America Headed for the Fiscal Cliff, Tough Job Ahead for Any President

"I'm not really conservative. I'm conservative on certain things. I believe in less government. I believe in fiscal responsibility and all those things that maybe Republicans used to believe in but don't anymore." ~ Clint Eastwood

In New York and New Jersey, some are still removing the debris left from Hurricane Sandy. The magnitude of this very unique weather formation was certainly a humbling reminder of nature's power. One of our clients made the comment that "the storm may have resulted in additional collateral damage." He was sarcastically alluding to the impression that the incumbent president's campaign may have benefitted from Sandy. Who knows?

At this point, it no longer matters, as the results show President Obama has been re-elected by the American people. He held an inspiring victory speech. I certainly wish Mr. Obama the strength and wisdom to make the best possible choices and lead America in the best possible way. A strong and healthy United States is not only in the best interests of Americans, but it certainly lies within the best interests of the entire global economy. Clearly, President Obama faces a tremendous challenge all around − politically, economically and fiscally.

As I write this commentary, the "US debt clock" shows a US national debt of US$ 16.047 trillion. This debt number, however, is only one number in a host of mind-boggling statistics. If you think the national debt is incomprehensible, then take a look at the US total debt ... where it stands at a whopping US$ 58.719 trillion! No other major economy in the world even comes close nominally or proportionately. US total debt per citizen is at US$ 186,575 and US total debt per family stands at US$ 703,234, while US unfunded liabilities stands at US$ 121 trillion! That corresponds roughly to 770% of the US GDP. Furthermore, it translates into a liability per taxpayer of over US$ 1,058,256.

America is so far down the road of fiscal profligacy that it is highly doubtful whether ANY US president at this point would be able to spare the American (and global) economy and its people a very tough and painful road ahead. With Obama as President, we may well expect that the pain will be postponed for as long as possible − more monetary inflation and dollar devaluation will certainly be in the mix.

The US Debt Trajectory Is Mind-Boggling

Ben Bernanke himself alerted Americans to the next "fiscal cliff." Unless Democrats and Republicans 'agree to disagree' constructively in regard to America's budget, the automatic tax increases and budget cuts would ensue on the basis of current law. Of course, ultimately, one should probably expect another lift in the current debt ceiling and another round of dutiful money creation by the Federal Reserve. Irrespective of who becomes president, America has some very tough choices to make ... and none of the choices that would REALLY fix the debt problems are going to be painless.

So far in the 21st century we have in essence experienced two US presidents: George W. Bush and Barack Obama. During Mr. Bush's two terms to 2008, the total rise in the official public (i.e., Treasury-funded) debt was US$ 4.35 trillion. Then, during Mr. Obama's one term, public debt rose by US$ 6.05 Trillion.

Together, these two Presidents have added roughly two-thirds of the current total debt load. Out of that, within just one term, Mr. Obama's great 'contribution' amounts to 60%! It will be of great interest to see whether, in another four-year term, Mr. Obama might be able to top this 'fiscal achievement.' The debt trajectory he has initiated is certainly ambitious!

Maynard Keynes' Legacy − A Government-Sponsored Ponzi Scheme

The American numbers discussed above are grotesque. What's astounding to me is that, although these numbers are publically visible and available, they are not given more serious attention. Some might ask how such numbers are possible. However, today the relevant question must be 'why are these numbers even deemed necessary?'

Today, virtually all major economies have followed America's lead in terms of building up their own "fiscal cliff." The past century has seen America ascend to global domination as both a financial and military power. The US government and central bank have largely set the rules, the pace and the scope in regards to the global financial system for almost 70 years.

In 1944, the Federal Reserve obtained the exclusive privilege of issuing the world's reserve currency. Like all prior superpowers, this 'monetary privilege' has been utilized (if not abused) to the full extent possible. Under the patronage of Maynard Keynes's economic principles, which today is the accepted model of most universities and amongst prominent economists like Paul Krugman, governments have used their monetary power to the max. The results are now visible and risks are imminent in America, in Europe and globally.

In another Mountain Vision article this week, our friend, Hans Fredrik Boe-Hanssen, gives an excellent answer to the question posed above. He gets to the bottom of the Keynesian fallacy. I urge you to read Hans's piece thoroughly.

What about the Swiss Franc?

My comments on Switzerland in "Switzerland Will Continue to Thrive and Outperform" were generally well received. I was actually surprised by the numerous acknowledgements and confirmations of my view. We did also receive some very good questions regarding the Swiss franc, one of which was:

"Regarding the strength of the Swiss Franc, the article ignores the fact that by decree the Swiss franc was pegged to the Euro at the rate of around 1.21 and is no longer a free floating strong currency."

I agree. I should have commented a little more on the Swiss franc's current relationship with the euro. I am pleased to point out a few facts and considerations in a somewhat more concise fashion here.

It is a somewhat fine but very important fact that the Swiss franc is NOT pegged to the euro. This point is frequently misunderstood and confused. In the summer of 2011, the Swiss National Bank (SNB), in its role as the 'guardian' of Switzerland's currency, decided to defend a minimum currency exchange rate of 1.20 Swiss francs to the Euro. In other words, the SNB defined an exchange rate floor that it intends to defend through what they deem as suitable forex transactions.

Therefore, the Swiss franc continues to be a free-floating currency. However, clearly, the SNB is interfering in the market to allow the Swiss franc to only depreciate, and not appreciate, versus the Euro.

The question then becomes whether the Swiss franc truly still retains its safe haven character. My answer to this question is a clear and decisive YES. A country's health and the strength of its currency is based on a multitude of fundamental factors. While central bank interferences may alter at least temporarily the relative price (the exchange rate) of a currency, in the long run, the fundamental and real economic health of an economy determines its currency's strength.

Finally, let's discuss the possible outcomes of the SNB's decision to implement a CHF-EUR floor. Should the euro zone succeed at implementing the required policies and regulations regarding a fiscal and banking union, and should the Euro therefore start to mend and appreciate, then the current "floor policy" of the SNB will become redundant and fade away naturally.

Should the Euro further depreciate, and should it do so in a 'civilized' manner (i.e., not too fast and not too far), then the Swiss franc will tend to depreciate with the Euro, based on the SNB's continued market interventions. Truthfully, this scenario is most probable in the medium-term. It is important to note that should the euro further depreciate, you can expect it to do so in sync with other major currencies, and certainly with the US dollar. The current reality in global currency markets is that we are witnessing a global 'race to the bottom.' Central banks around the world are in a competitive devaluation mode. This was, originally, the reason why the SNB really was forced to intervene. The Swiss franc was simply getting too strong. Economies like Norway are facing similar problems with their currency today.

Finally, should the euro crash, then the Swiss franc will not follow. That would be the point when the SNB will no longer defend the 1.20 floor.

In conclusion, the Swiss franc in my view is still a strong currency. Currently, its safe haven characteristics are somewhat curtailed. However, in the long run, the Swiss franc will continue to fulfill the fundamental requirements of a healthy currency − a trustworthy medium of exchange and a solid store of value − almost as well as gold.

Frank Suess is CEO and Chairman of BFI Capital Group. To subscribe to BFI's weekly Mountain Vision Update, in which this column appeared, click here.