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Are we set to plunge over the fiscal cliff?

Unless Congress acts, $600 billion of spending cuts and tax hikes will take effect in 2013. It could derail the economy and tank your 401k.

By Stacy Johnson Sep 18, 2012 2:09PM

This post comes from Stacy Johnson at partner site Money Talks News.


The Contenders © Red Frog/Vetta/Getty ImagesWithout congressional action, a combined $600 billion of spending cuts and tax hikes will happen in early 2013. Sadly, members of Congress have already supplied ample evidence they can't cooperate on anything, including major issues. So if the spending cuts and tax hikes take effect on schedule, the result will be an economy tumbling off what's become known as the fiscal cliff.


Many are afraid a recession lies at the bottom of that cliff. For example, here's a recent reader email . . .

Hi Stacy:
What are your plans for the coming "financial cliff" the U.S. government is headed towards? Plan on holding on to U.S. stocks? Buying foreign moneys? Gold or silver?
I am probably not the only one worried about this, and an experienced money guy like yourself can provide some much needed advice BEFORE we get to this "cliff."
- Steve

Before I offer my take, let's take a closer look at the potential problem.


The fiscal cliff: tax hikes

The end of 2012 will mark the end of a cornucopia of temporary tax cuts, some enacted during the Bush years, others by the current administration. Unless Congress acts to extend them, the following tax breaks will automatically expire:

Many of these breaks were enacted with the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003. The original laws were set to expire on Dec. 31, 2010, but were extended until the end of this year by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 and the  Middle Class Tax Relief and Job Creation Act of 2012.


Although the automatic expiration of all these tax cuts will return us only to the tax rates of the Clinton years, their magnitude, especially in light of today's anemic economy, has been dubbed "Taxmageddon."


What will it do? According to this Wikipedia page...

Based on figures from the CBO and Joint Committee on Taxation, federal taxes would increase by a total of $423 billion in 2013, if the tax cuts are allowed to expire. The non-partisan Tax Policy Center has estimated that for 83% of households in the U.S. there would be an average tax increase of $3,701, and the Heritage Foundation stated that those impacted by the tax cut expiration are primarily in the middle- and low-income groups, with its research finding that families would experience an average tax increase of $4,138.

While higher taxes will prove valuable in tackling the deficit, it will cost the economy -- and potentially jobs -- because Americans will have less to spend.


The fiscal cliff: spending cuts

Also good for reducing deficits but bad for the economy would be less government spending -- something else potentially imminent.


The Budget Control Act of 2011 was enacted to create a compromise when Congress couldn't agree on raising the debt ceiling. It requires automatic cuts in both defense and nondefense spending to begin in early 2013. While Social Security and Medicare were specifically excluded from the chopping block, nearly every other form of government spending could be subject to cuts that will total $110 billion per year: $55 billion to defense and $55 billion to nondefense spending.


Spending cuts, like tax increases, will go a long way toward addressing our nation's trillion-dollar deficits. But as with the impending tax hikes, automatically slashing government spending would be a shock to an already weak economy. It could also reduce defense preparedness and cut programs critical to helping those in need.


What's going to happen? Nobody knows. The options are:
  1. Washington doesn't act, and both spending cuts and tax hikes come to pass.
  2. Washington reaches a compromise that reduces the severity of both.
  3. Washington kicks the can down the road by extending the deadlines.

While few politicians want to send the economy into a recession, if past is prologue, compromise will be tough to reach. The president and his party will probably try to preserve tax breaks for middle- and low-income Americans, while pushing for tax increases for those with high incomes. Republicans will probably favor not increasing taxes on our nation's high-income "job creators."


Nothing is likely to be accomplished before the presidential election, leaving precious little time to do anything before the end of the year.


What's an investor to do?

Now let's get back to Steve's question: How we can protect our savings from going off a cliff along with the economy? He asks, "Plan on holding on to U.S. stocks? Buying foreign moneys? Gold or silver?"


My answer: Yes.


If you look at my personal portfolio, you'll see that I have money in stocks and also in a proxy for gold, SPDR Gold Shares. While I don't have money in foreign currencies, I've invested in companies dependent on international sales. I probably won't change that mix as we head into these dangerous waters.


There are three reasons I'll likely leave my positions unchanged.


The first is that I think the problem will be addressed, albeit only temporarily, by Congress extending the deadlines.


The second reason I'll leave my portfolio intact is that I can't predict the future. While what's ahead looks scary, if our nation manages to avoid the fiscal cliff, the market could rally -- and I don't want to be on the sidelines if that happens.


The final reason I'm staying the course is the most important: The money I have in the market isn't all the money I have. I'm diversified -- some in stocks, some in cash savings and some in real estate. That makes it easier to ride out storms like this one.


Don't think my attitude toward staying invested means I'm complacent, or that the amount I have in the market is immaterial to me. I think this potential self-inflicted fiscal wound is deadly serious, and the money I have in stocks is critical to my financial future. But this is the way I manage money -- I take what I consider appropriate risk, diversify, then hang on for the long-term.


If that's not you, Steve -- if you'll need the money you have in stocks within a year or two, or stocks are too risky -- I'd recommend you be wary and keep your savings somewhere safer. You're right to worry.


More on Money Talks News and MSN Money

52Comments
Sep 20, 2012 9:12AM
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Please notice the recent and heavy use of some new Frank Luntz-style PR terms related to the market hype, like “fiscal cliff”. They are really throwing the **** around to scare and move the suckers, and to ‘paint’ the supposedly divinely safe 'free-market'.

The scare term, “Fiscal Cliff” is certainly a Frank Luntz inspired phrase (like 'death tax') and may well be his own invention for the ruling elite Empire.

For all the uncritical media shills (and/or rubes) starting to toss this term around, they should step-back, think a bit, and then understand that:

The Luntz invented phrase “Fiscal Cliff” is really the propaganda 'scare term' and trigger word to soften the reality of the corporate/financial/militarist Empire's plan to “Kill Social Security and Medicare”

 Both of the “Vichy” faux-democratic Republican and Democratic parties of deceitful LIARS are planning to use this new Luntz invented “Shock Doctrine”  scare term "Fiscal Cliff"  just like the phony 9/11 “Useful Crisis” was used to institutionalize secrecy, illegality, un-Constitutional powers, and militarism “abroad” and “at home” (as Hannah Arendt warned all Empires do).

Hate to hit you media idiots with a shock, but this is how the Empire controlling our former country initiates the proven “Shock Doctrine” strategy with phony but oh soooo scary crises like “Fiscal Cliff”.

Best luck and love to the “Occupy Empire” educational and revolutionary movement.

Liberty, democracy, equality, and justice
Over
Violent/Vichy
Empire,

Alan MacDonald
Sanford, Maine
Sep 19, 2012 4:14PM
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When the attack on the embassy happened, Obama apologized for US citizens exercising free speech. But he said "No worries! If I'm re elected, I plan to take that away next, and then invite the Muslim Brotherhood over to turn our country around!"
Sep 19, 2012 3:32PM
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I'm tired of all the bi-parisan bickering.  ALL the incumbents in Washington in Washington are responsible-both Democrat and Republican. They are all crooks and will do and say anything to get a vote-and will vote anything for a dollars. It's absolutely repulsive and it's GOT to f'n stop.  I'm not sure what the hell is SO hard about NOT spending more than you take in (i've got great credit because it's SIMPLE MATH), keeping jobs in America and punishing companies who do otherwise, banning ANY lobbying, removing welfare as a way of life, forcing sterility on folks who've proven they've had more than 1 child they are unable to financially care for, encouraging strict and extreme punishment on white collar crime, doing away with bankruptcy (people need to learn personal responsibility and think before they spend).
Sep 19, 2012 3:13PM
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I used to think the Moody Blues were just a rock group. The new Moody Blues will be what results if the credit rating group makes good on its promise to lower the US's credit rating if Congress can't get off its dead **** and we wind up doing the Thelma and Louise thing off the fiscal cliff.  It was ObamAAA when he took office.  Then it became ObamAA just over a year ago.  Soon it will be Obam if things keep up.  It is time to replace the entire Congress, regardless of party affiliation, and the 435 of them we can throw out this year should take POTUS with them when they leave.
Sep 19, 2012 2:02PM
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We can only hope it leads to the REVOLUTIONARY WAR of 2013. Withdraw from NATO, cease all foreign aid, deport all the illegal aliens, bring all US militrary back home, send all the lawyers/politicans packing, no foreign back accounts for any US company or citizen, and get politics out of military affairs. Start the process of rebuilding the United States from the morally corrupt sewer it has become.
Sep 19, 2012 1:53PM
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Don't tell the dems and hollywood prezbo ain't worth a sh*t, he's the greatest thing since

penecillan, he's so transparent. Not long ago Bill Clinton said he was in over his head, now he's

saying 4 more yrs. of this clown. Show's what the democrats believe, MORE GOVERNMENT...

Sep 19, 2012 1:40PM
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Government creates nothing, it only costs. More government more cost to us the taxpayer. You can't have more people taking money than you have people putting the money in. Our government spends too much money. They can raise the tax rate to 50% and they still won't have enough. It's a sad state of affairs. This is the type of government that everyone was trying to get away from when they came to the new world and created the United States.  These politicians are killing this country. Who spends hundreds of millions of dollars to win a job that pays 500k for 4 years?  Do you think there will be some special interests to take care of after the election?  (both sides)

I wonder?
Sep 19, 2012 1:31PM
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Let's party like it is 1999! Cause i ain't driven the train and the tracks are broken.
Sep 19, 2012 1:10PM
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The issue will never be addressed until we have no other option.
Sep 19, 2012 12:45PM
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Obama wants it to happen ande it will. Be happy Obamas people.
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I say bring on the fiscal discipline. It is long overdue. Bringing down the deficit is of the utmost urgency. This medicine is far better than a monetary collapse and just printing more money out of thin air as we have done so much of and for so long. People need to save and live within their means. The whole world needs a one child rule to moderate future catastrophes. It's a lot easier to give some assistance to a few thousand than it is to help a few billion. We had WWII, Korea and Viet Nam and there were only 2 billion on the planet. When we first started measuring carbon dioxide in the mid fifties it was already increasing and the world population was 2 billion. Now we've got 7.5 billion and everything is magnified. Bangladesh quadruples their food production but also quadruples their population. Bangladesh will be one of the first countries to be impacted by rising ocean levels. So now 4 times as many people will need help or 4 times as many people will perish. Even if they have to limit social security to 75%, it is better than a monetary collapse.
Sep 19, 2012 12:36PM
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The fiscal cliff was manufactured by Congress.  It is an illusion that keeps us all believing America is broke when it is not.
Sep 19, 2012 12:05PM
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Let it happen. Sooner or later it will happen anyway and the longer we are in denial, the worse it will be.
Sep 19, 2012 11:53AM
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OBAMA is the most IRRESPONSIBLE SOB I have ever seen in my life. This F*CKING A*SHOLE NEEDS TO GO NOW!!
Sep 19, 2012 11:45AM
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By show of hands, who agrees that we have already gone over the cliff? From where I am looking, we have already hit the ground, and have splattered in grand fashion. This economy, and our government, are both epic f*cking failures.
Sep 19, 2012 11:38AM
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Extend the deadlines.  I've got a $100 bet on that in Vegas.

 

 

Sep 19, 2012 10:33AM
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As everyone with a brain understands doing nothing is what will plunge us over the fiscal cliff.

Any plan to address this enormus problem will most likely have some short term pain associated with it.  A large section of the U S population act like whinning children that can't find their pacifier so the politicians placate them with more goodies that they won't pay for

This is a pathetic and very dangerous situation

Sep 19, 2012 10:13AM
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This is where real honest truth needs to come out, not the lies from both sides, The defence department could very easily absorb a $55 billion cut, they could downsize, and save that money overnight. Even downsizing by 20% would still have the defence department strong enough to take on any situation that arises in the world. There is no reason , (being the largest army in the world by a factor of 10 compared to he next country in line), that the defence department could not take cuts in there stride.In fact it might help to get them to streamline there operations and look into ways to stop the fraudulent activity that is allowed to happen.

Add increasing the tax rate on those earning more than a million a year to 85% and the economy could be booming so much that the deficit could be lowered in a matter of years.

Yes there are other cuts that can be made that would improve the economy, changing healthcare to a single payer system would inject trillions into the economy, and that would also encourage people to spend more thereby growing the economy faster.

The problem is , as can be seen in this clip , that the Republicans at any chance they get will blame Obama for this mess they have got us into. I just hope Obama calls them all back from there break and gets them to get the job done or stay until Xmas, or even work over the Xmas period.Yes dems will want to be on the campaign trail as much as the Repubs but if both are forced to actually do some work for a change they might actually get something done, and if all the house and senate are in Washington , nobody can campaign on either side so it would be fair. This is what i am hoping Obama does, shows who is boss and shows who is not doing there job.

Sep 19, 2012 9:51AM
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maybe its time to put some taxpayers back onto the roles of 'taxpayers'.  47% paying no federal taxes is not what tax fairness is all about in the modern day of federal largesse.  if you enjoy the benefits of government maybe one should pay in a little.  whatever happened to shared sacrifice?  even token payments by all make everyone feel a sense of fairness in the tax code.  when so few actually pay in to the system it engenders a feeling of unfairness and INVITES those that do pay in to say ENOUGH and seek loopholes and investing out side this country(bad for everyone).

 

i'm not so afraid of the fiscal cliff as i am the federal debt.  the debt is more of a threat to our national security than any thing we now face.  sure it will cost me more but what price do you put on the future health of the nation.  the fiscal cliff may just be the SHARED SACRIFICE  of the modern political age.  giving up benefits and paying more seems the responsible way to rescue the country.

Sep 19, 2012 8:09AM
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2% payroll deduction - NEVER SHOULD HAVE HAPPENED - SHOULD HAVE STOPPED LAST YEAR
Earned income credit - SHOULD BE ABOLISHED
Mortgage forgiveness - NEVER SHOULD HAVE HAPPENED - YOU DON"T REWARD IRRESPONSIBILITY

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