We’re Already Over the Fiscal Cliff

The current story arc of Politics: The Reality Television Show for Suckers deals with the so-called fiscal cliff. Republicans and Democrats are trying to rally support for the causes of spending cuts and tax increases respectively. Anybody who has watched Politics for any length of time knows that these arguments are illusionary and that the Republicans and Democrats are working together to soak the people for more tax money without truly entertaining any idea of spending cuts:

Mr Obama meets business leaders at the White House on Tuesday and members of middle-class families on Wednesday.

He wants Republicans to accept tax increases on the wealthy, while extending tax cuts for families earning $250,000 (£155,000) or less.


John Boehner, the top Republican in Congress, has said he would consider increasing tax revenue by closing loopholes, though he remains opposed to raising taxes.

“Closing loopholes” is merely a fancy term for curtailing freedoms and, ultimately, an insidious way to increase taxes without technically increasing taxes. Effectively John Boehner has stated a willingness to cooperate with Obama but is using language that perpetuates the myth that the Republicans and Democrats oppose one another.

This is nothing new. What is worth discussing though is the idea of the fiscal cliff. The fiscal cliff, like the Republican-Democrat opposition, is a mirage created by the state. When politicians discuss the fiscal cliff they are actually talking about measures placed in the Budget Control Act of 2011 taking effect, which include supposed spending cuts and tax increases. The Budget Control Act, like the fiscal cliff, is also a mirage created by the state. It was supposed to be a compromise between the Republicans and Democrats to resolve budgetary issues facing the federal government. These budgetary issues can be boiled down to the fact the federal government spends far more than it bring in. Put into actual terms the federal government is insolvent.

Insolvency is the real issue facing the federal government and it won’t go away even with the most audacious tax increases. America has two options before it. Either spending must be slashed or the debt must be repudiated… again:

Although largely forgotten by historians and by the public, repudiation of public debt is a solid part of the American tradition. The first wave of repudiation of state debt came during the 1840s, after the panics of 1837 and 1839. Those panics were the consequence of a massive inflationary boom fueled by the Whig-run Second Bank of the United States. Riding the wave of inflationary credit, numerous state governments, largely those run by the Whigs, floated an enormous amount of debt, most of which went into wasteful public works (euphemistically called “internal improvements”), and into the creation of inflationary banks. Outstanding public debt by state governments rose from $26 million to $170 million during the decade of the 1830s. Most of these securities were financed by British and Dutch investors.

During the deflationary 1840s succeeding the panics, state governments faced repayment of their debt in dollars that were now more valuable than the ones they had borrowed. Many states, now largely in Democratic hands, met the crisis by repudiating these debts, either totally or partially by scaling down the amount in “readjustments.” Specifically, of the 28 American states in the 1840s, 9 were in the glorious position of having no public debt, and 1 (Missouri’s) was negligible; of the 18 remaining, 9 paid the interest on their public debt without interruption, while another 9 (Maryland, Pennsylvania, Indiana, Illinois, Michigan, Arkansas, Louisiana, Mississippi, and Florida) repudiated part or all of their liabilities. Of these states, four defaulted for several years in their interest payments, whereas the other five (Michigan, Mississippi, Arkansas, Louisiana, and Florida) totally and permanently repudiated their entire outstanding public debt. As in every debt repudiation, the result was to lift a great burden from the backs of the taxpayers in the defaulting and repudiating states.


The next great wave of state debt repudiation came in the South after the blight of Northern occupation and Reconstruction had been lifted from them. Eight Southern states (Alabama, Arkansas, Florida, Louisiana, North Carolina, South Carolina, Tennessee, and Virginia) proceeded, during the late 1870s and early 1880s under Democratic regimes, to repudiate the debt foisted upon their taxpayers by the corrupt and wasteful carpetbag Radical Republican governments under Reconstruction.

State debt has been repudiated in the United States before and it can be done again. Many people will claim that repudiating the debt would lead to catastrophe but that wasn’t the outcome of the above mentioned cases:

Rothbard’s History demonstrates how the repudiations of the 1830s and ’40s did not cause the sky to fall. In fact, the return to sound money coupled with a liberalization of the economy spurred a tremendous amount of growth. Rothbard explains:

It is evident, then, that the 1839–1843 [monetary] contraction was healthful for the economy in liquidating unsound investments, debts, and banks, including the pernicious Bank of the United States. But didn’t the massive deflation have catastrophic effects — on production, trade, and employment, as we have been led to believe? In a fascinating analysis and comparison with the deflation of 1929–1933 a century later, Professor Temin shows that the percentage of deflation over the comparable four years (1839–1843 and 1929–1933) was almost the same. Yet the effects on real production of the two deflations were very different. Whereas in 1929–1933, real gross investment fell catastrophically by 91 percent, real consumption by 19 percent, and real GNP by 30 percent; in 1839–1843, investment fell by 23 percent, but real consumption increased by 21 percent and real GNP by 16 percent. (p. 103)

Repudiating the debt had the opposite effect that most people would lead to you believe, it actually caused economic boon instead of of bust. Iceland, which recently repudiated its debt, is now experiencing economic growth as well.

It’s obvious that the federal government isn’t going to cut spending and it can’t tax its way out of the fiscal hole it has dug, which means the only other option is bankruptcy.