Obama, GOP face off at the edge

With a second term secured, the president squares off against Congressional Republicans with deadlines on the fiscal cliff and the nation's debt ceiling fast approaching.

By Anthony Mirhaydari Nov 9, 2012 3:34PM

Image: Washington, D.C. (Corbis)

Wecome to Obama vs. the Tea Party, Round 2.

 

Apparently, suffering through the economic and financial turmoil of August 2011, when the U.S. Treasury lost its "AAA" credit rating from Standard & Poor's as President Obama and Tea Party Republicans in the House fought over the nation's debt limit, wasn't enough.

 

Because on Election Day, Americans kept the fight going. And the stakes are higher this time.

 

As I've been writing over the last few weeks, the "fiscal cliff" of tax hikes and spending cuts worth some 5% of GDP are set to hit on Jan. 1 unless action is taken. The cliff is made up of tax cuts and spending hikes that have been a source of gridlock on their own. (See the seven parts of the fiscal cliff.)

 

Now, we're facing a fiscal cliff deadline, plus the country is again approaching its debt limit, now at $16.4 trillion. Add in a nervous business community, recent pullbacks in capital investment, hiring and stocks, and this is shaping up to be a battle royale. Here's where I hope the politicians take us.

 

As I said in my recent column on the subject, avoiding the cliff by keeping taxes low and spending high will cause the national debt to explode -- an option that will eventually weigh on economic growth and worsen the deficit via higher interest costs. And jumping off the fiscal cliff isn't really a viable option either since it will torpedo the economy and result in a recession/deficit death spiral of the like being suffered by Greece.

 

So we need a compromise solution focused on short-term pro-growth measures mixed with an attack on the structural, medium-term drivers of the deficit which are, mainly, out-of-control healthcare cost inflation. When people get jobs and make more money, they will pay more taxes and absorb less government benefits.

 

That will fix the cyclical deficit. But underfunded health-care entitlements will kill us, fiscally, unless we act. As things stand, the Congressional Budget Office believes the cost of government health care spending will grow from 5.4% of GDP now to 12% by 2055. And before people get upset at the term "entitlements," know that 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.

 

Republican House Speaker John Boehner has opened the door a little, saying he is looking for a temporary reprieve from the fiscal cliff during the current lame-duck session to give Washington time to work on a deal in 2013.

 

On the tax issue, he believes raising taxes on the wealthy, which Obama wants to do, will further damage the economy by slowing job creation. This is an important point I've discussed before, given that many pass-through small business entities pay the personal income tax rate and are having trouble raising capital from banks right now.

 

Instead, Boehner proposes adding revenue by reforming the tax code. This plan for a simpler, cleaner tax system with fewer loopholes could boost tax revenues while still boosting business confidence by reducing the economic dead-weight loss of tax compliance. It also looks a lot like what Mitt Romney was calling for, a plan that 48% of the country supported. Whether ardently anti-tax Tea Party Republicans would go along is another question.

 

I hope Obama sees that he can still get the rich to pay more in a way that won't damage sentiment, such as leaving the system unreformed and simply raising the margin rates on top earners would.

 

For his part, Obama also seems to be softening his position a little by opening the negotiating process to business and civic leaders and saying he is not "wedded" to every detail of his existing deficit reduction plan. He has also emphasized the need for infrastructure investment, which would be another short-term pro-growth stimulus and a positive for the economy. But he does say he has a mandate for tax hikes on the wealthiest Americans.

 

Still, a simple look at the numbers courtesy of Merrill Lynch shows that we can't tax our way out of this. Ending the Bush tax cuts on the wealthy will only result in about $40 to $80 billion of the first-year, $720 billion toll of the fiscal cliff. And anything above that risks recession, which will only make the deficit worse. Other items, like the cuts to the Pentagon budget, the cost of extended unemployment benefits, and the payroll tax cuts, will have a much larger impact on the bottom line.

 

My hope is that the Republicans placate Obama's emphasis on taxing the wealthy via tax code reforms so that the real work can begin on addressing health-care costs.

 

What are investors to do in the meantime?

 

While stocks have been doing their best to scare investors since President Obama's reelection, gold and silver have been quietly marching higher. The mining stocks are following, with the Market Vectors Junior Gold Miners (GDXJ) popping out of a three month consolidation pattern on a nice increase in volume.

 

 

Technically, the setups beautiful and suggest a medium-term uptrend -- of the kind we haven't seen since last July -- is getting started, particularly for the mining stocks. But there are fundamental reasons to believe the run will continue too.

 

For one, the political uncertainty surrounding the fiscal cliff and the debt ceiling has people looking for safe havens.

 

Plus, inflation is actually creeping higher as the Federal Reserve prepares to unveil a possible QE4 initiative next month to replace its expiring "Operation Twist" program and complement its QE3 of ongoing $40 billion-a-month mortgage purchases. If the Fed wanted to maintain its current pace of money printing, QE4 would need to result in $45 billion a month worth of Treasury bond purchases.

 

In anticipation, I'm adding the ProShares UltraSilver (AGQ) to my Edge Letter Sample Portfolio.

 

Disclosure: Anthony has recommended AGQ and GDXJ to his clients.

 

Be sure to check out Anthony's new investment newsletter, the Edge, and his money management service, Mirhaydari Capital Management. A two-week free trial has been extended to MSN Money readers. Click the link above to sign up. Mirhaydari can be contacted at anthony@edgeletter.c​om and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.  

 

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471Comments
Nov 11, 2012 2:42PM
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If these Teabag Taliban idiots spent have as much time trying to help our country instead of trying to keep the country in the gutter in order to gain political power the recovery would be much further along than it is. And then we have John Boehnor and his single digit approval rating house who not only roll over for the teabag taliban, he and his corrupt cronies have no intention of working for the American people as he and all the rest of the republicans are to busy kissing grover norquist(the biggest lobbyist in DC) ****. So why would anybody think the republican teabag taliban are going to compromise on anything?????? After the disaster that was the last election for the gop haven't these jackasses have learned anything yet???????
Nov 11, 2012 2:11PM
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This recent election has taught me that people with a lot of cash want to keep things as they are. And  are willing to back up that sentiment with legal bribes (campaign contributions) to their favorite politician(s). Simpson-Boyles would be a nice start. But that's wishful thinking. Big money is at play and they are willing to block anything that does not benefit the wealthy.
Nov 11, 2012 2:04PM
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Noleftist, your correct, we need to stop dicking with our tax codes and allowing some to pay less while others pay more. It makes no sense, the poor pay 0%, a millionaire like Romney pays 13%, a billionaire like Buffet pays 17%, and a middle class family with out a mortgage deduction is going to pay about 20% or more. The solution would be a minimum tax, the poor pay 5%, the middle class 10%, millionaires pay 15% and billionaires pay 20%. This would balance our budget and the disparity between the Richest American and poorest would still be about 15%.
Nov 11, 2012 1:37PM
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I live in arkansas and we pass our budget and pay our bills, novel idea right.  Sure we have some cheats, double-dippers and the such, but we vote them out of office really quick. If they would only pass a law that would let us throw them in jail and sue them to get the money back life would be just grand. I think we all could tighten up our belts a little bit and get this great country back to where our forefathers envisioned it would be. The rich in charge are fooling the rest , Rich pay about 7% of income in total taxes, middle class about 10%, but the poor pay on average of 12% in total taxes. The deductions make a mockery of the 35% rich are supposed to pay. Take corporations as another example. 2/3 of all big business pay not a single dime in taxes [600 of largest corporation pay zero]. Then you get the spiel that corp already pay 35% and the shareholders have to pay taxes on top of that? Bull!!!!! They pay the share-holders and the ceo's and workers first and that is deducted from profits. You are only taxed on profits.
Nov 11, 2012 1:36PM
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America has a spending problem, not an income problem. For FY 12 the government took in 2.6 trillion dollars, while we spent 3.7 trillion dollars. The pentagon budget for FY 12 was 740 billion. So that still leaves about 1.9 trillion dollars and what the hell do have to show for it other than debt. 
Nov 11, 2012 1:29PM
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Hockeydude, your right, sudden spending cuts and tax hikes would shrink our economy and cause a recession like in Europe. The solution is to slowly increase taxes and cuts, so as to not shock the system. If we cut real spending across the board fairly 1% per year and increase tax across the board fairly 1% per year, we will have a balanced budget with in 5 to 10 years guarantied and our debt to GDP levels will drop like a rock, just like the Clinton years.
Nov 11, 2012 1:24PM
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"Here's an idea, live like a normal person would. Instead of spending more than you make, spend less than that. Its ingenious right? That's how you stay out of debt. Pretty simple if you ask me"

Ok genius expplain how that would in any way help the present situation. This is about the fiscal chrisis facing the nation not independent credit. Your "solution" if taken would lead to massive layoffs less taxes collected and adding to the deficit. Prices being the way they are it is almost impossible to buy everthing you need to live without having credit. The answer is in the gouging that has gone on for so many years in the healthcare industry which is leading us off the cliff. Also tha applies to most other consumer goods. In my lifetime I have seen tomatoes go from 10 cents a pound to 2.50 cents lunchmeat from 20 cents to 7.99 and everything in between. Add to that wages which have stagnated every since Reagan killed the unions. For thirty years we have seen prices rising while peoples wages wer about the same jobs being sent oveseas and foreign workers brought in to work for pennies all along politicians whistling past the graveyard. Now we are faced with solution time and the president has to face a congress that is being held hostage by a ver minor bunch of whacko's Good luck with that.

Nov 11, 2012 12:55PM
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By raising taxes and cutting spending all at the same time ... there is a very good chance it would throw the country back in to a recession.  Pick one and follow through with it.  Cut the spending back and wait to raise taxes later. Why shock the system by doing both a the same time. Doesn't make any sense?? But hey .... when did the Gov't, especially the Obama crew, have an economic sense at all.
Nov 11, 2012 12:50PM
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Lots of "give me" people and naive people that can't see that the Fed Govt is a never ending power grab. A revision of 1930 Germany when the Govt owned the labor unions, banks and health care system. The 2008-2____ version of socialist America. Who cares about history anyway.   

Nov 11, 2012 12:42PM
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You want to end welfare ??????, pay people more than minimum wage to start...
Nov 11, 2012 12:38PM
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heres an idea, your idea doesnt work in the real world....
Nov 11, 2012 12:26PM
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First of all, let me say that I'm glad that Mr. Obama won again.  We did not need someone like Romney in office who flip-flopped on so many issues, I'm wondering if he remembers to change his underwear every day.  Secondly, instead of raising taxes on the wealthy, make people like Romney pay their fair share in taxes to America and stop using foreign banks to hide their money to keep from paying taxes. That is not fair to each and every working middle class and working poor American to carry the tax burden. I also agree to give significant tax breaks to the corporations that return jobs from overseas to America and hire American workers.  If people are so concerned about the handouts, etc. that non-deserving welfare recipients are receiving, then it should be mandated by every state that they be trained for these jobs, give them decent enough wages to support their families (maybe then they'll consider twice about having more babies that they cannot support themselves).  If the handouts have to stop, then so does the outsourcing.  Also the tea baggers should lick their wounds and soften their stances and make up their minds to work WITH Mr. Obama instead of against him.  Make sense? 
Nov 11, 2012 11:46AM
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Yeah the public complains about how Washington handles things, but then re-elects the same people they complain about.  So we'll get what we deserve.  I hope this crew can learn to work together for the public’s benefit, not just for the benefit of their own politics.

 

But I don't buy into Boehner's stance that "raising taxes on the wealthy, which Obama wants to do, will further damage the economy by slowing job creation."  The wealthy have been hoarding money, and their corporations have been cutting research & development, for far too long for me to believe that they would expand business if their tax situation was easier.  We're following the same path that led to the Great Depression, and the wealthy had a major hand in that.  Can't blame the Government solely for our economic situation, since business is the main driver of Gross Domestic Product.

 

As far as "where are the investors?", we small non-fulltime investors are sick of Wall Street shenanigans.  Even if we had money to gamble on the stock market, we've been burned too much to keep doing it.  So I don't think that companies should look to Wall Street to make profits for them – they should go back to earning profits the old-fashioned way:  via selling goods / creating markets and jobs.  To many lazy C-level executives want to make money without working for it!

 

Nov 11, 2012 11:32AM
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Time will tell how much compromise both parties are willing to make regarding the economic uncertainty still facing the Nation. Both parties where for too big to fail, both parties resurrected GM by TARP, both parties didn't disagree with Big Bond Buying Ben easing and both parties drove us into the ditch to begin with. Guess what? It will take both parties to get us out of the ditch and the economic engine firing again, not just at a stagnant idle. Flip the M in me upside down and put it in front of the e and the nation will make leaps and bounds with the leadership of WE!

Nov 11, 2012 11:29AM
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Their is people who really need welfare, but it is so abused by the poor as well as the rich. The system needs overhauled. Lets spend our money here not china(WALMART) Buy AMERICAN NOT TOYOTA,HONDA,,NISSAN,KIA ETC!!!! Thats how you build a strong COUNTRY We need to export goods not import SIMPLE DO THE MATH
Nov 11, 2012 10:51AM
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When the economy was crashing, the motor co's crashing, the insurance Co's the Banks, the housing etc. It became a national emergency, and the tax payers were required,  to bail the countries  economy out! Even though we live in a capitalistic society! Now we have a spending problem, coupled to a weak recovery, If you ask the wealthy, the banks, ins. Co's, corporations oil Co's etc. to to help out it becomes a socialist take over of their money! What is good for the goose is good for the gander!
We as a country could all pay cash on a sliding scale, and raise 1.2 trillion dollars over night eliminating the budget deficit! This could be done easily,  and would give  us in a perfect   opportunity to cut spending and live within a budget! It would also open the door to leave the tax cuts in place while they reform the tax system!  It would not be that hard to raise two trillion dollars! That would be even better. The extra money could be used to balance States budgets, infrastructure, The money left over could be used to do any number of things needed to get the country back on a sound fiscal track, like for education, shoring up medicare, or helping to fund health care.
Before anyone says they would just spend more, The congress could pass a law stopping that, and designating where the money would go! Think of it this way we can sink or swim! The sliding scale could read like this banks could pay a million, oil a billion millionaires fifty thousand, billionaires a million, etc. Bill Gates a billion, Johnny , ten million, Opra, Letterman, etc. etc. working man accordingly, Obama a million  this would help the country in this national emergency, and it is not the capitalistic way to do it ! Just as asking the middle class was not the capitalistic way! 
Nov 11, 2012 10:09AM
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Now that EVIL has been reelected I believe that there might be some truth in the Mayan calendar predicting the end of the world next month. It certainlly is the end of America because of the uneducated racism vote caused by the Great Divider in Chief
Nov 11, 2012 8:37AM
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The US is going into decline and their is no stopping this downward trend. I don't beleive that congress is going to give Obama a blank check and tax the bejeebers out of the wealthy. So, we get what we elected , another Greece or worse. While Atlas Shruggs.
Nov 11, 2012 8:29AM
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Not to say we do not have a problem to solve, but  when you talk about 156,000 paid in over that time period, factoring in compound interest; You could  also see it,  as these people are only getting a third of what they paid in back!   When you say entitlements, in reference to what they receive, and then say entitlements in reference to  what they paid in,  It becomes confusing!  Almost like, for example,  when they pay it in , they are not draining the system, but when they receive those benefits the are taking from others in the form of a handout! When you add something to your portfolio, do you expect to get a return on your hard earned money? Lets get one thing straight here these are productive people who have contributed much to the nation, by paying their hard earned cash over many years! You might say they should receive more return on "that" investment! 
Nov 11, 2012 8:13AM
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Finding ways to reduce our budget is easy     honestly

 

We are ending a war of very questionable utility which costs about 750 billion per year

Do we really need 2 years of unemployment insurance

We have over 100,000 troops in Germany     WW2 ended a while ago

It is perfectly reasonable to cut 5% out of the MD fee for service rates  Most of us go to contracted groups of doctors that are much cheaper  and provide a higher quality of care anyway

 

Bohener says close loopholes on the rich, Obama says raise the rate from 15% to 20% on income  such as dividends or LTG over 250K .   We need about 150-200 billion per year in revenue do both  There is no reason to not have 3% GDP in 3 years and a Balanced budget in 4   

 

Their is no reason not to get this done except the failure of our leaders to work together   compromise is where no one gets all of what they want

 

 

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