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 10, 2012 10:38AM
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For all those who believe that GM [government motors] is doing well, and Americans will have jobs there indefinitely;       WHY is GM sending their entire R&D division to China???     Here's an eye opener:  Ford  Motors  pays a dividend,  GM does not!!    Hm-m-m     As I recall, Ford Motors took no BAILOUT MONEY; SO IS NOT CONTROLLED BY THE GOVERNMENT!!

All who have received Student Loans from the Government, are controlled by the Government!!!      

 "The borrower is servant/slave to the lender.!!"    and   "Neither a borrower nor a lender be""    is quite good advice.

Everyone who is now expecting the Government to supply them with everything -- are in for a rude awakening!!!

 

GOVERNMENT CANNOT GIVE AWAY -- WHAT IT FIRST DOESN'T TAKE AWAY.

 

A GOVERNMENT THAT IS BIG  ENOUGH TO GIVE YOU EVERYTHING YOU WANT -- IS ALSO BIG ENOUGH TO TAKE AWAY EVERYTHING YOU HAVE!!!

 

 

 

 

Nov 10, 2012 9:37AM
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The best thing for the country IS going over the fiscal cliff in a barrel. It would fix the markets too, since the pain and recovery would be felt top to bottom instead of just the bottom. Denial does not change the facts; ALL tax payers need to pay more (or at least something), and Government  budgets MUST be cut. This teetering on the brink will continue until the facts are collectively accepted and acted upon. Please turn off the TV and/or radio and read the Constitution, especially the fine print.
Nov 10, 2012 8:48AM
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Wait till next year, when the 3% sales tax on real estate transactions over $250,000 kicks in from Obamacare.   I think it will hammer rural states like Iowa hard.  The good part is it will hammer those on the West Coast, and big cities too...

 

Pay up your hard earned profits so you can pay for someone else's medical insurance....

Nov 10, 2012 4:36AM
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An Eagle,

You are correct, taxing 100% of all income over $250,000 would not fund the government for one year. On the other hand why would you want to work at all as soon as you reached the magic number you would just stop.

 

Let's say you were an OB gyn with a decent practice and made $350 k. You would not work a day longer than it took you to make $250 k. Why would you run the risk of a mal -practice suit for each baby you delivered for no return? Answer you wouldn't. So much for healthcare.

 

Let's say you're running a small business and you make $250 K. You''ve got an idea for a wonderful product that would vastly improve the lives of all that used it. It might have the potential to make a lot of money. You would have to take the risk of product development and acquiring more capital. Would you??? No you wouldn't. All those that would have been enriched from your product, and all those you would have worked productively to make, it will not and not ever know what wonders they've missed.

 

What if you were a farmer that makes $300 K a year. At $15 a bushel for soybeans the money can really pile up in a hurry. You would plan on growing 20% less next year. Not worth the wear and tear on you and your equipment to work for nothing, Meanwhile less food on the shelves causes hunger to spread around the globe. What do you tell the starving Americans??? Go eat your SNAP card.

Nov 10, 2012 3:45AM
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V_L - a Varied Lunatic

Once again, Obama can't even where an accountant's jock strap.  You can take all the income from the "rich", 1%, 2%, etc and you will not solve the deficit and debt.

Nov 9, 2012 10:05PM
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Hardly a face-off, Anthony. We either tax the rich or enslave the Tea Party. Everybody keeps the car in the garage and the anarchist in the basement.

 

"Mommy... how come that wierd Boner man keeps coming over to cut our grass?"

"Because he owes us $1 Quadrillion in currency, derivatives and debt notes. At $8/hour, he should be paid up by 4014."

 

Obama said it best himself... "I'm not going to have college kids, seniors and the middle class pay for debt created by wealthy people. Everyone including me who makes more than $250,000 a year will pony up." Indeed, Mr. President. If they don't want to, cap their pay at ZERO, make MINE $250,000 and feel free to raise my taxes. I will GLADLY help Americaout of this Hell hole a man named Bush got us into!!!!

Nov 9, 2012 9:52PM
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Is everyone watching the news? Businesses holding out for a Republican win are now starting to layoff people. They did their best to hang on in hopes we would get rid of Socialist Government but the lazy won. Now the coal industry is basically gone. That's why West Virginia went Republican because those people need to eat to. the news cam out that their laying off a lot of people. I also heard on the news tonight that Eveready Battery is closing two plants to restructure in part because of Obamacare. I sincerely hope those that get laid off in the next four years are the ones that voted for him. Unfortunately, most of them don't work.
Nov 9, 2012 9:45PM
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good bargains (small brains)

 

30 years ago we didn't have big screen TV's

 

30 years ago many countries destroyed by WW II were still rebuilding and America had a vitrual monopoly to manufacture products and export them across the world at prices we decided with little or no competition.

 

30 years ago social security was solvent and there was less government regulation in business.

 

The point is, lots of things were different 30 years ago.  So what?  Today is today and you either adapt or continue to cry about yesterday when we manufactured more and that offered lower educated Americans high paying assembly line jobs with pensions. 

 

Here's a scoop.  Those days are OVER and aren't coming back.  Even if more manufacturing does return to America, it will be done with fewer people (technology is a problem for you).  Thinking you can tax people who adapted better to the modern world than you so you can hang on to yesterday's middle class income is going to be a recipe of disaster for you.

 

Retrain, retool and quit crying about yesterday

Nov 9, 2012 9:37PM
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Anthony, I read your diatribe often and still seem to find some value of fact/opnion in %10 of your comments.  So here is my diatribe:1: Get people to work , increases tax income and less reliance on "benifits".  Well known fact. 2. Deduce loophole/subsidies and benifits to those above  a certain financial limit.  This reduces expenditures and make Dems happy that it is focused on "the rich".  Examples are :  SS benifits for those with income above a specific limit, lowere interest write off with cap, again reduce the loophole only the rich take advantage of.   The debt cannot be kicked down the road any more.  IMHO it was the radical right (TP) that is causing the Rep party to loose touch with everyday people.  My prediction is that the Rep party, if it continues to make policy based on religious beliefs and arogant positions that are self rightous, will be a splinter group in politics at the top levels. This is just my opinion, and not a PAC contibutor.
Nov 9, 2012 9:28PM
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30 years ago the top tax rate was 70%.

Romney's dad paid an average tax rate of 36.9% over 12 years returns he provided.

30 Years ago the 400 richest Americans owned 10% of the countries wealth.

30 years ago the middle class was 10% larger and there were less considered poor.

30 years ago we manufactured twice as much as we do today.

 

Today the 400 richest own 24% of the countries wealth an increase of 14% and exceeds the net worth of the bottom 60% or 185 million people.

Romney according to his summary paid less than 14% over the last 12 years. His father paid 2 1/2 times as much.

 

 By any factor the middle class makes less today on average than they did 30 years ago, there are fewer jobs and the rich pay only maybe as third as much as they did. Explain how cutting their taxes lower and lower every few years is supposed to create jobs again.

Nov 9, 2012 9:21PM
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I saw a post that said let all tax cuts expire, I'm ready. I am at the point to say why not as long as the other money sucking 47% money suckers have to pay too.
Nov 9, 2012 9:16PM
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The perfect approach for the country is simple. Make a deal with Obama that the Republican's will agree to everything he wants regarding his plans. But, in return if the country becomes worse off in the next year he has to resign. He'll be gone three years sooner. I like that. In other words, put your money where your mouth is. God knows that Obama has used his mouth. It has been lip service from the start.
Nov 9, 2012 9:07PM
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Go Obama, give em hell.  Obama is better than God.  Listen to him and accept him as your savior.  Assalamu alaikum wa rahmatullahi wa barakatuh
Nov 9, 2012 9:05PM
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Perhaps they should just rename the Tea Party the "Koch Brothers' Club".

 

What many initially thought to be a grass roots rising of ordinary citizens, has really been a carefully planned concerted scheme to advance the policies of the filthy-rich, specifically, the Koch brothers.

 

Next time you see a Tea Party rally, see how many blacks, latinos, or asians you see amongst their ranks. You can count them on one hand.

 

Unfortunately, Republicans need them to win their local seats, but Nationally, the Tea Party candidates have been thoroughly rejected. Republicans probably lost a chance to grab control of the Senate because of them.

Nov 9, 2012 8:58PM
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If you review what our founding fathers wanted from taxation they did NOT want direct taxes (i.e. taxes on income and property). 

 

Instead they desired indirect taxes (i.e. transaction taxes such as sales tax as well as excise taxes on whiskey as well as revenues from tariffs) to fund the military and government services.

 

We have strayed so far away from this system of taxation that all we have now is class warfare and income envy.

 

Human beings respond to incentives, and by nature want things as easy as possible.  Our government and system of taxation has made an entire culture of people who have become comfortable living off the government and the tax revenues of one half of the American workforce.

 

Until the incentives are changed and people are actually rewarded and given incentive to work, save, and invest it is just too easy to just hang out and not contribute. 

 

The election earlier this week made this fact abundantly clear.

Nov 9, 2012 8:56PM
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I hope that the President spends this election clout on the right things and sticks to his guns on this round 2 with those pesky wittle T/Pers. His mastery of boxing the GOP into another corner as the inconsederate political party that dragged the whole economy down into another recession. In order for the rich to keep from paying their fair share of taxes will be at display real soon. Watch and learn while he exposes his opponents and their faults. But here is whats so upsetting about this un-necessary drama. He's just raising the taxes back up to the same rate that President Clinton had them at. And those rates produced the most peace-time prosperous era of our time. So what's wrong with wanting everyone to be better off. You all right wingers tell me and the rest of us that won this election so handily???  
Nov 9, 2012 8:47PM
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Old Fool 727: Romney owed an actual 10.3% in 2010 on 21 million income. Would he be poor if he paid the same rate as his father did when he was running for president at 36.9%? You fools act like democrats want to take everything the rich have when in reality between their constant demand for tax cuts and specialty tax deductions most pay very little. Do people really deserve to pay nothing as a reward for shipping jobs over seas? Over 30,000 people with $1,000,000 a year or more revenue in 2010 paid no income tax. Had Romney been elected and his tax cut passed that number could have exceeded 100,000. Why do you fools defend this?
Nov 9, 2012 8:38PM
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  Too many moaners 'n groaners-- whining their doom 'n gloom routine. I've put my 40 years of documented labor into not worrying and am currently enjoying what I have.

  And I'm not living way beyond my means, b/c I was never that type of person. Life is good!

The fiscal cliff? No worry. No whine. Bring it on!!!!

  Don't and won't care about the 'baggernuts, aka, Tea Party.

Nov 9, 2012 8:37PM
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When the Bush tax cuts expire on Dec31st you will see just what you voted for. Each household with 2 children will get a $4,00.00 tax increase, $4,700.00 for 3 kids, plust 2% on their paychecks. This is all before "Obamacare" even dips into your pocket. That Fiscal Cliff everyone is talking about, we will fall off that cliff the 2nd of January 2013. Economists are expecting the Stock Market to collapse & rocket ship us into another recession. These tax increases are just awesome for this nations middle class! OH WAIT! Thats right, we are only going after the rich. Thats the BS & lies that you fell for. Good luck!

 

 

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.
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