10/24/2012 8:00 PM ET|
How we can avoid the fiscal cliff
Whether Washington has the will to make hard decisions is a big question, but there is a way out of this mess. Plus: How investors can prepare for the rough road ahead.
After years of avoiding tough choices on the debt and the deficit, a reckoning is upon us. The outlook is bad, but there is a glimmer of hope.
With a time bomb ticking, America seems to face a terrible choice: fiscal austerity and recession, or denial mixed with more debt and a new credit downgrade. A decision must be made soon; we will reach the "fiscal cliff" on Jan. 1, and the nation will hit the $16.4 trillion debt ceiling limit in January or February.
But all is not lost. In fact, a true solution is possible. I'll outline it below and then offer some initial advice to investors.
Politicians, you've been warned
Time is running out.
Yet as deadlines approach, the leaders we've tasked with finding a solution are engaged in a political blood feud and can agree on little, if anything.
They've bungled their responses to the smaller, incremental events that helped get us here, including past battles over the debt ceiling, extending the Bush tax cuts and lengthening unemployment benefits, as well as the failure of the congressional deficit supercommittee.
Now, tougher choices are stacked up just ahead, like piles of dynamite, awaiting the election, the lame-duck session of Congress and, potentially, a lame-duck president.
The credit-rating agencies are not pleased. Fitch warns that the fiscal outlook is "mired in uncertainty" and that indecision threatens America's rating. Standard & Poor's cut our AAA rating in August 2011, to great financial turmoil and economic damage, in large part because of the dysfunction surrounding that summer's battle over the debt ceiling.
S&P has promised to take additional action unless the country starts making real, structural progress on its debt and deficit problems and addresses the "recent decline in the effectiveness, stability, and predictability of its policymaking and political institutions, particularly regarding the direction of fiscal policy."
Business leaders are not pleased. CEO confidence and plans for capital spending are way down. The August report on durable goods orders -- machinery and equipment -- dropped at a rate not seem since the depths of the financial crisis. Hiring plans are down. Factory activity is down. New orders in the Federal Reserve's regional activity surveys are down.
A Merrill Lynch survey of chief financial officers found that the "effectiveness of U.S. government leaders" is their No. 1 concern right now. In July, a U.S. Chamber of Commerce survey of small businesses found that 65% were "very concerned" about the cliff. It's no surprise that job growth, based on the payroll report rather than the volatile household survey, has stalled or that a large portion of the jobs being created are part time.
And increasingly, investors are not pleased. A Merrill Lynch survey of U.S. fund managers shows the cliff at the top of their list of concerns, as issues such as the eurozone debt crisis, Iranian-Israeli saber-rattling and the Chinese housing market fade. The fiscal cliff is also the top concern of currency and credit traders, as well as European fund managers.
In other words, even with Spain on the brink of a bailout and Greece desperate for another injection of German cash, managers in Madrid and Athens are increasingly looking to Washington -- with a sinking feeling in their stomachs.
Falling off the cliff
Europeans are all too familiar with the risks.
If Congress and the White House take no action, the cliff will result in a fiscal body blow totaling $720 billion, which is worth nearly 5% of gross domestic product. (The numbers, and some options laid out by Merrill Lynch experts, are shown in the chart below.) This includes a $120 billion hit as the payroll tax cuts -- which started in 2009 as the Making Work Pay tax credit -- expire; $110 billion in budget cuts known as "sequestration" tied to the supercommittee's failure, which will hit the Pentagon hard; and $200 billion in tax increases as the Bush tax cuts expire and Obamacare taxes on the wealthy kick in.
However you add it up -- Merrill outlined three options -- this is a serious economic hit.
With the economy now managing to grow at only a 1.3% annual pace -- despite massive and repeated doses of cheap-money, dollar-weakening, inflation-priming stimulus from the Fed -- you don't have to be an economist to realize this would raise the threat of recession and start unwinding hard-won progress in the job and housing markets.
If you add in the additional drags from financial market turmoil (remember last summer's market dump related to the S&P credit downgrade?) and lost business and consumer confidence, it's an ugly outlook.
Oh, and it gets worse.
You see, we're not alone in facing this fiscal reckoning. France, Italy, the United Kingdom and Spain are all expected to tighten their budgets by 1% of GDP or more next year as the sun sets on the era of unmitigated borrowing and spending by governments. Germany, Canada and Japan are also tightening their belts. This is the kind of globally synchronized, demand-destroying policy tightening the made the Great Depression so terrible.
Overall, the International Monetary Fund expects the advanced economies to continue such policies through at least 2015.
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Kidding, right? There is no bipartisan support for this plan because the Democrats either
a) don't believe Romney's numbers add up or
b) don't believe Americans will give up their tax loopholes (like the home mortgage interest deduction) that make lowering rates (read that as pro-growth) possible or
c) believe Romney truly wants the plan he supported during the primaries, which lowers tax revenues
Bring back the tax rates under President Bill Clinton. Those were the most high growth years of the past generation.
Good article but the flippant reference that Medicare should be considered an entitlement because "a typical middle-class couple retiring in 2010 is on track to collect $387,000 in Medicare benefits after paying in only $156,000 in taxes. Give me a break! That couple started paying Medicare taxes over 40 years ago. If the government can't turn $156,000 into $387,000 over forty years, it's time to do something else.
It is really simple! Just play like President Obama is going to win another 4 years, and play like every law signed onto law is going to stay law too, and then get back to work and continue investing in your own country and its healthy future instead of devoting so much time, anguish, and money in a counter-productive manner. You fiscal cliff types are a whole lot like the Titanic's bridge staff 30 minutes after hitting the iceberg! I'll bet that there was a lot of finger-pointing going on there too!
Expiration of Fiscal cliff will not make any differance.Don't protect Rich and Corporations.
They only give part-time,minimum wage non leaveable earnings and no benefits.This part-tme
jobs to be counted as employment started during President Reagan, Republican Time.
Patriotic people should create more jobs and only wear U.S. Flag pin hippocratically.
The fact is- those born from 1932 to 1944... you lived through the post-Depression America and have cash in the bank while you live frugal. From 1945 through 1955, you seem to lack commonsense and live like egomaniac sociopath idiots. If you are born after that and struggling... SNAP OUT OF IT, get some enterprise skills and QUIT your corporate death role. The big businesses no longer resemble the businesses built by their Founders,. YOU are aiding corruption in destroying us. You certainly ARE entitled to a GREAT LIFE with ample rewards. It isn't going to be there on ever-suppressed salary. Your administrative loser boss will get yours.
What I love best is that every cut to entitlements only affects the generations after the boomers. Funny that the boomers are the largest population block and any cut to them could have the greatest affect but no, their votes trump everything. Even though it was under their leadership that all these debts occured, and they got to see all of the benifit of them like lower cost education. In fact they got to enjoy unparrelled prosperity. Now they are screwing over their grandkids so that they, the most previlaged generation that did not have to ever make a single sacrifice, fight in any major war or endure any hardship and can retire in style. The arguement that they paid into it all their lives is BS because their kids and grand kids will also pay into it all their lives but get much less out of it so that the boomers can get every drop of their "entitlements".
I hope the polictians are lying when they say the current generation will not face any cuts, that is one promise I could enjoy seeing broken.
"NEW YORK (Reuters) - Stock index futures rose on Thursday, indicating the S&P 500 may rebound from its worst five-day slide in five months, on optimism China's economy may be recovering and ahead of a flurry of economic data and corporate earnings.
The Ministry of Industry and Information Technology said China's factory output should grow faster in the last three months of 2012 than in the third quarter, raising hopes the world's second largest economy may avoid a hard landing to its slowdown."
WHO in America WANTS this? Time to close the banks, end the Federal Reserve and GET RID of Wall Street. China is firing up the factories that produced the cheap goods that destroyed us while FAKE ELITISTS who either got hired-in or inherited iconic business platforms got rich off it. Do I think we should go to war with China? NO. Do I think we should go to war with inheritors and fake Elitists? YES.
Hey prgprops.....here's some inside information on how well government programs worked to get us ot of the depression:
"Treasury Secretary, Henry Morgenthau, angry at the Keynesian spenders, confided to his diary May 1939: “We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and now if I am wrong somebody else can have my job. I want to see this country prosper. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. I say after eight years of this administration, we have just as much unemployment as when we started. And enormous debt to boot.”
Most religion's....Christianity in particular preach AGAINST DEBT> So what religious belief are you talking about?
Why don't we focus on the authors of the Fiscal Cliff instead of parading the sociopath losers of the GOP in the news. This week we've heard from Palin and Trump. Next we'll hear from who- Cheney, Rumsfeld and Bush?
Recover jobs now. That's how we stop the Fiscal Cliff. Close the banks, end the Federal Reserve, get rid of Wall Street... these are tools of terrorists.
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