Fiscal Cliff = Y2K?

All this tiresome talk about the fiscal cliff is a non-event. It reminds me of all the drama over Y2K. Y2K was the Year 2000 computer problem also known as the Y2K problem, the Millennium bug, the Y2K bug, or simply Y2K. This was when computers all over the world were supposedly going to go haywire. This was because of the practice of abbreviating a four digit year to two digits in all of the computer programming. I woke up the morning of January 1st 2000, and turned on my computer just fine. I did online banking just fine, and surfed the Internet and there were no downed websites, etc. It was a non-event, so is this supposed fiscal cliff.

I am in good company.

Warren Buffet agrees and says there should be no concern and any effect will be mild. More on that here. I quote from a CNN article, “Buffett shrugged off the Congressional Budget Office’s warnings that failure to address the fiscal cliff by Dec. 31 could lead to a recession. ‘We have a very resilient economy,’ he said.”

If we have a recession it will be because we were due for one anyway. It won’t be due to the ceasing of a small slice of spending by the federal government. It is as if everyone forgot that small business and private job creation are the main engines of growth in the economy. You would think that government really creates wealth the way people are fearing the fiscal cliff. People are confusing cause and effect, which I find is common. I believe the fiscal cliff is mostly a media creation.

We have a massive economy

We have a $14 trillion economy, with $1+ trillion in annual deficits. Cutting government spending by $110 billion, which is 10% of the annual deficit, is hardly going to be cause for recession and massive alarm. We can use some trimming of the fat anyway. So if we go over this alleged fiscal cliff, then bring on the $110 billion in spending cuts I say!

Ratings downgrade

I hear that some of the ratings agencies are considering a downgrade of the U.S. debt rating. This is nonsense. If they do, which they likely will, the fiscal cliff is simply a pretext for doing so. The U.S. should have had its debt downgraded many years ago. This will  be another confusion of cause and effect. I believe the fiscal cliff will be a political cover for the ratings agencies to do what they have wanted to do for a long time.

Conclusion

Unfortunately, the fiscal cliff isn’t our only problem. At some point in the first quarter, we will again hit the debt ceiling, which is the same issue that disturbed the markets in the summer of 2011. The larger issue is the absurd amount of debt we carry, and the fact that our entitlement programs are unsupportable. So if we have a recession in the near future, it will be the economy’s way of telling us that the government carries too much debt and is crowding out private investment and growth. It will not be because there was a very small forced amount of spending reduction by our government.