grown and things are manufactured (eg: no more land can be created but a new oil well can be drilled, etc. just like life.) But gold is a pain to carry and a bigger pain to measure and make change for. So people begin putting their gold in a “gold bank” that issues slips of paper stating how much gold is on deposit. The “gold bank” is privately owned.

Eventually the bank owner realizes some of the gold slips will end up lost or destroyed and there is no way everyone will come and ask for all their gold at once. So they issue more slips than they have gold in the vault. They loan this money out to pawnbrokers in the village so they can do business, charging a fee for the use of the money, let’s call this fee “interest.”

So in year one they loan Rick the Pawnbroker, and some of his competitors, 10% more money than was around the year before. Because of this, prices rise in the village as Rick’s clients buy more of all kinds of things from beer to clothes to land. The pub owner, seeing a good thing, raises beer prices and some other prices go up as more money chases the same number of goods.
At the end of the year the “gold bank” collects all the interest and principal from Rick. They collect 11% of the money supply because Rick has to pay them 10% interest. The next year the pub owners have have a terrible year because the villagers have less money to buy the same goods. One pub almost goes out of business.

Oscar, the village mayor, sees what has happened and tells the gold bank they cannot do this anymore. It is too disruptive. He tells the bank they may issue loans, but they may not issue so many new or call so many back that it causes disruption. The bank is to check prices on everything weekly and add or call loans as the prices go up or down. The $1 pint of beer should cost about $1 five years from now, assuming no outside forces such as a grain shortage cause the problem. In fact, if grain is going short, the gold bank should loan money to the bank the farmers use so they can till more land.
In return, the government will officially make the “gold slips” the legal tender everyone uses for official business. The government even asks to be a client, borrowing money in May for taxes that are paid in October, after the harvest.

So the “gold bank” is now chartered as a “central bank,” and is free to print slips at-will. The government makes sure they do the job well, but the mayor cannot simply demand slips be printed, for if he does the price stability will be no more.
Next: PART II—The Fed and the feds, why we cannot just print our way out (legally)

Quote: Face

And it's just so damn sexy ;)

If you say so. It's one of my all-time favorites. Certainly the nicest plane built around a gun, or the only one ;)

Quote:

I count 2 sidewinders, 2xAGM 65s, 4x500lb bombs, two rocket pods, probably 2,000x20mm cannon rounds, and what I assume is a FLIR pod on the outmost left wing. Mmmmm, firepower

If they'd made a follow-up version, there'd be no need to waste a pilon on avionics.

And the Sidewinders, I don't know. Do you want to dog-fight on a Warthog?

PART II—The Fed and the feds, why we cannot just print our way out (legally)
For round numbers lets say we own Japan and China $1 Trillion each. Know who we owe more to? The Fed! The Fed holds $2 Trillion of Treasury Debt. This is pure “printed money.” Lets go back to the village example to see how this worked.

So Mayor Oscar sees the economy is slow and decides to stimulate it a little bit, and he doesn’t care that it will destroy the price stability that is needed. City council says he can borrow up to $5MM of gold notes at any one time to meet operating needs. (assume a debt-free city) He will use $4MM to do the project and goes to the private banks and even Rick for a loan. The best they can syndicate is $2MM. So Oscar calls the gold bank and tells them to print him up another $2MM. Boom, he is done!

The next year he wants to borrow more. Rick and the bankers see where this is leading and walk to the gold bank to redeem. As they do, the gold reserves start to fall. Others also want to redeem. The owner of the gold bank calls Oscar and informs them at this rate the vaults will soon be bare because there is a multiple of 10 times notes to gold! Oscar tells the world that they can no longer get gold for their notes, but the notes are still the means of exchange. Additionally, he tells the head of the gold bank that instead of just stable prices, they are to loan enough money to others to keep most people working.

The effect of this is “stable” prices mean yearly increases of 3-5% and more and more money will be printed.

Meanwhile. Oscar still owes the townspeople $2MM which they want now. But Oscar still does not own the bank, his credit is at its max. To pay Rick and his friends back he must ask city council to allow him to borrow more, then he can demand they print him the money to pay the others back.

Next—PART III, where this leaves us today.

Quote: Wizard

What would happen if we printed two $1.1 trillion dollar bills and gave them each one.

Nigeria did that. Tried to pay its foreign debt with bills not even useful for toilet paper.

End the war on drugs? What you gonna do with all the drug cops and drug courts and drug counselors and probation officers?

End entitlements? Heck, people already think of social security as something they will receive when they are 65, not something they will receive only if they would otherwise be destitute. They feel they've earned their social security. Thats what entitlements means.
You can change it for them but remember... they VOTE!!

END medical research into life extension.... or else people will have to go pay off their own debts!

Remember, ICELAND did it right. They let their government fall and they let the banks fail but rescued the people. Wiped out all the bankers completely.

Quote: Nareed

If you say so.

I do =) It's my all time favorite warplane

Quote: Nareed

And the Sidewinders, I don't know. Do you want to dog-fight on a Warthog?

Certainly not, and vs a fighter jet, the fighter's AIM-120s would likely take out the A-10 15 miles outside of the Sidewinder's range (provided the A-10 was flying high enough for radar lock). BUT, those Sidewinders would make nice work of any attack or support choppers the A-10 would contact flying at 800 feet. And what is an attack chopper if not a flying tank? =)

(Sorry for the derail =p)

PART III, where this leaves us today.
So now we get to where this leaves the USA now. $17 Trillion in debt. We owe a lot to a few places, though. $1 Trillion each to Japan and China. $2 Trillion to the Fed. Some amount to Social Security, and lots to a few other nations. Why not just print the money? Why not just print it for some creditors? Lots of reasons.
First, $17 Trillion is more than the USA GDP. Prices would go by a factor of who knows how much. All of that money has to go somewhere. And it would go somewhere fast as everyone from central bankers to bored bloggers would know that the $1 they have now will buy far fewer goods tomorrow, next week, next month, and next year. Some people would invest in assets, but even staples down to toilet paper would be scooped up since, “it doesn’t go bad and if I hold this cash I will get less in the future.”
Shelves would go bare. People would stop working because there would be no goods to buy. People that make goods will not ship them because opposite the consumer, they will get *more* next month than this month.
Then, the US Government would still need to borrow, but it would not be able to. Once they did this once, who would trust they never would again? And even if we only did it for some creditors, the others would dump their holdings. International trade would soon be reduced to barter as the dollar is the currency of trade. No other nation has the might to support the international system.
In summary, the Fed is a bank. Not retail, better capitalized than most, able to create money, but a bank. The US Government borrows form it just like anyone else. So the debt limit still applies.

Quote: Fleastiff

END medical research into life extension.... or else people will have to go pay off their own debts!

Have heard the theory that our population is afflicted with old age diseases, whereas you might never experienced some of these in the past. Don't know if this chart is correct but it's nice looking. : )