Fiscal Cliff Fearmongers Still Don’t Know What The Fiscal Cliff Is

The most frustrating thing about the “fiscal cliff”—a combination of tax increases and spending cuts that will rapidly reduce the US budget deficit—is the extent to which the people doing the most to ring the alarm bells about the need to “avoid” it don’t seem to understand what it is. To wit, Cargill CEO Greg Page says if there’s no deal international investors will lose confidence in the United States:

A failure to navigate the cliff could, he feels, be one of the types of events that starts to erode confidence in the country’s governance.

“People begin to doubt your institutions,” he said in an interview at Cargill’s Washington office. “If you take the name off and just look at the vital signs, you’d jump to all sorts of conclusions,” he said, referring to the country’s high debt and annual deficits.

Got that? Unless congress reaches an agreement to make the budget deficit bigger people will jump to all sorts of conclusions about our high debt and annual deficits. I don’t get it.

It’s also worth noting that the whole dynamic in terms of international investment flows doesn’t work the way Page seems to think. A big company like Cargill wants the confidence of credit markets so it can borrow at low interest rates and make money. But if international investors lose interest in buying US government bonds, what will happen is the trade-weighted price of the dollar will fall boosting American-made exports and American-made import-competing goods. Since we currently have high unemployment and a fair amount of excess capacity, that drop in the dollar will boost growth, shrink the output gap, and lead to a smaller budget deficit.