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 10, 2012 10:46PM
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Here's how to fix our economy...Cut people off after 3 YEARS!

If someone has been on Welfare, Food Stamps, or Unemployment for over 3 years they have no intention or desire to work.. They have chosen this lifestyle so screw em!

Nov 10, 2012 10:17PM
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Those of us who are unhappy with the direction the country is taking need to cut spending this holiday season and increase saving. If a majority of American's want economic failure let them have it.
Nov 10, 2012 5:14PM
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"When people get jobs and make more money, they will pay more taxes and absorb less government benefits." - OF COURSE Anthony!

But some "job creators" would rather just complain about the unemployed rather than employing people.
Nov 10, 2012 5:13PM
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   I'm tired of both sides talking about deficit reduction, when deficit ELIMINATION is what is needed for many years, with surpluses going to pay off debt, in order to save this country.  Yes, I voted for Gary Johnson!  This country is now in deep sh*t. 

Nov 10, 2012 4:56PM
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"Tumbleweed there will be no civil war. Most Republicans stand for fiscal resposnsiblity."

 

Huh? A Republican named BUSH drove us into this ditch AND created the unfair tax cut thing for his cronies. A bunch of treasonous leaches signed the Norquist Pledge and let innocent Americans DIE from financial strangulation. A Republican named Romney was a corporate raider and managed his money by taking it offshore. A BUNCH of Republicans invested foolishly in all sorts of corruption that failed to swing voters. Republicans are NOT fiscally responsible, they are irresponsible Americans. It has to occur to you that the two WORST pieces of legislation ever passed were the Tax Reform Act and Gramm Leach Bliley Act. Both were anything BUT fiscally responsible. A bloodletting civil war sounds good.

Nov 10, 2012 4:51PM
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Here is my prediction on how it will play out.  

 

1.  As always, everyone will say they want to reach an agreement.

2.  As always, no one will be able to reach an agreement.

3.  It will be played out in the week between Christmas and New Years, with everyone blaming   

     each other.

4.  A day or so before New Years eve, the news media will announce with fawning praise and 

      great fanfare about how great and skillful a leader that Obama is, that a deal has been

      reached that will raise taxes and cut spending.

5.  The Repubicans will cave on tax increases.  As always, the tax increases will happen now, 

      but the so called spending cuts will happen a few years down the road.  

6.  The tax increases will take out of your pocket right now.

7.  The spending cuts will never come.

8.  The deficit will continue to grow.

9.  The cycle will repeat itself at sometime in the future, and will keep repeating itself until the

      entire economy of the United States collapses under the weight of its own debt because  the

      politicians of today will lie their assets off to keep their jobs.

10. The economy will head into recession once again. Because, as always, absolutely nothing

       was done to address the real underlying problems causing the deficit.

Nov 10, 2012 2:33PM
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Just LOOK what McCain did to the GOP in 2008 by saying the Mavericks got traction. Split them apart, that''s what Sarah did, The Tea party was an attempted pseudo-Libertarian hostile take over coup. Did it work? 2014 will tell
Nov 10, 2012 2:25PM
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 Perry VS Ryan Vs Christie--- and maybe Mitt again. That should be interesting for the next four years. Let the GOP bloodletting civil war begin. Get some popcorn, kick back and enjoy the show! Tea party Mavericks vs Michael Steel, David Brooks et al. Place your bets for 2014 and 2016. Religious Kooks like Akin and "Morlock" are as good as gone, got a lib women's stake in their hearts
Nov 10, 2012 2:15PM
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Obama's team brilliantly boxed the GOP into  a corner when he pulled out a pen and said he was ready to sign the Senate approved Middle Class Tax Cut Extension as soon as it hit his desk, and that the only things holding it up were Boehner, Ryan and Cantor
Nov 10, 2012 2:05PM
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Obama's goal should be to get the voting public to view the GOP in an even more negative way so the Dems can take back the House in 2014. They like intransigence. do they? Get them to be viewed as intransigent while the Dems come across as comprmising. .Point out Nordquist and his pledge at every turn
Nov 10, 2012 1:55PM
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The wealthiest are enjoying a tax rate from the 1950's, if  they are even paying that with loopholes and sheltered money around the globe. If they are forced to pay more, they will still be wealthy. The hollow threat that you can't tax the "job creators" just doesn't fly anymore. Corporate profits are through the roof. The Bush tax breaks have to go.
Nov 10, 2012 1:51PM
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 Small potato defense contractors are already laying off people because they do not have firm commitments for projects in January. My machinist neighbor is one of them
Nov 10, 2012 1:46PM
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Slowly but surely we are edging toward a flat tax... As a small business employer, the budget for a $30,000 hourly position includes:

11.26% federal income tax

9.53% social security tax

2.66% Medicare tax

3.5% state income tax

1.4% state unemployment tax

 From the employer's perspective, this employee, with the current payroll tax, is paying 23.5% of his costs to the federal government and 5% to the state. When the payroll tax cut ends, this employee will be paying 25% of their cost to the federal government, for a total of 30% before the employee even sees their check. This of course does not include employee specific deductions nor additional taxes such as sales, property, fuel, etc.

 

And now of course we have Obama care as opposed to emergency room care... With all due respect for medical technology, we do not have unlimited resources to invest in health and longevity... as awlful as those decision are to make.

 

 

 

Nov 10, 2012 1:42PM
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 The Upper Class got to where they are thanks to the hard work and consumer spending of the Middle and Lower Classes. The way i see it, the Middle and Lower Classes are ENTITLED--- and I use that word specifically--- to a kickback in their old age
Nov 10, 2012 1:35PM
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 The FIRST thing we should do is decline Warren Buffet's bill for his prostate cancer treatment. And when they whine well he  put into Medicare so he deserves to take out, just tell them to go **** themselves! A MEANS TEST is definitely in order
Nov 10, 2012 1:31PM
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 Nordquist wants to balance the budget ENTIRELY on the backs of the Middle and Lower Class while asking the Upper Class to sacrifice NOTHING----And the GOP signed on en masse, Like Obama said,  FTS
Nov 10, 2012 1:25PM
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Obama to Nordquist-- up yours pal I don't HAVE to worry about reelection and plan to fully employ the bully pulpit on you, ya pudgy JERK
Nov 10, 2012 1:22PM
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 Why CAN'T they split up the Budget bills, one for each Cabinet depatment instead of bundling them all into one
Nov 10, 2012 1:17PM
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 SO simple a solution to the fiscal cliff. Go over it and then craft NEW SEPARATE spending bills for Medicare and Defense. And craft NEW SEPARATE  tax cut bills, one for the Middle Class ONLY and one for the Upper Class and then just let Congress's damned voting  chips fall where they may in 2014
Nov 10, 2012 1:13PM
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 To the people who said Mitt would win most of the swing states-- your credibility is SHOT. I would DEFINITELY buy ANYTHING you short
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