fiscal cliff impact on gdp

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The Fiscal Cliff is a Mole Hill Compared to This

By , Chief Investment Strategist, Money Morning • @ShahGilani_TW -

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?

By , Money Morning -

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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Protect Your Money from the Fiscal Cliff Attack on Dividends

By , Money Morning -

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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CEOs, CFOs Voice Concerns over Crippling Fiscal Cliff

By , Money Morning -

While the fiscal cliff might not be at the forefront of concerns for the average American, it is deeply affecting the spending and hiring plans of many businesses.

Four recent surveys show that corporate chief executive officers and chief financial officers are taking measures to prepare for the Jan. 2, 2013 actuation of the fiscal cliff.

According to a recent study by the Congressional Budget Office, this could easily take the U.S. economy back into another recession. Despite that threat, it appears less and less likely that anything will be done by the Obama administration and Congress to avert the crisis.

Needless to say, this has not gone unnoticed by the high level executive leadership of corporate America.

"This complete Mexican standoff that we have now is not getting us anywhere," Jim McNery, Chief Executive Officer of Boeing Company (NYSE: BA) said about the looming failure of Congress and the Obama administration to mitigate the impact of the fiscal cliff.

Business Feels Bearish

Since businesses see fiscal cliff talks failing to deliver progress, growth expectations of the country's biggest companies have fallen.

Members of the Business Roundtable, an association of chief executive officers, expressed in a recent survey bearish sentiment for every business measure (sales, capital spending and hiring).

From the results of this research, the Business Roundtable has lowered its projections for a wide range of economic indicators for its most recent CEO Economic Outlook Survey. These were registered at the lowest level since 2009, the nadir of the Great Recession.

Those closest to the fiscal operations of a company, the chief financial officers, are similarly bearish due in a large part to fiscal cliff 2013.

The CFO Signals Survey found that 47% of chief financial officers are more pessimistic about how well their company will do this quarter.

According to the survey, that sentiment represents the "most somber year-over-year expectations" ever in the history of that research report.

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CEOs and CFOs view hitting the fiscal cliff as a huge failure in the economic leadership from the elected political leaders in Washington, DC.

John Engler, the former governor of Michigan who is now the President of the Business Roundtable, compared the negligence to the recent standoff between the National Football League (NFL) and its referees.

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Fiscal Cliff Deals "Devastating" Blow to Defense

By , Contributing Writer, Money Morning -

The potential effect of the fiscal cliff on our national security spending just became clearer - and more unsettling.

Friday, amid pressure from Congress, the Obama administration for the first time outlined how some $100 billion in spending cuts scheduled to take effect Jan. 1 will disrupt thousands of federal programs if no action is taken to avert the fiscal cliff.

The automatic cuts, known as sequestration, are a kind of threat Congress implemented on itself in the 2011 Budget Control Act. Yet, they were never meant to actually happen.

As White House press secretary Jay Carney explained in Friday's briefing, the idea was to make the cuts so objectionable that Congress would come up with a more acceptable way to reduce the deficit.

"The sequester was designed to be bad policy, to be onerous, to be objectionable to both Democrats and Republicans," Carney said.

The detailed report is aimed at putting Congress into action. The Office of Management and Budget clarified in its introduction, "The specter of harmful across-the-board cuts to defense and nondefense programs was intended to drive both sides to compromise. The sequestration itself was never intended to be implemented."

But to date, no concessions have been agreed upon and the perilous looming cuts are coming closer to reality. The announcement brings the U.S. nearer to going over the dreaded fiscal cliff, which scores of analysts say will thrust the economy into a recession in 2013 by draining mountains of money out of the already besieged economy.

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Fiscal Cliff Not a Priority for This Do-Nothing Congress

By , Associate Editor, Money Morning • @DavidGZeiler -

With the United States poised to topple over a recession-inducing fiscal cliff in January 2013, you'd think Congress would be frantically working on a solution.

After all, that's what we elected them to do.

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.

But rather than focus on figuring out how to avoid the fiscal cliff, Congress members are focused on figuring out how quickly they can get out of Washington for their next recess.

"Everyone wants to get out of town - fast," a top Senate aide told Reuters.

That would be fine if lawmakers were just finishing a grueling summer session, but they just returned from a five-week recess. The current session will last just two weeks, and then Congress departs for another recess, possibly as long as seven weeks.

And what lawmakers have placed on the agenda for their abbreviated session hardly compares to the flashing-red-lights, sirens-blaring crisis the United States faces with the fiscal cliff.

Instead Republicans and Democrats will spend much of their limited time voting on bills and holding hearings designed to score political points they can use in their re-election campaigns.

The Democrat-controlled Senate plans to vote on jobs bills they know the House Republicans will reject; the GOP-controlled House plans to repeal Obamacare for the umpteenth time, which obviously will get nowhere in the Senate.

"Democrats appear ready to ride out the rest of the year spinning tall tales that the economy is doing fine while doing virtually nothing about the problems we face as a nation," Senate Minority Leader Mitch McConnell, R-KY, told Politico.

Rep. Chris Van Hollen, D-MD, called the GOP moves an "example of Republicans wasting time that should be spent on finding solutions to the country's problems. We're up to zero votes on Obama's jobs bills and more than 30 votes to repeal Obamacare," he told Politico.

Meanwhile, America edges closer to the fiscal cliff with each passing day.



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Fiscal Cliff a Far Bigger Threat Than Most Investors Think

By , Contributing Writer, Money Morning -

The United States may or may not go over the fiscal cliff in January, but few investors are taking the possibility seriously enough.

That's the message Goldman Sachs (NYSE: GS) chief U.S. equity strategist David Kostin had for his clients in a recent note.

He believes investors are not focusing enough on the potential impact of the fiscal cliff, which could set the stage for jittery markets akin to last year when the debt ceiling debates sent stocks tumbling.

When it comes to anticipating the impact the fiscal cliff will have on markets, "portfolio managers have been swayed by hope over experience," Kostin recently said in his note.

Kostin compared the current situation to last year's debt ceiling crisis when Congress waited until the eleventh hour to reach a deal.

"Investors were stunned and the S&P plunged 11% in 10 trading days (and more than 17% from the level one month prior to the deadline)," Kostin said. "Eventually Congress reached a compromise on raising the debt ceiling."

"We believe the uncertainty is greater this year than it was 12 months ago," Kostin said. "Political realities and last year's precedent suggest the potential that Congress fails to reach agreement in addressing the "fiscal cliff' is greater than what most market participants seem to believe based on our client conversations. In our opinion, equity investors seem unduly complacent on this issue."

The market rally enjoyed this month is a markedly different from last year's showing as markets skirted past the one-year anniversary of the debt ceiling face-offs. But Kostin says the S&P 500 is headed for a fall-and a steep one at that.

Kostin warns: "Assigning a P/E multiple to various fiscal cliff and earnings scenarios is difficult because ultimately we expect Congress will the address the situation. But investors must confront the risk they may not act until the final hour."

His year-end target for the S&P is 1,250; quite a bit lower than the current 1,424.

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How to Fix the U.S. Housing Market

By , Chief Investment Strategist, Money Morning • @ShahGilani_TW -

If this week's economic reports showed us anything, it's the fact that two years into what's supposed to be an economic recovery, the U.S. housing market remains on life support.

But here's what those reports didn't tell you: If the housing market isn't fixed soon, it's going to drag the rest of the economy down into a hellish bottom that will take years, if not decades, to crawl out of.

The housing market is our single-most important generator of gross domestic product (GDP) and, ultimately, national wealth.

It's time we fixed what's broken and implemented new financing and tax strategies to stabilize prices.

Contrary to the naysayers - and in spite of political pandering and procrastination - we can almost immediately execute a simple two-pronged plan to fix mortgage financing and stabilize U.S. housing prices.

I call it a not-so-modest proposal.

The Worst Since the Great Depression

The facts are frightening: We are in a bad place. The plunge in housing prices we've seen during the current downturn is on par with the horrific freefall the U.S. housing market experienced during the Great Depression.

And without an effective plan to arrest the double-dip in housing, there's no bottom in sight.

Hope Now, an alliance of lenders, investors and non-profits formed at the behest of the U.S. Department of the Treasury and the U.S. Department of Housing and Urban Development, counts 3.45 million homes being foreclosed from 2007 through 2010. Current estimates of pending and potential foreclosures range from another 4 million to as many as 14 million.

According to RealtyTrac, a real-estate data provider, the country's biggest banks and mortgage lenders are sitting on 872,000 repossessed homes. If you add in the rest of the nation's banks, lenders and mortgage-servicers, the true number of these REO (real-estate owned) homes is closer to 1.9 million.

These shocking statistics illustrate just how large the current overhang of bank-owned properties actually is (at current sales levels, REO properties would take three years to unload). And they help us to understand how the staggering number of yet to-be-foreclosed, repossessed, and sold homes will depress U.S. housing market prices for years to come.



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Special Report: How the Government is Setting Us Up for a Second Subprime Crisis

By , Chief Investment Strategist, Money Morning • @ShahGilani_TW -

[Editor's Note: Shah Gilani, a retired hedge fund manager and noted expert on the global credit crisis, predicted this developing FHA debacle in a July 2008 Money Morning essay.] Is the government creating another subprime-mortgage bubble? The first time around, the three-headed federal serpent - the Bush administration, the Treasury Department and the U.S. Federal […]

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The Slow Death of General Motors

By , Money Morning -

By Martin Hutchinson Contributing Editor Money Morning U.S. President Barack Obama's firing of General Motors Corp. (GM) Chief Executive Officer G. Richard Wagoner Jr. may be the beginning of the final act of a long and sad drama - the slow death of GM. The company nameplate may soldier on in some form, but it […]

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