The inability of the American government to a pass a budget bill exemplifies how inefficient and dysfunctional their system of government truly is. And it is unfortunate for us as Canadian’s to sit by and passively watch the demise of our greatest trading partner. Responses to American’s going over this “fiscal cliff” have been twofold. One side, including the views of some analysts and rating agencies are claiming that a nose dive over the cliff leading to 600 billion dollars’ worth of automatic spending cuts and complemented with tax increases for all earners will send the US immediately into recession. Extreme estimates are for GDP to contract by as much as four percent. The other side of the coin views the cliff as over-hyped, for a potential deal to smooth spending cuts and avoid tax increases to a struggling middle class is still possible for early in 2013. Further to this, an entitled president will have the ability to put forth a budget with limited opposition from a defeated Republican congress.
So, despite the warnings from Fitch, Moody’s, and Standard and Poor’s of the imminent danger of plunging over a metaphorical cliff, the real question regarding the American’s approach to putting forth a budget deal and attempting to address how to finance the future liabilities of major entitlement programs like health care and Social Security is, should the impasse of the American government really come as that big of a surprise?
The answer is no.
We do not even have to delve that far back in time to see that a lot of these budget deals or bills involving government financing do not actually occur until the 11th hour. It was as recently as August of 2011 that the Budget Control Act was drawn up to increase the US debt ceiling. And it was August the 2nd, the exact day that non-partisan Congressional Budget Office had earlier estimated the US’s would reach its borrowing limit, that the bill was passed. It is unfortunate that with only the pressure of time there is accomplishment; however, the word accomplishment is over ambitious as America’s solutions to their fiscal problems leave much to be desired.
Debt has been the ongoing issue for a number of years, and unless we are in crises people seem oblivious to the reality of it. It was as recent as October that the IMF, Bank of International Settlements, and the Congressional Budget Office in the US warned of the increasing present value of America’s future liabilities.
Back to budget debates, initially there was a common misconception involving America’s debt ceiling that it was a debate over the size of government. Simply put though, the money had already been spent. The debt limit needed to be increased in order to avoid defaulting on payments already issued by their government. This was not a debate for bigger government; in reality, it was already that big. Same too with what is expected to come to fruition with America’s entitlement programs. Medicare, Medicaid, and Social Security are increasing financial burdens. They were designed to provide support in correspondence with the levels they are currently contributed too.
That is why the American system of government is broken and remains broken. They are unable to decide upon how to finance their country, and in what direction they want to lead it. Until they do, the allocation to real assets like, gold, real estate, or other tangible assets are the only thing that provides protection against the pall of debt casted over the global market place.