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.
VIDEO ON MSN MONEY
Like many conservative writers, your statement conveniently neglects to mention the amount of money that GW stole from the Social Security trust fund, the national highway trust fund, and even the FAA trust fund, in an attempt to falsely portray our economic strength as a whole lot rosier than it actually was. One of the biggest problems with a desire to return to the days when trust funds could be plundered with impunity to address shortfalls is that today that money is largely already gone!
According to the US Treasury October, 2009 revision, the last year of GW's Presidency was the most-expensive single year of any President in US history, including any year presided over by President Obama. GW's total borrowing for 2008 was $1.838 Trillion, not that $550 billion misrepresentation that you conservatives are so fond of spewing. Why not accurately report facts instead of attempting to continue that charade any longer?
What happens to corporations that issue completely false earnings reports that try to hide 70% of their total debt when they get caught? Why shouldn't that happen to the US too? The main reason that we need deep spending cuts and some tax increases is because your buddy GW completely lied for 8 years about US economic strength, in what could very well be the biggest case of insider trading ever.
It's funny those Democratic "government based solutions" Mirhaydari doesn't seem to support are what got us out of the Great Depression. History has been a guide here. The Republican economic policies he prefers, run amok, caused the Great Depression as well as our recent economic calamity.
So his answer to the problem, apparently, is to double-down on those policies.
Gee, maybe Americans were smarter last time around.
So what is so wrong with allowing our income tax rates to revert to what they were when Bill Clinton was in office? If anyone has a short memory about those 8 years, our civilian economy was never stronger! My own educated guess is that higher income tax rates will encourage more productive investment at home trying to mitigate those tax rates. Why make it easier for wealthy Americans to invest offshore Anthony? Why not force them to invest at home instead?
As a member of the 80-90% group in annual income, along with a member of the top 5% in terms of net worth, I would be very happy to pay a little extra in taxes in order to enhance our national economic security in a manner beneficial to all Americans, and I would also be even happier if I knew that those above me on the totem pole were also paying their fair share to support their own country too.
Entitlement = paying $156,000 in taxes and getting a single cent more in benefits 35 years later. You are not supposed to get a return on your investment. It doesn't work that way for people in your class (taxpayer class citizen). You should have been born in the investor class if you want to make a return on the money you put into something. With many businesses expecting a 3 year pay back on investments, I'm sure they would jump at the opportunity to invest $156,000 over a 35 to 47 year period to get a total of $387,000 benefit over the following 30 years. This even doesn't take into account the risk. No business would consider this a good investment even if you guaranteed that you would pay them the full amount in increasing increments over a 30 year period after they had to invest for so long. Investing the way that you have advised in the article over a 35 to 47 year time period should produce over $1,000,000 easily. I doubt that the weathly still remember why some of these "entitlement" programs and pro-worker laws like minimum wage were allowed to pass by the previous generations of wealthy people who controlled everything in their time like our wonderful rich people do today. When you allow most people to scrape by and feel like they are successful or at least believe that they have everything that they need, they are much less likely to commit crime focused at the wealthy who have cheated them out of the profit made by their labor. Combine that with blaming "colored people", "illegals", "feminists", "Communists", "Socialists", "welfare w_ores", "ungrateful unemployement dependents", etc for all the problems that poor people face and you can always be secure in your mansions. The poor fight blame and fight each other, while this "class warfare" is strongly discouraged by all media. It's not like the wealthy recieve more benefit than anyone else from common public services like roads, firefighters, and police. There is no reason for you to pay more than any working person. If I pay $15,000 in taxes total, then you should pay the same actual dollar amount even if you make $2,000,000. Of this wouldn't be fair if you earned the money by investing. If you invested to make the $2,000,000, you shouldn't have to pay tax on that because you truly earned the money from the hard work you did every day to get that. On the other hand, if you got paid $2,000,000 for a salary from an employer, maybe you should be taxed at a higher rate. That was someone else's money that you took when you got the salary, so you didn't earn it as much as the inverstor. Even better, your children are entitled to inherit all of your money tax free. Their hard work is what earned the money in the first place so they completely deserve the inheritance which is not at all like a hand-out.
The best way to step back is just to FIRE '57 States'. We don't need to raise taxes on anyone.
Oblama just needs more money to spend on his special interest groups. When W left we spent 2.95 trillion and took in 2.4 trillion. Now with all of the imbecile Obama's new spending we spend 3.8 trillion and take in 2.5 trillion. We have record tax revenues.
This idiot keeps trying to Tax, SPEND, Borrow and Print our way to prosperity. Obama is Arrogant, Lazy, CORRUPT and economically a clueless imbecile.
We need to FIRE Obama, slash government spending end the borrowing and PRINTING.
There can be no compromise on the TAX issue. WE NEED TO SLASH SPENDING 1.3 TRILLION FIRST. And as to fairness we need the deadbeat 47% to start PAYING taxes. 5% pay 65% of the taxes, 48% pay the other 35% and the 47% of deadbeat LEECHES pay NOTHING. Only dumb democrats can argue that UNEQUAL is FAIR. If that is the case we can have a lot of other unequal but fair policies. Wanna bet they are not for that idea?
This is just great. Mirhaydari is a Republican.
And if we do not re-elect Mirhaydari and if we do not elect Romney than America's fate is sealed. We can be guaranteed that the Republicans will drive the economy off the "fiscal cliff." Our hardly tested AA credit rating will be knocked to junk. And they will do this while impeaching the newly re-elected President Obama over the phony, Republican Dirty Tricks squad Benghazi emails, thus grinding the government to an even greather halt than before. We will see a dysfunctional government worse than any Blade Runner Charlton Heston Omega Man Planet of the Apes Soyent Green dystopia ever imagined.
Shoot, I say bring it on. Should be fun.
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
[BRIEFING.COM] The stock market finished the Wednesday session on a modestly lower note, but it is worth mentioning today's retreat took place after six consecutive gains. The Dow Jones Industrial Average (-0.1%) and S&P 500 (-0.2%) settled not far below their flat lines, while the Nasdaq Composite (-0.8%) lagged throughout the session.
Equity indices started the day in the red, with the Nasdaq showing early weakness as large cap tech names and biotechnology weighed. The technology ... More
More Market News
|There’s a problem getting this information right now. Please try again later.|
MUST-SEE ON MSN
- Video: Easy DIY smoked meats at home
A charcuterie master shares his process for cold-smoking meat at home.
- Jetpacks about to go mainstream
- Weird things covered by home insurance
- Bing: 70 percent of adults report 'digital eye strain'