Posts Tagged ‘Fiscal Cliff’

Fiscal Cliff Turns Into Fiscal Bluff

Friday, January 4th, 2013

“What’s a five letter word for ‘cliff’?“ an editorial page cartoon asked.  The answer: “Bluff.”

To bluff is to mislead and that’s an appropriate summary of the fiscal cliff agreement, which will raise taxes and spending, while failing to consider the country’s growing debt crisis.

The market reacted positively, with the Dow Jones Industrial Average initially up more than 2% and markets in other parts of the world showing similar gains.

The market reaction was not, we suspect, because a well-crafted agreement that benefits America had been negotiated, but because the “fiscal cliff” had been avoided at the last possible second.  Consider what the agreement does – and what it doesn’t do.

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From Goldfinger to Groundhog Day

Friday, December 21st, 2012

Tick.  Tick.  Tick.

It’s like that scene in “Goldfinger,” where the seconds are ticking down and James Bond is trying to defuse the bomb.  He succeeds, of course, just in time.

Of course, John Boehner is not James Bond and real life is far more complicated than the movies.

Tick.  Tick.  Tick.

The real problem is not a cliff, but a chasm.  The degree of separation between Democrats and Republicans in Congress has never been wider.

On one side, President Obama and his Democratic supporters are hell-bent on raising taxes on the wealthy, which may not do much to tame the deficit, but may achieve the goal of moving toward class equality.  Democrats believe that more spending is needed to stimulate the economy, even though spending is at an all-time high and the economy is still in dismal shape.

On the other side, Republicans are dead set against raising taxes, and want spending cuts, tax reform and entitlement reform.  Medicare, Social Security and government employee pensions have created unfunded liabilities of more than $86 trillion, but the chances of working out a rational reform before the end of the year are about the same as the chances of winning Powerball.  Maybe less.

Tick.  Tick.  Tick.

Congressman Boehner’s “Plan B,” which would have raised taxes on millionaires, did not even make it to a vote.  He could go through the entire alphabet and the results would likely be the same.

Republicans in Congress would rather go over the fiscal cliff than approve taxes on the wealthy, who are viewed as job creators.

Democrats would rather go over the fiscal cliff than approve major spending cuts, as spending is viewed as an economic stimulant.

Tick.  Tick.  Tick.

Maybe Gary Cooper in “High Noon” provides a more appropriate comparison.  The clock on the wall ticks down and you know that confrontation is unavoidable and blood will be spilled.

Take a look at the futures market and you’ll see that it’s already spilling.  Last night, S&P 500 futures dropped from 1437.25 to 1391.25 as soon as Congressman Boehner’s plan was scrapped.  The value of the dollar also tumbled, as witnessed on the EUR/USD, which pairs the dollar with the euro.

Tick.  Tick.  Tick.

Another movie that comes to mind is “Groundhog Day,” where Bill Murray’s day is endlessly repeated until he gets life right.

The déjà vu is appropriate to today’s negotiations.  Consider the U.S. Macro Surprise Index, which quantifies the extent to which U.S. economic indicators exceed or fall short of consensus estimates.  This year’s path is almost identical to last year’s, when Congress put off making tough decisions by extended tax breaks for another year.

Then again, “Groundhog Day” had a happy ending.  Maybe “The Day the Earth Stood Still” is a better comparison.

The Black Cloud in the Silver Lining

Friday, December 7th, 2012

All I want for Christmas is a new economy.  Ours is broken.

While there are a few positive signs that optimists can latch onto, it appears that either the country will go over the fiscal cliff or virtually no cuts will be made in the $3.8 trillion federal budget.  If nothing else, current spending should prove that Keynesian economics doesn’t work.  With a fourth consecutive deficit exceeding $1 trillion, optimists take as good news a drop in the unemployment rate from 7.9% to 7.7%.  Considering the federal spending that has taken place in recent years, wouldn’t the economy be booming now if Keynesian economics really worked?

In November, 146,000 new jobs were added, exceeding expectations of 85,000, according to the Bureau of Labor Statistics (BLS).  In spite of Sandy, according to the BLS, the unemployment rate declined to 7.7% from 7.9%.  However, these preliminary figures could be more BS from BLS.  Final BLS job figures for September and October were revised downward by 49,000 jobs.  You may recall that the BLS stats brought the jobless rate below 8% just in time for the election.  We’re betting that when final stats are released, the number of new jobs will not have to be revised upward.

Those cheered by the latest job figures can always find a black cloud in the silver lining by visiting Zerohedge.com, which correctly points out: “What is certain is that the broader mainstream media will continue to focus purely on the quantitative aspect of the report, while the real story over the past 3 years has been a qualitative one: a shift to lower paying jobs, a painfully slow (if any) rise in average hourly earnings, a transformation of the US labor pool to ‘Just In Time’ inventory as virtually all new hiring needs are met by temps, and finally a secular shift to an older labor force, as job creation in the 25-54 category since January 2009 is still negative!”

The biggest driver of the U.S. economy is consumer spending.  Over the past four years, income for the average consumer has dropped by about $4,000.  While the inflation rate has been relatively tame, prices for basics such as food and oil have increased significantly.  On top of this, going over the fiscal cliff would cost the average household nearly $3,500 in new taxes, according to BloombergBusinessWeek.

So consumers need to lift the economy while taking a $7,500 hit to their incomes and paying more for essentials.  The only way that will happen is if consumers use the federal government as a role model and spend more money than they earn.  Lots more.

Merry Christmas, indeed!

So This Is Compromise?

Friday, November 30th, 2012

“We are both heading for the cliff.  Who jumps first is the Chicken.”

                                                                                                      – Rebel Without A Cause

Post-election, both Democrats and Republicans have promised to compromise and avoid the fiscal cliff.

So what would you consider a compromise?  A little tax increase, perhaps, along with some spending cuts, then call it a day?  That’s not happening.

Apparently, by “compromise,” they mean not giving an inch.  With the end of the year just a month away, both parties seem to be digging in and playing a game of chicken.

President Obama doubled down by calling for a $1.6 trillion tax increase – twice the increase that will take place if no action is taken and we go over the fiscal cliff.  Media has focused on a couple of Republicans who have said that they will break their pledge of no tax increase … but mostly there has been talk and no concrete plan for avoiding the fiscal cliff.

Remember the scene in “Rebel Without a Cause,” where two cars race toward a cliff and the first driver to jump out of the car is “the Chicken?”  The winner went over the cliff and died in a fireball as his car slammed into the ground.

Real life is resembling that 1955 film, but this time when the car goes over the cliff we will all be along for the ride.

Looking Over the Fiscal Cliff

Tuesday, November 27th, 2012

You’ve heard plenty about the fiscal cliff.  But little attention has been paid to what’s beyond it.

What’s beyond it is another higher, steeper cliff.

The federal debt now exceeds $16 trillion and Congress will need to vote shortly to raise the debt ceiling in order to keep the government operating.  We’re running an annual budget deficit exceeding $1 trillion, so the debt will only get higher.

The longer we try to maintain the status quo, the more difficult it will be to bring the debt back in line.  We’re reaching the point where every dollar in the federal budget will be needed just to service our debt.  That means your taxes will no longer go toward building new highways, helping the poor or protecting the United States.  They will be needed to pay off the enormous debt that the President and Congress have incurred.

The only way to keep the government functioning under those circumstances, even if we cut spending and raise taxes, will be to incur more debt.

The bigger issue, though, is the unfunded liabilities from government entitlement programs.  According to The Wall Street Journal, we have already incurred $86.8 trillion in liabilities for Medicare, Social Security and future retirement benefits for federal employees.  If we could freeze time and incur no further liabilities, we would still need to pay out $86.8 trillion.

Both Medicare and Social Security are “pay as you go” systems.  As baby boomers retire, payment for these two entitlements will come from those who are still in the workforce.  As they are a much smaller population than the baby boomer generation, they will need to pay more or both Medicare and Social Security will collapse.

But how much more will be needed?  A commentary in The Wall Street Journal, “Why $16 Trillion Only Hints at the True U.S. Debt,” includes the following glum assessment:

“When the accrued expenses of the government’s entitlement programs are counted, it becomes clear that to collect enough tax revenue just to avoid going deeper into debt would require over $8 trillion in tax collections annually.  That is the total of the average annual accrued liabilities of just the two largest entitlement programs, plus the annual cash deficit.

“Nothing like that $8 trillion amount is available for the IRS to target. According to the most recent tax data, all individuals filing tax returns in America and earning more than $66,193 per year have a total adjusted gross income of $5.1 trillion. In 2006, when corporate taxable income peaked before the recession, all corporations in the U.S. had total income for tax purposes of $1.6 trillion. That comes to $6.7 trillion available to tax from these individuals and corporations under existing tax laws.

“In short, if the government confiscated the entire adjusted gross income of these American taxpayers, plus all of the corporate taxable income in the year before the recession, it wouldn’t be nearly enough to fund the over $8 trillion per year in the growth of U.S. liabilities.”

The Good News: No More Election Ads

Friday, November 9th, 2012

In the wake of Tuesday’s re-election of President Obama, the Dow Jones Industrial Average fell 434 points in two days, a drop of 3.3%.

That’s better than when he was first elected.  After a 305-point rally on Election Day 2008, the DJIA fell 486 points, or more than 5%, on the day after, which was the largest post-election drop ever.

In 2008, the housing bubble had burst and we were dealing with the biggest financial crisis since The Great Depression.  Today, we still have not recovered from the financial crisis, but face a “fiscal cliff” and continuing troubles in Europe.

The fiscal cliff, which combines $800 billion in tax increases and government spending cuts, has investors spooked for many reasons.  Unless action is taken:

  • Corporate dividends will be taxed like earned income, increasing the tax from 15% to a top rate of 39.6%.
  • The Affordable Care Act adds a 3.8% on investments, so the tax on dividends could nearly triple overnight.
  • The top tax rate on capital gains will increase from 15% to 20%.
  • Income taxes and estate taxes would also increase, and many more Americans would be subject to the alternative minimum tax (AMT).
  • The re-election of President Obama, who favors tax increases, makes it more likely that the increases will take place.
  • With Republicans controlling the House and Democrats controlling the Senate, Congress is divided and it will be difficult to reach an agreement that would avoid or reduce the impact of the fiscal cliff.

Of course, there’s plenty of time between now and the end of the year to deal with the issue.  But Congress will be on holiday for much of the time between now and the end of the year.

Meanwhile, in Europe

While Europe’s sovereign debt crisis received little attention during the busy election season, it’s not because the crisis has abated.

Once again, Greece is the little country that can’t, as it increasingly appears that “the Greek ‘austerity’ vote was merely theater,” as Zerohedge put it.  The resulting news in Europe this week is that European finance ministers may delay approval of the next bailout payment for Greece from November 16 to late November, when they will hear a full report on Greece’s compliance (or lack thereof) with the terms of the bailout.

The unveiling of the Outright Monetary Transactions (OMT) program in September by the European Central Bank (ECB) boosted market confidence that Europe was doing something about its problems.  But, like America’s ongoing quantitative easing, Europe’s OMT won’t eliminate economic problems.  Lower interest rates just make it less expensive to keep borrowing more and more money.

Maybe that’s why economic confidence in Europe has sunk to a three-year low.

So the economic misery continues, but at least we won’t have to see or hear any more election ads.

Pretzel Logic

Friday, June 22nd, 2012

When Fed Chairman Ben Bernanke said recently that he did not expect The Fed to initiate any additional monetary stimulus, apparently stock traders weren’t listening.

The recent run-up in stock prices was based on conjecture that The Fed would respond to the still-weak economy with major action – perhaps yet another round of quantitative easing.

Instead of announcing quantitative easing, though, the Fed announced the expansion of Operation Twist on Wednesday. Under Operation Twist, which is designed to lower long-term interest rates to stimulate borrowing and investment, the Fed has been selling $400 billion of short-term bonds and using the funds to buy longer-term securities.

The extension through the end of 2012 added another $267 billion in bond sales. The measure is not very controversial, but an extension is also not likely to be especially effective, given that long-term rates are already at record lows.

Bernanke did not rule out further action. If none is taken, the “fiscal cliff” will become a little steeper.