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

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.

Yikes!

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?

No.

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.

  • William

    The Bowles/Simpson debt/deficit commission recommendations, if adopted, which they were NOT, would have knocked about $4 TRILLION off the projected deficits over the next 10 years……an average of about $400 Billion/year. The annual deficits over these next 10 years would still have been BAD, just $400 Billion less each year. Obummer’s caving to the Repukes on extending the Bush tax cuts will add $429 BILLION a year to the projected deficits over the next two years. WE ARE DOOMED! There is no way to tax our way out of this mess; there is no way to stimulate our way out; there is no way to grow our way out, there is NO way for ANYTHING, except DEFAULT and the loss of the dollar’s position as the world’s reserve currency. The US system of government is BROKEN! Got gold, silver, long shelf life food, firearms and ammo??? If you do, I would not tell anyone. Keep a LOW profile……..

  • Tim

    Michael, you are a blogging machine. :)

    With annual budget deficits greater than $1 trillion for the past two fiscal years, we very well could see a $2 trillion deficit this year. That’s mind-boggling. This is going to end very badly….and very soon.

    • Admin

      Tim:

      Thanks for the compliment :)

      Michael

  • zack

    My prediction is that in about 6 months, unemployment will be above 10% but we’ll be hearing how much worse it would have been WITHOUT this new stimulus. Sound familiar? That’s what they’re saying about the first stimulus boondoggle from early 2009.

    Our company Path to Asia http://www.pathtoasia.com/jobs/ helps Americans move to Asia for jobs and prosperity. Visit our site for details.

  • mondobeyondo

    Barack Obama can’t save the economy.
    Sarah Palin can’t save the economy.
    Ron Paul can’t save the economy.
    Ben Bernanke… haha, he’s doing his best to WRECK the economy!

    We are approaching $14 trillion in debt. Fourteen trillion dollars.

    That’s more than the amount of currency in the entire world.

    There is no possible way it could be paid off. But just to provide a light at the end of the tunnel, I think I’ll contribute one dollar to the federal debt.

    The 13,999,999,999,999 of the rest of you, please do the same!

  • A Dodgy Bloke

    Anybody who thinks this will save the Republic is a delusional moron. Like it or not taxes will have to go up (On everybody) and spending will have to be cut, and cut to the bone. This will boost the defect to two Trillion (God that number is just mind boggling) or pretty damn close. We have trillions in unfounded liabilities, and have you looked to see how deep in hock your state is in? This money has to come from somewhere and not just the rich and large corporations (Look to see where Halliburton is based and look to see who’s leaving).
    The time for stupidity is over!!!!!

  • mondobeyondo

    Well ya know… they say the only certain facts in life are death and taxes.

    You’re going to die. It might be tomorrow, 3 years from now, or September 28th, 2032. But you are going to die.

    Taxes, well… it didn’t have to be this way. If we had maintained an ethical government which was truly faithful to what the Constitution and Founding Fathers laid out, we would be in such better shape.

    Our money was originally based on gold and silver. It was that way for many, many years. Kind of a deterrent for presidents and congresses to wage wars against little helpless nations with pipsqueak dictators. World wars, yeah. We’ll throw in the kitchen sink, and then some, to fight those. But notice how many little skirmishes that the U.S. was involved in, in the early 1900′s.

    These days, our money is backed by… nothing. The Fed can print money to its heart’s content. And there is no real financial deterrent for military action against little bitty nations. Think Korea, Vietnam, Grenada, Bosnia, Iraq, Afghanistan…

    We are ruined. Don’t believe it? Tell the Fed to manufacture all the gold and silver bars they want. What do you mean, they can’t do it??

  • Gary

    I simply want to vomit with the rich getting more tax cuts. Can’t anyone see that this does nothing to stimulate/create jobs? They have had tax breaks for the last 10 years. Where are the jobs? There needs to be demand which could be accomplished by taxing the rich-heavily-and the corporations who are sitting on record profits, and spread the wealth around.

  • hognutz

    Nothing is going to save the economy at this point. All we can do is hang on tight as it is going to be a hell of a ride.

    Also has anyone noticed there has not been any serious effort to cut Government size/spending? We have a bloated , tyrannic group of people in D.C. whose sole purpose it seems is to hinder any hope we have with regulations. D.C. has killed the goose that laid the golden egg…….

  • justhanginon in Charlotte

    And with all that said, Obama and the democrans STILL screwed the 99ers!!!!!!! To give an extension to some unemployed and leave out the ones hurting most is reprenhensible.

    He should be ashamed!

    Time will tell if this so-called “compromise” is for the betterment of ALL the American people. And it will soon .

  • mondobeyondo

    Tax cuts aren’t going to work. For one thing, the debt is so huge, the government will need to tax everyone every last dime they have.

    And it still won’t be enough.

    The magic wand doesn’t work anymore. Cut taxes 100 percent across the board for every single economic group. Happy happy, joy joy!

    Not gonna matter. Just a few steps further towards the abyss. Sorry to be so pessimistic (I’m an optimistic person by nature, I really am!!)

    But would you rather hear the truth, or a lie that sounds good?

  • http://pathtoasia.com Rhea

    Another burden to carry… The financial system as a whole is already at its worst and the government has already known about this, even before the Lehman announced its bankruptcy. The problem is they have just taken it for granted and is confident that they can use consumer’s money/consumer credit to increase its fake assets. To top it all, the American government does not have the political will to be honest with the American people about our financial condition. And so effects are pouring in and is passed on to us, working majority.
    We help Americans find jobs and prosperity in Asia. Visit http://www.pathtoasia.com/jobs/ for details.

  • lostinmissouri

    Why worry about the debt being paid off? When is the last time you heard a Congressman or Senator worried about paying off the debt? You don’t anymore, because we are not going to pay it off.

    Default is our only option. Hit the reset button and start this game all over again. It is not like America is the only country that will default. All will…worldwide.

    With default, comes a new currency and a new tax system…hopefully one that makes sense.

    Let’s get it on……I for one am sick of this zombie economics…..just saying

  • BiBi

    How come no one EVER mentions the kids? If the adults can’t make it, what the hell are the kids going to do? “They will find themselves homeless” [Jefferson] wasn’t said just for the sake of talking. Hey Admin, please address the dire future of today’s school children. What the hell are they to do? You said in an article that 85% of college students are moving home. So where does that leave schoolchildren? How will generations of people who have no future, no way of paying taxes or even being able to pay rent or buy food survive? All I see for the future is chaos, pure chaos….

  • Sithicus

    Well Gary…you should know that it’s the rich that create jobs… they take the risk, invest THEIR OWN money, start companies, hire people, produce goods/provide services…. and as the result they make more money. Or go bust.
    So what does poor people make? Except more children that become next generation of poor people.
    In other words – if I open – lets say – dental surgery, either by investing my own hard earned money or asking bank for a loan – I’ll rent/buy a surgery, buy chairs and all equipment, hire dentists, menager, nurses, receptionist (and other staff) – I expect at the end of the day/month/year after wages/materials/lab bills/and of course bank loan have been paid that I’ll profit from my bussiness. And socialist like Garry would tax me so I would have the same income as a worthless bum like Garry?