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This thing called “Fiscal Cliff” bothers a lot of people nowadays, so I figured it would be a good topic to start from. As many times before, a perfectly useful term is used to describe something completely different to divert attention from something really important.

Someone asked me to explain what is this thing all about, and I did, in technical details, to the extent of my understanding. Not convinced, a person asked me “so what is so ‘cliffy’ about it?”.

Really – what is? After all, those automatic tax hikes and spending cuts are planned events, agreed upon some time ago by the same Congress people, as part of the same types of deals as the one they are trying to cook now. We are told that without agreement we will all fall off the fiscal cliff, but how exactly?

Saving America

The fear is the worsening of the current recession if those two “disastrous events” are not reigned in, somehow.  So here we are told that the best deal between the two parties would look something along the lines of “extend the tax cuts for ‘middle class’ but not the ‘rich’ and minimize the spending cuts as much as possible”.

And by the way, don’t forget the debt ceiling, that needs to be raised early in 2013, to make sure we can pay for all that fiscal orgy. This way (and only this way) will we avoid the fiscal cliff, and live happily ever after, spending our way into everlasting prosperity.

What a bunch of horseradish. Here is how you fall off the fiscal cliff – stop going to work, spend all your savings, then fill up all your credit cards with debt until they get blocked, then borrow as much as you can from friends and family (foolish enough to lend you, I must say) and then when you exhaust the last reserve you will reach your fiscal cliff. There is nothing mysterious about it, it’s simply obvious.

How is it different from the predicament the U.S. Government is in right now? Well, it is different, many say, because this is macro economy, and rules here are different. Sure, sure, I remember that Keynesian nonsense from my MBA, but seriously, do we, as individuals, really live in a fundamentally different reality than the one in which the U.S. Government dwells?

“How’s ignoring reality working for you?”

“You can ignore reality, but you cannot ignore the consequences of ignoring reality” is one of the most widely repeated quotes by Ayn Rand.

So imagine this scenario: you keep borrowing money from a friend, who keeps lending you on the premise that too much was already lent, and in order to ensure that all the money is eventually repaid its necessary to keep lending you more, otherwise you might “reach your fiscal cliff” and then that’s it, all money is lost.

You keep borrowing on the premise that with your lavish lifestyle there is no feasible way for you to earn what you need to spend, so why bother, as long as you can borrow enough to pay the interest and live your life. You have to keep promising your pesky friend that things will turn around soon, and even do some gestures, like not buying a new car, and telling him about it.

Both sides are ignoring reality (or living in denial if you prefer). You ignore the fact your lifestyle is unsustainable, and your friend’s resources and patience are not unlimited. The consequence of your ignoring reality is loss of friend, collapse of your lifestyle, and loss of all credibility with your economic circle.

Your friend ignores the writing on the wall, screaming “he will never pay back!”. With a little help from you he chooses to believe the opposite. After all, you pay the interest, regularly, in full, without delays. So on the face of it the deal is rock solid…

He sure can ignore the reality, but sooner or later he will have to face the consequences of ignoring reality – the money he lent you is gone, together with hopes of spending it one day on things he really wants to buy (and, well, the illusion of having a trustworthy friend).

And he does. This is the moment of awakening to the reality, when your friend suddenly gets it. It’s when he says farewell to his money, and accepts his current reality. The next step would be to decouple from the liability which is yourself.

It is inevitable, sooner or later.

The Mother of All Fiscal Cliffs

So that’s how it all ends. And that’s how it will end for America, unless drastic change of attitude towards our debt takes place in Washington. But who am I kidding?

It’s just a matter of time that our creditors wake up to their reality. And then what we will face would be the real fiscal cliff, or, as Peter Schiff calls it, the “mother of all fiscal cliffs”. No matter what kind of deal they will come up with (and they will), all of this political charade is meaningless.

I say buckle up, and brace for impact.