By Paul Craig Roberts | Institute for Political Economy

The “fiscal cliff” is another hoax designed to shift the attention of policymakers, the media, and the attentive public, if any, from huge problems to small ones.

The fiscal cliff is automatic spending cuts and tax increases in order to reduce the deficit by an insignificant amount over ten years if Congress takes no action itself to cut spending and to raise taxes. In other words, the “fiscal cliff” is going to happen either way.

The problem from the standpoint of conventional economics with the fiscal cliff is that it amounts to a double-barrel dose of austerity delivered to a faltering and recessionary economy. Ever since John Maynard Keynes, most economists have understood that austerity is not the answer to recession or depression.

Regardless, the fiscal cliff is about small numbers compared to the Derivatives Tsunami or to bond market and dollar market bubbles.

The fiscal cliff requires that the federal government cut spending by $1.3 trillion over ten years. The Guardian reports that means the federal deficit has to be reduced about $109 billion per year or 3 percent of the current budget. http://www.guardian.co.uk/world/2012/nov/27/fiscal-cliff-explained-spending-cuts-tax-hikes More simply, just divide $1.3 trillion by ten and it comes to $130 billion per year. This can be done by simply taking a three month vacation each year from Washington’s wars.

The Derivatives Tsunami and the bond and dollar bubbles are of a different magnitude.

Last June 5 in “Collapse At Hand” http://www.paulcraigroberts.org/2012/06/05/collapse-at-hand/ I pointed out that according to the Office of the Comptroller of the Currency’s fourth quarter report for 2011, about 95% of the $230 trillion in US derivative exposure was held by four US financial institutions: JP Morgan Chase Bank, Bank of America, Citibank, and Goldman Sachs.

Prior to financial deregulation, essentially the repeal of the Glass-Steagall Act and the non-regulation of derivatives–a joint achievement of the Clinton administration and the Republican Party–Chase, Bank of America, and Citibank were commercial banks that took depositors’ deposits and made loans to businesses and consumers and purchased Treasury bonds with any extra reserves.

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