Captain Rick’s FISCAL CLIFF course 101 . . . Lesson 2: What is the Fiscal Cliff? + The Math of how grave Americas debt problem is!

Posted: December 5, 2012 in America, American Debt Crisis, Economy, Fiscal Cliff, Fiscal Cliff Course 101, U.S. Debt Crisis, United States
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Captain Rick: The term “Fiscal Cliff” is a newly coined term that represents the effect of a number of laws that become effective in January 2013 that will cause $600 billion in spending cuts and tax increases, meant to reduce the U.S. deficit beginning in 2013. The deficit (the negative difference between what the government receives in revenue and what it spends) is expected to be reduced about 50% in 2013. That’s a good start, but lots more effort is needed to get America back on track to a balanced budget, so that America’s monumental debt is not just “kicked like a can down the road” for our younger generations to manage.
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America is currently spending $1.1 trillion more each year than it receives in revenue. This continues to increase the U.S. national debt, that stands at a staggering $16.2 trillion. America’s debt is financed by other countries like China and Japan. Interest on the national debt is $259 billion per year … an alarming 16% of the U.S. GDP … growing at a reckless rate of speed. Each year the foreign debt holders own a larger hunk of America.
The “Fiscal Cliff” is a “baby step”, but an important one, towards curbing the growing fiscal catastrophe that will face America’s future generations.
America’s fiscal problems need to be addressed now, while the American dollar is still recognized by world investors as a strong currency. The value of the dollar will continue to degrade over the next few years if this fiscal crisis is not addressed appropriately. If not, at some point the American Dollar will no longer be recognized as a strong currency. When that day comes, America will have no more “cards left to pull out of the hat”. It will be too late to save America from economic destruction. I believe the “Fiscal Cliff” needs to happen as current law provides, without interference from legislators. America can handle the “Fiscal Cliff”. The economy might slow a bit, but that is far better than the ugly economic consequences that will assuredly result if this serious fiscal problem is not addressed now.
FISCAL CLIFF Course 101 EXTRA CREDIT: The economic math in support of the “Fiscal Cliff”
Many economists pick 20% of GDP to be a respectable point to balance America’s budget for revenue and spending. I agree!
Current U.S. annual fiscal situation:
Value of the economy (GDP): $15.5 Trillion
Revenue: $2.4 trillion (15.5% of GDP…needs to be raised 4.5% to 20% of GDP to balance the budget and be equal to expenses)
Expenses: $3.5 trillion (22.6% of GDP…needs to be lowered 2.6% to 20% ($403 billion) to balance to budget and be equal to revenue)
Deficit: $1.1 trillion (this is the amount added to the national debt each year)
National debt: $16.2 trillion ($52,000 per citizen / $142,000 per tax payer)
U.S. Revenue:
Income Tax: $1.129 trillion
Payroll Tax: $843 billion
Corporate Tax: $238 billion
Total revenue: $2.438 trillion (15.5% of GDP…needs to be raised 4.5% to 20% ($698 billion) to balance the budget and be equal to expenses)
Required revenue to reach 20% of GDP and balance budget: $3.1 trillion
U.S. Expense:
Medicare/Medicaid: $728 billion
Social Security: $759 billion
Defense: $653 billion
Interest on national debt: $259 billion
Federal Pensions: $212 billion
Other expenses: $889 billion
Total expenses: $3.5 trillion (22.6% of GDP…needs to be lowered 2.6% to 20% ($403 billion) to balance to budget and be equal to revenue)
Required expenses to reach 20% of GDP and balance budget: $3.1 trillion
Revisions required to reach a balanced budget (based on above figures):
$698 billion increase in revenue
$403 billion decrease in expenses
$1.1 trillion total increase in revenue and decrease in spending required to balance the budget
$600 billion – increase in revenue and decrease in spending produced by “Fiscal Cliff”
$500 billion – amount of correction needed beyond “Fiscal Cliff” to balance the budget
Bottom Line: The “Fiscal Cliff” is a “baby step” … but, a good one  towards fixing America’s monumental fiscal problem. The “Fiscal Cliff” is monumental legislation that all Americans need to embrace in an effort to save America from inevitable fiscal ruin. Any action by legislators to reduce tax increases or cuts established by the “Fiscal Cliff” legislation will be counter productive. Let’s all hope our legislators in Washington go home for the holidays with no agreement to “water down” the “Fiscal Cliff”. Hopefully, they will start working on “Fiscal Cliff 2” when they return in January 2013.

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