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Stock Market Today / U.S. Economy1
Fiscal Cliff 2013: Pay Now or Pay Later
For all the talk about how Congress needs to avoid the fiscal cliff, few have pointed out that the U.S. economy will suffer regardless.
The only question is the timing.
If Congress fails to act and America goes over the fiscal cliff on Jan. 1, 2013, the U.S. economy will, as many have noted, quickly slip into a recession.
But if Congress does somehow agree to avert all or most of the impact of the fiscal cliff, it simply postpones the pain for a few months or years.
And if Congress elects to postpone the fiscal cliff indefinitely, choosing to continue the federal government's massive deficit spending in perpetuity, the federal debt will weigh more and more heavily on U.S. economic growth as the years go on.
"That highlights lawmakers' dilemma," wrote The Wall Street Journal in a recent editorial. "Going off the cliff will produce great pain in 2013 but lead to a more stable fiscal situation a decade on. Averting it will forestall recession now but hamstring growth later."
How Fiscal Cliff 2013 Affects U.S. Economy
The fiscal cliff is political shorthand for the combination of spending cuts and tax increases scheduled to hit Jan. 1, 2013. It's the result of the expiration of the President Bush-era tax cuts combined with $1.2 trillion in automatic reductions in federal spending made last summer as part of the deal to raise the debt ceiling.
The consequences of going over the fiscal cliff or delaying it can be found in the latest report on the matter from the Congressional Budget Office (CBO), "Economic Effects of Policies Contributing to Fiscal Tightening in 2013."
And this latest report, which is different than the previous CBO projections, actually includes a clue as to how Congress could decide to deal with the fiscal cliff before the end of the year...
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Five with Fitz: What to Expect If We Go Over the Fiscal Cliff
I'm on the road this week in Las Vegas and Los Angeles and receiving lots of great questions as usual from your fellow Money Morning subscribers.
Here's a few that really caught my attention. Not surprisingly, one of the biggies deals with the fiscal cliff.
Q - What happens if we go over the "fiscal cliff"...really? - Jerry S.
A - Nobody truly knows Jerry. However, here are five things I expect to happen as a result.
First, the U.S. goes back into recession. The CBO (Congressional Budget Office) suggests there will a 0.5% contraction if the government can't stop both the debt and the spending cuts. That's a huge drop from the 2% growth it presently expects.
I think both numbers are complete fantasy, incidentally. The government missed this crisis in formation and they are flying blind now. How on earth they can predict 2% growth right now defies any sort of logic whatsoever. Then again, we are talking about the federal government. Sigh.
If we go over the fiscal cliff, I'm expecting as much as a full 1% contraction. And growth under the circumstances will hardly be normal, let alone 2% for years to come. The fiscal cliff and our politicians' unwillingness to do anything about it other than kick the can down the road so far makes it clear to me that America is going to struggle with the legacy of decades of bad fiscal policy for years to come -- just like Japan has for more than two decades.
Second, I think companies are simply going to vote with their wallets under the circumstances. Many are already hoarding dollars and announcing changes to operations following the election, but now they're going to cut back further on capital spending.
At the same time, the fiscal cliff will reduce foreign direct investment into the U.S. because many companies will shift their attention to other markets where there is more certainty.
Third, the unemployment rate will rise, housing markets will reverse course, and the Fed will engage in yet more meddling and more money printing. It will no doubt be well intentioned, but simply digs America further into a hole.
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How the Fiscal Cliff Will Affect Gold Prices Now
On news of a second term for U.S. President Barack Obama, investors didn't show any excitement as the market fell 2.3% the day after Election 2012.
The fiscal cliff countdown has come to the forefront of concerns this week, helping push the Dow Jones Industrial Average down more than 2% since last Friday.
But for gold prices, this could be a good thing.
Here's how the fiscal cliff will affect gold prices as Washington battles over how to solve the looming threat to the U.S. economy.
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Facing the Fiscal Cliff Solves 77% of the Deficit Problem in One Move
With the election over, Wall Street is now obsessing over the possibility that the "fiscal cliff" negotiations may end in stalemate.
Well I have news for them: a stalemate would be good for the U.S. economy, and any deal that does not preserve most of the fiscal cliff is not worth having.
Here's why.
By ending Social Security tax relief, the Bush tax cuts and cutting spending on both defense and domestic programs, the "fiscal cliff" cuts a deficit projected by the Congressional Budget Office (CBO) at $10 trillion over the next 10 years down to $2.3 trillion.
Contrary to all of the media caterwauling, that's not a dreadful fate.
In fact, it is exactly what we ought to be doing, since it solves 77% of the deficit problem in one fell swoop.
Of course, lovers of low taxes (which includes me) will claim that we should not support the "fiscal cliff" because it will raise taxes on everybody. But honestly, what's the alternative?
The reality is that President Barack Obama won the election and that he passionately wants to raise taxes on the rich. It's more important to him than any other outcome from this negotiation.
In setting out his objectives he twice reiterated that he was non-negotiable on tax hikes for the rich, and wanted to close the budget gap primarily by tax increases.
And guess what: Tax increases in budget negotiations are much more real than spending cuts, because once the legislation is written, they always happen, whereas politicians often find a way to weasel out of a spending cut deal once the klieg lights are off.
Thus, given the Republicans' weak negotiating position, it's likely we'll end up with the tax increases on the rich anyway.
However, tax increases alone will do little to reduce the deficit.
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Forget January – the Fiscal Cliff Effects are Here
U.S. President Barack Obama will hold his first press conference today (Wednesday) since winning re-election and will state his case for a whopping $1.6 trillion in tax hikes to fight the fiscal cliff.
Democratic and Republican policy makers returned to Washington, D.C. on Tuesday with just seven weeks left to come up with some sort of compromise. If the two opposing sides fail to reach an agreement and the nation falls off the cliff, a recession in 2013 is guaranteed, the Congressional Budget Office has warned on a number of occasions.
Negotiations with congressional leaders will convene Friday.
But while Washington takes its time to argue over the fiscal cliff, businesses can't wait any longer.
Their impatience was highlighted in recent advertisements by the Business Roundtable, where they tell Congress it's time to act.
In one ad, Honeywell International Inc. (NYSE: HON) Chair and CEO David Cote jumps to the point: "If the last debt ceiling was playing with fire," he asserts, "this time they're playing with nitroglycerin."
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Will the Fiscal Cliff Clash Damage the U.S. Credit Rating?
There are less than fifty days left for lawmakers to come to agreement on the fiscal cliff, but uncertainty surrounding the dilemma is already affecting the economy. The political bickering over solving the fiscal cliff issue now has put the U.S. AAA credit rating at risk again.
In early September ratings agency Moody's Corp. (NYSE: MCO) announced it would likely downgrade the U.S. credit rating if no deal is reached before the end of the year, and on Monday the company reiterated its stance.
"A scenario whereby action on the budget is delayed until sometime in 2013 appears increasingly likely; for example, via a temporary extension of most measures except the increase in payroll tax," Moody's officials said.
"Such deferment, if not accompanied by an apparent commitment to achieving agreement and a credible timetable for implementing the necessary reforms to preserve sovereign creditworthiness, would be inconsistent with maintaining a AAA rating," they warned.
Fiscal Cliff Bickering Must End
Due to the higher taxes and automatic cuts that come with the fiscal cliff, corporations already are starting to lay off workers. The independent Tax Policy Center estimates that taxes will increase almost $3,500 per household as a result of the fiscal cliff.
It remains to be seen whether the fiscal cliff will be resolved before the year is up, but even if that happens the U.S. could still have its rating lowered by Moody's due to the political stalemate and partisanship that has gone on the past two years.
Immediately after the election all focus has shifted towards the fiscal cliff and whether or not Congress and the president can work together.
House Speaker John Boehner, R-OH, has been very vocal after the election, calling for compromise and insisting that Republicans can accept more revenue.
However, many are wondering if that is just a post-election piecemeal offering and if his true feelings were voiced before the election.
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Fiscal Cliff: Both Sides Optimistic, But Still No Real Answers
Over the weekend, both Republicans and Democrats voiced confidence that the two opposing sides could strike a deal and avert falling off the fiscal cliff.
However, details on how policymakers will do so remain unclear.
Key sticking points that have kept the two parties at odds is that Democrats widely favor increasing taxes on wealthy Americans, while Republicans maintain that the answer to the bulging fiscal deficit is to slash federal spending.
With just weeks until the cutoff date, it appears each side is ready to make some concessions.
Tennessee's GOP Sen. Bob Corker acknowledged Sunday on Fox News that the nation's wealthiest should shell out more in taxes. But, he added, the increases should come from closing loopholes instead of boosting tax rates. Corker added that cuts to entitlement spending would also need to be considered for Republicans to approve any pact.
"I'm optimistic on a deal," the Senator said. He went on to say he thought a "basis for the deal" was in place.
Corker continued, "I think finally, Democrats are willing to accept-and I don't mean this pejoratively, but I think they know that Republicans really are willing to put revenues on the table if we can do it in a pro-growth way, and there is a way of doing that."
In addition, David Axelrod, a senior adviser to U.S. President Barack Obama's re-election campaign said Sunday on CBS's "Face the Nation" he believed the Republican comments regarding the fiscal cliff are "encouraging."
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The Fiscal Cliff is a Mole Hill Compared to This
Everyone is afraid of falling off the "fiscal cliff." But there's another dangerous countdown clock about hit to zero.
And no one is talking about it, even though it will spell even more financial problems for us all.
At midnight on December 31, 2012, the Transaction Account Guarantee (TAG) program will expire.
The TAG program was initiated at the height of the credit crisis when depositors were fleeing banks for fear they would go under.
To quell what was turning into a run on banks, the FDIC upped regular deposit insurance from $100,000 to $250,000 and under the TAG banner initiated unlimited insurance for all non-interest bearing transaction accounts.
It's the second part that's important because that's the piece that will soon come to an end.
When the unlimited insurance expires, corporations, businesses and depositors -- whose soon- to- be- uninsured deposits, which total some $1.4 trillion, are likely to flee smaller banks -- will rush into money market funds and seek the safety of short-term U.S. Treasuries.
This will create serious negative repercussions affecting our economic future.
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What's Next for the Fiscal Cliff?
With both parties viewing the results of Tuesday's election as a mandate from the American people to address the major economic problems, Congress and the Obama administration will focus first on not having to cross the fiscal cliff.
Clearly, neither party wants the American economy to ever look anything like it did in 2008 and 2009. Towards this end, Congress has gone back into session to reach an agreement to move the economy forward.
Drawing a line, House Speaker John Boehner, R-OH, said Thursday that, "Raising tax rates is unacceptable. Frankly, it could not pass the House. I'm not even sure it could pass the Senate."
Democrats have taken upon the victory on Tuesday to urge a strong line be taken in budget negotiations.
Speaking today (Friday), President Obama kept his call for greater taxes on higher income earners.
"As I've said before, we can't just cut our way to prosperity," President Obama said Friday. "If we're serious about reducing the deficit we have to combine spending cuts with revenue. That means asking the wealthy to pay a little more in taxes." //
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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."
