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Is There No Return From the Fiscal Cliff?

The mounting debt problem has become a serious issue for the United States due to a decade of irresponsible spending, lack of revenue and assuming too much of corporate and private sector debt. Corporate bailouts, economic stimulus packages, reckless spending, and fighting two unpaid wars have caused the U.S. federal deficit to spiral out of control, reaching a current ballooned level of $16.358 trillion. With an estimated U.S. population of 314 million, each citizen’s share of the debt problem is an estimated $52,082.00.

By the government spending an average of $3.85 billion per day since September 2007, elected officials have put the country in a very precarious fiscal situation. There are going to be serious problems down the road if the U.S. continues to spend like this in the future, as it is simply unsustainable. The White House estimates that the government’s tab for servicing the debt will top $700 billion a year in 2019, up from $202 billion this year, and that’s if the annual budget deficit shrinks. More doubtful and perhaps more objective economists believe the interest may be much higher in five years, especially if the United States gets further downgraded by credit rating agencies. This worry has increased over the last couple of weeks as fiscal cliff negotiations have stalled, with little hope there will be a deal by year-end.

The cost of capital is a major concern due to the threat of interest rates going higher, which will be propelled if ratings agencies downgrade the United States due to the fiscal cliff. If a long-term plausible solution is not put in place by both Democrats and Republicans, with spending controls and entitlement programs revamped, then the credit agencies are expected to downgrade the country’s credit ratings. This will have a negative effect on the United States as the cost to borrow cash will increase. Eventually, most believe that the U.S. will run into serious confidence issues, making Treasury securities less desirable as investors question the country’s strong reputation of paying back its debts.

The government deficit bubble has already begun to form in many nations around the world, and the U.S. is not immune to this growing problem. The United States’ two biggest holders of Treasury Securities are China and Japan According to recent Treasury International Capital (TIC) data, China now holds $1.161 trillion in Treasury securities, which is less than they held in January of this year of $1.166 trillion. Japan has for the most part picked up China’s slack as it now holds $1.134 trillion, from this past January when the country held $1.083 trillion. There are serious fiscal problems forming and the fiscal cliff is another difficult example of gridlock in Washington. Most are aware that federal spending curbs and revenue strategies must be put in place, but no one has been able to actually create a plan with support.

This deficit has been one of the more transparent bubbles in the market due to the media coverage and the political theater in Washington. The Federal Reserve has been adding to the nation’s woes by pumping massive amounts of liquidity into the financial system ever since the real estate crisis. A printing press buys time and is a short-term solution to boost the economy, but once you start going down the path of leverage and debt, it is very difficult to stop. Now that the U.S. is well on this undesirable path, what will this mean for American citizens? How will their lives be impacted by the irresponsibility of the federal government borrowing from future generations to pay current bills?

The most immediate impact will be felt in tax reform as eventually the government will have to raise the rates on all citizens. This is inevitable, as there is simply no way to solve the deficit problem without having all income levels paying a little more. The current administration has not asked this of its citizens yet, due to the high level of unemployment and fragility of the economy.

Cuts to the budget will have to be made in areas such as Medicare, Social Security and other entitlement programs that need to be revised. American citizens who depend on income through these programs will suffer and will have to adjust their living standards appropriately.  Federal spending cuts will also hurt many companies who receive subsidies from the government to perform certain duties that are deemed beneficial for the nation. Everyone from low income families to wealthy individuals will be negatively affected by the spending habits of the nation. So far the central bank and U.S. elected officials have been able to push back the day of reckoning, but that day is quickly approaching.

The most profound and atrocious ramification of the current deficit is that we will be passing on a horrible fiscal situation to the next generation to solve. They will have to suffer and work through austerity measures and weak economic times due to our fiscal irresponsibility. Young professionals coming out of college are already the victim of a difficult economy as more graduates are living at home now more than ever. In ten to fifteen years, the next generation will have to figure out a way to recover from the country’s mounting deficit.

We can only hope by that time it is not too late.

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