Looking at the fiscal cliff from a medical perspective, I find similarities to the obesity epidemic in the U.S. - the debt is gargantuan and getting bigger. There are options to decrease the weight and the weight of the debt, but they require hard choices that our pill loving society is loath to undertake. What are the various possibilities and outcomes?
- The Congress and White House reach a deal that raises taxes and cuts spending, though not as drastically as ordained in the sequester. If it does not substantially reduce the debt, but just decreases the rate of increase, does that really matter? If my patient is getting fatter, even if at a slower pace, fact is he is still getting fatter, and thus prone to diabetes, heart disease, osteoarthritis, etc. That doesn't really help. On top of it, cutting spending will decrease the money in the economy, which may tip it into recession. Just not as badly as the sequester would, but that again is like saying my patient is just in the hospital, but not comatose or on a respirator, which is again not particularly good for my patient-- or the economy.
- The other option for the Congress is to not cut spending, but simply raise the debt ceiling, like it did last time. So it will be kumbaya, don't worry be happy, and hope and change all over again. Till the debt reaches a level when even the Chinese and Japanese stop bailing us out. Then it is high interest rates, recession, and a diet till the obese is really in the Intensive Care Unit with lactic acidosis and on a respirator.
- The last option is the Joker Option. Let's say the Congress goes with option 2, and the Federal Reserve buys all the bonds. Heck, it already has a $3 trillion balance sheet, what's another $3 trillion? And then, the Fed simply tears up government IOUs. All the trillions worth. Skeptics will say that the Fed is supposed to have a balance sheet, and that the balance sheet at present is leveraged even more than Lehman Brothers' was when it went under. But that doesn't seem to bother anyone as bond yields keep going down and bonds/TLT keeps going up. So, what is to stop this process from going on for ever?
So the Joker Options is the only way forward for us. It's Bernanke's Miracle Obesity Pill.