What does the “Fiscal Cliff” really mean?

Politics, politics. I hate it, although I used to love it. I used to have a lot of hope for politics. It seemed like the best way to truly “make a difference” in the world. I mean, how better to do it, right? You change some laws and alter the lives of millions. You could build a better world. This, of course, was my unrealistic utopian dream. And now? Now we see little things like this “FISCAL CLIFF”! We’re gonna all economically fall! Watch out. Hold your babies tight.

So what if we fall? Economically speaking, there are reasons there’s a s0-called fiscal cliff. It is impossible for the governments to repay their debt. The American government has been borrowing money like crazy for years and years, never even really attempting to pay it back. But wait, what about other countries? And what about their debt? Wait some more – isn’t America the richest country in the world? How can you be rich if you’re in debt? I mean, if I owed a ton of cash to the banks, I certainly wouldn’t be called rich.

Think some more – WHO are the governments of the world (all of them in debt) borrowing from? Where does this money come from? Do you know? Yeah, most people don’t think about this one either. I could go into oodles of details, but to free you from boredom I’ll state it clearly:

The governments owe money to central banks, who make the money out of nothing (hence the need to print it). You then owe the bank money for printing at an interest rate. Now this is where the hook is. This is why debt is actually unrepayable and must continue to accumulate. Sorry, it’s math time.

A (loan from bank)Β  = X(debt) + i(interest)

So the bank gives the government 1 million at 1% interest ($10,000), let’s see what happens.

1,000,000 (loan from bank) = 1,000,000 (debt) + 10,000(interest)
1,000,000 = 1,010,000

Now, if you have basic math skills, we can see that the two sides of the equation do not equal each other. If the bank prints money for the government to spend, it actually OWES MORE money than has been printed. There’s only $1,000,000 printed, but they owe $1,010,000. So how do they repay their debt? They have to keep borrowing more and more.

This is the vicious cyclical truth of our current economic system. We will always be indebted at an exponential rate as the interest on loans compounds.

So any political action to the fiscal cliff is unlikely to solve the underlying problem. If they increase their ability to borrow money, we prolong the problem for future generations. Hooray politics, let’s all pass the buck.

It looks like we need some different reforms, some more drastic reforms to actually solve the problems here. So what’s next?

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3 Responses to What does the “Fiscal Cliff” really mean?

  1. zen city says:

    so, what is the solution? i don’t follow politics either (i like to keep my energy high . . .) have any reasonable alternatives been proposed? how can we help? i’m willing to pitch in and support a peaceful & viable plan to end the madness. . . πŸ™‚

    • I personally believe we’d need to fundamentally change the montetary system to actually come out with a viable, sustainable future. The current model is unsustainable. For example, even growth is counterintuitive.

      Companies and countries are trying to increase their growth. Canada, for example, tries at 3% growth per year. First of all, there are finite resources on the planet and finite ways to grow. So growth as a “must” cannot be forever without ravaging the planet. Second, and more scarily, the growth model is exponential. The growth of 3% from this year adds to next year’s GDP, so another 3% is actually compounded over time, becoming an exponential growth curve.

      For a solution, we need to change the way we view things. Our perspective of constant growth is dangerous. The second, we need to change the financial system drastically. It takes time to explain, perhaps I’ll focus my next blog post on that…

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