By Craig R. Smith
1. FISCAL CLIFF 'DEAL' IS NOT A FIX - This agreement has no cuts, no growth, no jobs and $330B in new spending. 77.1% of Americans will be burdened with a tax increase as the Bush-era two-year moratorium on payroll taxes expired, causing Social Security taxes to effectively rise 2% across the board. For the average family earning $50k per year that equates to at least a $1,000 increase in taxes, in direct violation of Obama's repeated promise to only tax those earning over $250k/year.
2. 'TAX THE RICH' STRATEGY WILL NOT WORK - Under this proposal, capital gains taxes are raised from 15% to 20%. Add on the 3.8% Obamacare surcharge and the tax rate on investments is now at 23.8%. Estate taxes will maintain their current position on the first $5M for individual estates and $10M on family estates, but all estates above that threshold will now have an increase from 35-40%. Obama's original plan was to cap estates at $1 million and raise the tax rate to 55%(!) on any amount above that.
FIVE WAYS TO FIX AMERICA'S BROKEN DEBT to GDP RATIO
1. Increasing Economic Growth - The U.S. economy could grow its way out of this black hole of debt if our economic growth (GDP) increased from $15T a year to $16-20T. The best way to do so would be to create jobs and expand the economy, leading to real growth. But inflation is the simplest way because it quickly creates artificial growth. For example if inflation jumped from 3% to 10% per year, GDP would then rise from $15T to $16.6T, without adding jobs or cutting spending.
2. Fiscal Austerity - If government could cut spending similar to Greek model we could bring debt down even with slow growth.
3. Default or Restructuring - With a government mandated restructuring of long-term debt for both private and public sectors, we could postpone solving the problem by kicking the can down the road. Example; moving a 30-year mortgage to a 50-year would bring payments down, without seeing a spike in interest rates and inflation.
4. A Surprise Burst of Inflation - If gov decided to mandate removal of deposit guarantees they could force capital into the markets as investors would no longer be allowed to sit on money in banks, etc. This sudden increase in the 'velocity of money' could cause a dramatic rise in consumer inflation rates.
5. Financial Repression w/ Steadily Rising Inflation - This is most likely option, as explained in "The Great Debasement". This 'frog in the kettle' approach would allow politicians to refrain from making the neccesary spending cuts needed in Social Security - the electric 'third rail' of politics. With Bernanke and Geithner at the helm, they can quietly crush the middle class, retirees and future generations -- all at the same time by continuing unlimited 'QE' (money printing).
Conclusion: In the near term, London Telegraph International Economics Editor, Ambrose Evans-Pritchard sees $2,000 an ounce gold in 2013. In a private meeting today I outlined why we could see $6,000 an ounce gold prices over the next five years, regardless of which of the five paths our leaders decide to follow.