As the US Fiscal Cliff melodrama heads towards its climax I thought I would offer an observation based upon the 60s US TV sitcom series-the Beverley Hillbillies.
For those of you who are too young to remember, the series was about a family of backwoodsmen-the Clampett family-who discover oil on their land and become rich as a result. They move to Beverley Hills and the series was mainly based around the culture clash between the Clampetts with their unsophisticated and minimalist lifestyle, and the social mountaineers of Beverley Hills, most notably their neighbour Mr Drysdale who runs the local bank. Drysdale has to engage in increasingly outrageous manoeuvres to keep the Clampetts in Beverley Hills and their money in his bank. It sounds like a moral tale for our time. Is life now imitating art, or at least a 60s sitcom?
In one episode, Jed the patriarch of the Clampetts decides that he doesn’t trust the bank to take care of his money (a man ahead of his time perhaps?) and goes to withdraw it. He has $7,000,000 deposited and says he is withdrawing $7 because a) he doesn’t trust the bank with that much money; and b) he thinks he only has $7 as ‘everyone knows zeroes don’t mean anything’.
What’s this got to do with the US Fiscal Cliff negotiations?
As my friend Nick Carn of Carn Macro Advisers (www.carnmacro.com) points out, the US budget numbers can be viewed in a similar fashion to Jed Clampetts view of his bank balance as follows:
* U.S. Tax revenue: $ 2,348,000,000,000
* Fed budget: $ 3,661,000,000,000
* New debt: $ 1,313,000,000,000
* National debt: $ 11,279,000,000,000
* Recent budget cuts: $ 24,000,000,000
(Sources: FY 2011 figures from Financial Report of the United States Government (FRUSG) and the President’s proposed cuts as per the White House Budget Department)
Following Jed Clampetts lead, let's now remove eight zeros and pretend it's a household budget:
* Annual family income: $ 23,480
* Money the family spent: $ 36,610
* New annual debt on the credit card: $ 13,130
* Outstanding balance on the credit card: $ 112,790
* Total budget cuts so far: $ 240
As you can see as a result of this, the US budget situation is dire. The inadequacy of what is being proposed compared with the size of the problem is simply stunning as I hope this simple example illustrates. The reason why I have said when asked that whether or not the US goes over the so-called Fiscal Cliff is largely irrelevant is that neither the changes caused by that nor the proposals being negotiated between the President and Mr Boehner are going to have anything like enough impact to begin the necessary process of correction in America’s situation. At some point America will need massive tax increases and spending cuts.