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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425Comments
Nov 11, 2012 6:57AM
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Don't spend more than what you make. If you make $22k and spend $36 with a credit card balance of $164k that is not smart. This what our government is doing. We give the government  more money, they will spend more. Don't depend on the government, look for a job. In my opinion, this government promotes laziness.
Nov 11, 2012 3:24AM
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Inport duty, you hit the nail on the head, for 8 years republicans did nothing but, spend , spend , spend and never paid for anything, they've become the party of the freebee life style, passing the buck to my children, I'll never forgive them for this evil.
Nov 11, 2012 3:08AM
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Kakaa, great articles, just like after 1929, the American people haven't forgot who tanked the economy in the first place. Nobody blamed Roosevelt for the bone crushing poverty that Republican policies brought on during the great depression.
Nov 11, 2012 3:04AM
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I am wondering how many individuals that post on this and numerous other financial sites on MSN have any serious money invested in the markets. This can be in IRA's,defined benefit plans and inherited wealth.the reason I ask this is that in several articles on MSN Money state that over 60% of Americans over the age of 50 have less than $10,000 in retirement accounts.
Nov 11, 2012 2:55AM
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He who robs Peter to pay Paul can always count on Paul's support.

Tuesday night that old saw was proven again.

Nov 11, 2012 2:11AM
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FOX News is my new favorite channel. Straight Comedy all day long!!!!!

Nov 11, 2012 1:05AM
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There are too many TeaPublican trolls on these boards - HELLO, Obama won the election - 332 electoral votes and FOX is telling you that it was a "narrow" election. Obama won the popular vote by more than 3 Million votes! Pull your heads out of the sand! You TeaPublicans keep writing like Romney won - he didn't, and it was not Sandy or voter fraud (rather GOP voter suppression!) that was the cause for Romney's loss. MORE Americans BELIEVE in Obama's and the Democrat's plan. Bring the jobs back to America. Living wage. Back to a fair tax system (eliminate the Bush tax cuts for the wealthy). Affordable health care and education. Cut unnecessary programs/expenses (many times these are GOP's "pet projects").
Nov 11, 2012 12:53AM
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If you want more tax money........ put the 47% to work .....that should do it and stop wasting my tax dollars paying for there drugs-cigarettes-cell phones etc.
Nov 11, 2012 12:51AM
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The word is 'Welcome,' not "Wecome.' Learn to spell you twit.

Nov 11, 2012 12:32AM
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   I wouldn't be caught dead in the 'baggernut's f**kingTea Party-- for all the tea in the world!

Every time I hear their name, I "LAFF" ! Just a bunch of NASCAR-type, chewin' tobacco- goobers on welfare-- and won't admit it! Seen too many of 'em. Nuthin' but loudmouth, whining cartoons, too.    

  Again, let that fiscal cliff come. I know I'm not going over it. Let everybody do their moaning 'n groaning over some imaginary BS, while I act like I'm not gonna worry.

   There's just too much paranoia going on, when people should be looking in the mirror at their problems, instead of whining about something they really know nothing about, or what's gonna happen.

   This nation has been too lazy and spooked for too long. Always looking for something to blame on someone else.

America... quit crying over imaginary fears-- and get tough!!!!

Nov 11, 2012 12:30AM
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Everyone wants to spend, and never pay.  Half the people made it clear in the election, they don't want to pay any bills.  Just give me more. 

What's going to happen if some of the one percent have had enought, and decide to take some of their money off the table and play some other place?  Going to kill them like Hitler did?  

Just keep printing paper, that's what Hitler did and starved millions of people to death.

I don't believe the one percent will just set there and give up everything to others.

Could be the one percent are smarter than we are.

Nov 11, 2012 12:25AM
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Obama won Florida - Obama is up to 332 electorates and Romney is staying on 206....and FOX is still crying about the "narrow" victory....again TeaPublicans want us to forget W Bush's truly narrow victory - 271 electorates (Al Gore had 266 AND Al Gore won the popular vote by half a million voters!). Hint: Listen to Obama, he listens to us.
Nov 11, 2012 12:18AM
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KaKaa you forgot to mention cutting entitlements.
Nov 11, 2012 12:11AM
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The taxes for wealthy are at a record LOW! Of course, the Bush's tax cuts for the wealthy have to be eliminated  - that will bring in more revenue (like in the old times)
Then we have to keep trimming expenses. Obama is cutting unnecessary defense expenses, as well as other unnecessary programs, such as corporate welfare - that will lower our expenses.

Nov 10, 2012 11:59PM
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Cut all programs to the [illegal aliens!] Catch them all and kick them out of our country.  Give the legal mexicans that are in this counry three years to learn how to fill out their application(in English,) if they can, they will lose their benifit. No more translators, no nothing but English after the three years period.

 

There are about 40 millions people are on welfare and food stamps now, and I bet that 99.99% of them are Mexicans!  Cut of the support to these free loaders and we will save more than a trillion dollars a year!

Nov 10, 2012 11:27PM
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I am a firm believer in the people. If given the truth, they can be depended upon to meet any national crisis.  The great point is to bring them the real facts.

Abe Lincoln

Most of our news organizations refuse to give us a fair and balanced view. MSNBC is the biggest culprit. They refuse to cover the economy. They failed to jump all over the cover-up that is going on with Benghazi. The CNN moderator for the second Presidential debate where she was the one who was wrong, not Romney. CBS 60minutes failure to show the full interview with Obama. In which he said it wasn't a terrorist attack. And also the White House with holding news that Iran attacked one of our drones in international waters 5 days before the Presidential election. Must I say more.

Nov 10, 2012 11:23PM
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I truly believe that the biggest hoax in the history of the world has just been played on the United States,Romney was truly ahead for weeks prior to the election.Where did that go,Who would vote for a murderer of our own troops?
Nov 10, 2012 11:19PM
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The Republican Brand Name is finished in this country.  It's only a matter of time until it becomes another Wig Party, Libertarian Party, Tea Party, pick your name.  They are marginalized to the point of being nothing more than a fly to be swatted at every election.  They are comprised of liars, racists and the greedy rich, with no morality and no hope of ever being better - most of them are old, white males.

They will learn nothing from this election - they will continue to obstruct until the electorate digs them out of their safe gerrymandered districts like rotten, embedded ticks.  It won't happen overnight, but every two years like clock work, a few more will be thrown in the trash, until they are all gone.  And then the Rebranded Republican Party will undergo an EtchaScetch moment and suddenly become so friendly with minories, women, the young, and the infirm.  Just your best buddies forever!  Disgusting people!

Nov 10, 2012 11:10PM
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Impeach the President for covering up Benghazi. 4men dead, he went to bed.
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!

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