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 9, 2012 8:37PM
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I make about 250,000 a year and i currently have a tax rate of 48%.   Thats about 125000 going straight to programs that don't work and and people who most of the time, aren't making the initiative to get a job.  I didn't spend 12 years in college and contribute more in taxes than most people to the u.s make a year to be viewed as inferior or greedy.  Tax everyone equally and make EVERYONE pay taxes who are physically able to work.  It's not that hard to find a job.  Everywhere I go, I see plenty of now hiring signs in common retail stores, which probably don't even require a college education to achieve.  Just because I worked hard all throughout my life doesn't mean I should carry the burdens of other peoples mistakes in life.
Nov 9, 2012 8:36PM
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Romney's a taker. His last actual tax rate was 10.3% and most of his money was in the Caymans. How many Americans has he hired from there? Obama won more votes and raised more money even though he doesn't propose lower taxes on anyone. Romney couldn't win promising the middle class a 20% cut and millions upon millions given to those that already pay the least the rich have paid in history. America can't be bought, except for republicans.

 

P.S. Your republican logic is that only those that personally benefit would vote for anyone not giving them something. As Obama raised money from Buffet, Gates hundreds of Hollywood elite and ten's of thousands paying 50K a plate at fund raisers few are takers. The majority of us vote what's best for the country not our wallet. You'd never understand.

Nov 9, 2012 8:26PM
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Good job America, on 11/6 the takers outnumbered the producers.
Nov 9, 2012 8:22PM
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Look if you work for a living Democrats are not your friends.   Don't talk to them, don't do business with them and don't hire them.  They are really your enemies.  Treat them as a Jew would a Nazi, Ok, maybe not that nice.

 

These leeches will steal as much of your paycheck as they can to fund their far left socialist agenda. 

 

If you have democrats on your payroll, lay them off.  Hire outside firms and have them check public voting records (very easy to do).  When you see that, just pass.  The less of these enemies the better. Let them fend for themselves. 

Nov 9, 2012 8:09PM
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please just work to gather, remember the promises you made to get voted into office
do what you were hired to do, don't  act like children and fight!
Nov 9, 2012 7:53PM
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  Obama is kind of like the guy with a bunch of ex wives. He not only has to feed and house his family but has to pay for the debt the ex's saddled him with. Obama started out with a decimated economy with 500 billion a year less revenue, a new drug program costing 200 billion a year, millions losing their homes, 2 wars, 5 million newly unemployed, 280 billion a year interest rates on the debt from Bush and prior presidents and a 400 billion a year tax cuts that republicans won't allow to lapse. You have to pay for all those things and take care of todays bills as well. We need cuts and new taxes.
Nov 9, 2012 7:48PM
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SgtSteve088  Icouldnt agree with you more!!!!!
Nov 9, 2012 7:45PM
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I just Adelson is going tosell Las Vegas and move back to Isreal .Solong!!!!!
Nov 9, 2012 7:42PM
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Boiler Mike  I dont know what log you sleep under but are really a screwball.
Nov 9, 2012 7:33PM
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There are obvious several people who need a course on Federal economics, which is not the same as household economics or for that matter, local or state economics.
Nov 9, 2012 7:30PM
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I am a business owner here in the great state of Washington.  I have 67 employees, over the next few months I’m going to have to cut that number to under 50.  Then I will take another 25 and move them to part time work.  It is still dumbfounding how the USA could have put this man back in office.  I’m going to start sniffing around and figure out which employees are Democrat and they will be the first one to go.  Hopefully I can put off the layoffs until after the holidays.  But I’m afraid my accountant is going to want to start right away.

Nov 9, 2012 7:29PM
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This is quite simply, tax everyone the same pecentage, stop corporate hand out (welfare). If you earn a dollar you simply deduct your cost to earn the dollar then pay the same percentage as everyone else. This makes the IRS law simple,  the accountants and tax attorneys won't like it. The IRS than can concentrate on those that pay employees off the books. 
Nov 9, 2012 7:25PM
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People forget that the Bush tax cuts for the wealthy was done so they would in turn invest money in their businesses and not lay off people. The wealthy kept the money and still laid workers off. If you keep the tax cuts for the wealthy then you need to take away the amount of things that can be written off on taxes such country club memberships. Not being evenly taxed on all your income and being able to write off your trips and other extravagances is a bit much, so pick one or the other.

Nov 9, 2012 7:16PM
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  The article states eliminating the Bush cuts for the top 20% would only raise up to 80 billion a year. Though it doesn't sound like much compared to our debt that would hire 1 million people or 8% of our unemployed and pay them $80,000 a year if hired directly by the government.
Nov 9, 2012 7:12PM
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Even if I have to personally pay more income taxes, the Bush tax cuts MUST end...and I am on the low end of "middle class" in income. Bush's tax cuts were NEVER supposed to be permanent. We MUST hold the House of Representatives proverbial "feet to the fire" and insist that all the Bush tax cuts come to an end. All that happened as a result was that the really rich got really richer, while everybody else suffered. During Bush's years as President, the economy tanked, Wall Street failed, jobs were being lost at a rate of over 800,000 a month. In other words, the country went to hell in a hand basket. Republicans spent like a drunk sailor splurging on self aggrandizement, putting the bill on the tab for the next President, Obama, to pay for his selfish excesses. Job growth and an expanding economy has never worked and it will never will work applying the debunked theory of  "trickle-down" economics. I say we all "bite the bullet" and go back to the Clinton tax rates when the country created 23,000,000 (yes, that's millions) jobs and we had a surplus. The rich got even richer under Clinton, even though they paid a slightly higher tax rate. Regulations also need to be tightened so that a few rich guys can never fling all the rest us, willy-nilly off that steep cliff. The rich NEVER suffer, it just gets better and better for them while the screws just get twisted tighter and tighter for the middle class.. 
Nov 9, 2012 7:08PM
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It's easy saying it's a spending problem but you have Obama having to come up with 200 billion every year to pay for Bush's drug plan, 280 billion interest on Bush's debt, 400 billion for Bush's tax cut that republicans won't allow to expire and continuing war funding that carries over and a republican congress who refuse to cut any military funding. You can't say everything Bush passed is sacred and then blame Obama because he can't pay for them.
Nov 9, 2012 7:06PM
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Republicans wet their pants as the American Tea Party morphs into the American Pee Party. I'd personally like to thank the American Tea Party, Rush Limpbaugh, and The Donald, for the great job they did in getting Obama re-elected. We couldn't of done it without them.
Nov 9, 2012 7:03PM
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  Tax rates should be high on the super wealthy but with huge tax breaks for those hiring American workers in America. I wouldn't care if they paid 0% if they used those profits to hire Americans but believe our current system that doesn't distinquish between building here or building abroad is no reason to give them breaks. You want lower taxes? Earn them by hiring the people who made you rich.
Nov 9, 2012 6:57PM
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  Funny that the defense of ever lower tax rates for the super wealthy is that they're job creators. They now have the lowest tax rates in 50 years and yet we reached the point that 90% of all manufacturing is done over seas. What possible logic is there to reward people for shipping jobs over seas? Romneys actual tax rate was 10.3% in 2010 and would have been 0.82% had Ryans tax plan been in effect. Do any of you really believe Romney would have brought home that 100 million he had in his Caymans shell company just because tax breaks increased it to 105 million?
Nov 9, 2012 6:51PM
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The American People
Have Spoken.
The Almighty God
Will Answer!

WAKE UP AMERICA

Before the Fire 
And Brimstone 
Begins To Fall
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