Fiscal Cliff 2013
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N/A: DJIA
May 17
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Fiscal Cliff: Are We About to See Compromise in Washington?
Now that Election 2012 is over, Washington is readying for its next battle: the fiscal cliff.
U.S. President Barack Obama's victory in Tuesday's election has upset the Republicans' political calculus. The purpose of four years of obstruction was to deny the president any legislative achievements and thereby prevent his re-election.
It didn't work.
With the election behind us, the politics of obstruction has lost its meaning. There is nothing to be gained from obstruction for obstruction's sake.
Boehner made that abundantly clear when he read a statement Wednesday afternoon in which he opened up the possibility of compromise in order to avoid the looming fiscal cliff at the end of the year.
"For purposes of forging a bipartisan agreement that begins to solve the problem, we're willing to accept new revenue, under the right conditions," Boehner said.
"The president has signaled a willingness to do tax reform with lower rates," Boehner continued. "Republicans have signaled a willingness to accept new revenue if it comes from growth and reform. Let's start the discussion there."
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What is the Fiscal Cliff?
What is the fiscal cliff, and how do we avoid it?
The fiscal cliff will be crossed on Jan. 2, 2013 when $530 billion in tax increases and spending cuts at the federal level take place due to a previous budget agreement between Congress and the Obama administration.
Since Congress and the Obama administration could not reach an accord to reduce the federal budget deficit, a series of automatic tax hikes and decreases in spending will take place instead to achieve the necessary savings.
This is much like the Gramm-Rudman-Hollings Balanced Budget and Emergency Deficit Control Act from 1985. The fiscal cliff will pack a one-two punch to U.S. cities that are already burdened by heavy debt loads, and raise taxes on U.S. households struggling to recover.
What is the Fiscal Cliff Effect on the U.S. Economy?
According to the Congressional Budget Office, a non-partisan organization, if there is no other agreement and the fiscal cliff is crossed on Jan. 2, the United States could fall back into a recession in 2013.
That will have a tremendous negative impact on the global economy as Europe is in a recession and economic growth is slowing in China and India.
Based on the 320-point drop in the Dow Jones Industrial Average the day after President Obama's re-election, Wall Street is not bullish about the future of the economy.
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Hurtling Over Fiscal Cliff Likely Regardless of Election Outcome
Representatives of the Group of 20 (G20) industrialized countries meeting in Mexico City over the weekend begged U.S. officials attending the meeting to avoid the impending fiscal cliff in 2013.
Chile's finance minister, Felipe Larrain told Reuters, "If we're not able to resolve the cliff, that could be the tipping point for a much more complicated scenario in the world economy."
The G20 clearly recognizes the risk of the U.S. falling off of the fiscal cliff.
Comparing the relative risks of the U.S. and Europe, Canadian finance minister Jim Flaherty told Bloomberg Businessweek, "In the near-term, clearly the U.S. situation is the higher risk."
Tomorrow's presidential election may complicate the situation regardless of if U.S. President Barack Obama wins a second term or if Mitt Romney is our next president.
Washington insiders have suggested that, unless there is a wider than expected margin of victory for either candidate, legal challenges are likely, which could put the result of the election in doubt.
In fact, each side has hefty legal teams waiting to jump to action if the election is close.
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Protect Your Money from the Fiscal Cliff Attack on Dividends
Anyone not living in a cave by now knows about the ominous tax-cut situation - fiscal cliff 2013 - that could be unleashed on the U.S. economy early next year.
That is assuming Congress does nothing, and, let's be honest, doing nothing is one thing in which Congress is truly proficient.
Unfortunately, one of the tax cuts that will sunset should the fiscal cliff become a reality is the dividend tax break that went into effect in President George W. Bush's first term.
This is not an endorsement of one candidate or party over the other. After all, the economy could fall off the fiscal cliff regardless of the outcome of next week's presidential election.
However, there is little refuting the fact that the dividend tax break has been a winner for investors.
The top dividend tax rate is currently 15%, but for the most fortunate among us, that rate could surge to 40% under the fiscal cliff scenario.
In other words, letting the dividend tax cuts expire amounts to a government boondoggle of epic proportions that even Uncle Sam would have a hard time topping.
Here's why.
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The Fiscal Cliff's Biggest Surprise Could Be a Rising U.S. Dollar
My grandmother Mimi had a saying that was as blunt as it was uncouth. "When the stuff hits the fan," she used to say, "it will not be evenly distributed."
This one came up often when she sensed that world events were about to take a turn for the worse.
You've heard me mention Mimi before. She was widowed at a young age and went on to become a savvy global investor long before people thought to look beyond their own backyard.
Mimi never cared what Wall Street's "Armani Army" had to say.
Instead, she preferred to travel widely to see for herself what the real story was. Having grown up in the midst of the Great Depression, she believed that people were the ultimate indicator and that governments were the penultimate contrarian influence.
If she were still alive today, I think she'd encourage us to take a good hard look in the proverbial "mirror" especially with regard to the looming fiscal cliff making headlines the world over.
And I don't think she'd waste any time with the doom, gloom and boom crowd either.
She was always on the hunt for opportunity when everyone else was running from chaos. Thanks to her, it's a habit that remains firmly ingrained in me today.
Not One but Three Fiscal Cliffs
And that brings me back to the "fiscal cliff."
In my mind, this is a misnomer. There isn't really a singular fiscal cliff . As I explained earlier this summer to Sheryl Nance of Forbes there are actually three.
- The massive adjustments headed our way as tax and spending cuts expire and come into effect beginning in 2013. You may know it as taxmegeddon.
- The debt debacle and the near complete lack of any sort of credible financial consolidation plan that will affect everything from interest rates to collateral requirements and the US credit rating - again.
- And politicians who simply don't understand that issues 1 and 2 are already dramatically impacting the economy long before the theoretical limits of spending come into play. Profits are declining and 61% of companies that have reported through Monday October 22nd have failed to meet expectations. Hiring is slowing and top line revenue is increasingly hard to come by.
Many believe this is a moot point because Congress will get down to business in November after the Presidential Election takes place. The hope is that some sort of budget agreement will be reached and that the US economy will then be positioned for stronger growth in 2013.
Yeah and I suppose the tooth fairy will show up, too.
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New Report on Fiscal Cliff 2013 Details Our Painful Future
Are you worried yet about fiscal cliff 2013?
If not, here are millions of reasons to be concerned.
According to a report released today (Friday) from the National Association of Manufacturers, "The "fiscal cliff' is still two months off, but the scheduled blast of tax hikes and spending cuts is already reverberating through the U.S. economy, hampering growth and, according to a new study, wiping out nearly 1 million jobs this year alone."
The report, titled "Fiscal Shock: America's Economic Crisis," details how the fiscal cliff could destroy some 6 million jobs through 2014, and send unemployment skyrocketing to nearly 12%.
"The worst could be ahead," the report said. "If the fiscal contraction happens, the economy will almost certainly experience a recession in 2013 and significantly slower growth through 2014."
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