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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475Comments
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
Nov 9, 2012 6:50PM
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The elimination of tax cuts to the rich would fund an infrastructure re-build program. Even though such a program would be a two or three year one, it would put over one million people back to work. The cascading effects would spur growth in the economy.

 

Remove corporate tax loopholes.  Many companies pay little to no income taxes. They have been raking in record profits, have restricted hiring, hoarded capital and cut employee benefits--lots of greed that needs to stop.

 

Reducing unemployment to the minimum needed to exist--pay for food and lodging--would reduce cost.  If you're drawing unemployment, you should not be going on cruises or skiing vacations--Sorry, but that's life.

 

Hospitals and medical providers need to stop their greed! Charging ridiculous fees for services that just two years ago cost half of what they're charging today is absurd. I had open heart surgery two years ago.  The hospital billed the insurance company $135K for the two hour procedure.  The insurance company paid the hospital $75K, which is still too high.  Today, I hear that hospitals routinely bill insurance companies between $200K to $250K for the same procedure -- Why are people such greedy ba$tards?

 

Leave Medicare and Social Security alone!!

Nov 9, 2012 6:48PM
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It's time to start governing and stop trying to make someone look bad.  For 4 years they have been trying to unseat the President instead of governing and trying to keep America strong.   Now that your efforts have failed do what we elected you idiots to do do.  Solve problems, and try new ideals that will lead to prosperity and forget about party lines  PLEASE.

Nov 9, 2012 6:44PM
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Anthony - it's tax increases and spending cuts.  Also, anyone can see that it's a spending problem in Washington - not a revenue problem.  The federal government is currently spending $750 billion they took from the private sector to pay people to not work.  He can use any or all of it to reduce the deficit, spend on infrastruture, etc.  He doesn't need more, he just needs to reallocate what he already has.  You know, like any good manager would do. Anthony, your suggestions, as well as the president's, just move us closer to Greece.

BTW Anthony, did you read the MSNBC story about the public sector employees in Greece throwing firebombs at their Parliament the day after our election?

Nov 9, 2012 6:41PM
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"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."

 

Anthony: You do realise that money paid for medicare in dollars from the 50's, 60's, 70's, etc. when gasoline was 40c a gallon isn't the same as todays dollars right? We'd have a riot if people were required to pay into a system in current dollars if they'd only have pennys in value in 50 years.  As in social security the government is supposed to pay interest on all surpluses.

 

 I agree a tax agreement should eliminate or lower deductions on the wealthy rather than raising the rate. What good would raising the top rate from 35% to 39.6% do when super wealthy like Romney only pay 10% anyway?

Nov 9, 2012 6:40PM
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Make it fair let all the tax cuts expire I'm ready.

 

Nov 9, 2012 6:40PM
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It is so funny to hear about the rich disappearing because of taxes... Whoever believes this please buy a bridge I got to sell you.
Nov 9, 2012 6:39PM
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"Stocks suffer worst weekly loss in 5 months"

And every bit of it came  AFTER the Election............​..................
Nov 9, 2012 6:38PM
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The solution to US economic situation is right up Washington's alley: Do nothing. Never has recovering from a recession been so easy or had such an attractive ticket price.

 

Associating the health of the economy with the DJIA, S&P 500, and NASDAQ is ludicrous. Real economic health is indicated by the bottom lines of govenrnments' budgets at the state, local, and national level. All of which are in desperate need of the revenue generated by taxes.  

 

Letting the Bush era tax cuts expire may cause the markets to recede in the short term, but as public debt subsides confidence will be restored in our financial system and the markets will respond accordingly. Sometimes doing the right thing means doing nothing.   

 

Lets just hope Congress doesn't wake up at the last minute and bail out Wall Street at the expense of meat and potatoes economic recovery.  

Nov 9, 2012 6:36PM
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Or just call one of those debt relief hotlines that always works
Nov 9, 2012 6:36PM
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If if wasn't for the tea party keeping Obama in check we would already be over the fiscal clift.
Nov 9, 2012 6:34PM
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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. Just becuase you want something doesn't mean you must have it and it certainly doesn't mean you deserve it. Common sense (however uncommon) must prevail.

Nov 9, 2012 6:21PM
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hello the tax on the rich the dem's want will pay the bills for less than a week
Nov 9, 2012 6:07PM
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Obama I am good with what you do. We can jump over the cliff and then in two years we can get rid of the hold outs. Get some young blood in there. After all they say it is for our kids but they can't vote yet so we will just screw them to the wall.
Nov 9, 2012 6:06PM
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Cut the welfare and the pork barrel spending and stop rebuilding ever country we go to war with and cut the retirement of all the politicians let theme have only ther own like the working class have to do. And let tfhe politicians have obama care isince you think it so great including you Mr President .The united states could be the wealthiest  country in the world if we could have fair politicians whith all the resources we have here in our own country. All the money you spent on gm will we the tax payer ever get it return YOU GOT TO CUT WEFARE AND HAND OUT

Nov 9, 2012 5:48PM
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Easy, how do you say KENNEDY AND BACK DOOR BANKING AND HALF UNDER THE TABLE STOCK MARKET FOR THOSE free cars, trucks, air conditioners, roofs, homes, etc, etc.
Nov 9, 2012 5:18PM
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Look, it's all or none.   If anyone should be taxed its the 47% that pay ZERO!

 

Mr. President, we are OK going over the fiscal cliff.  You want more money piss away, then you have to tax the 47% to get it.  

 

When W left we spent 2.95 trillion, today that is 3.8 trillion.  We have RECORD tax revenues.  If you want to raise taxes, it MUST be on everyone.  The 47%, who pay ZIP, cannot continue to skate.

 

So, once again we are OK with the cliff. 

 

Don't even think about a  Debt Ceiling increase WITHOUT slashing all of your 800 Billion in NEW SPENDING.   That will not happen.  

 

So Mr. Presdient, it is  time for you to deliver on your promis to balance the budget.  No new taxes of debt ceiling increase until YOU TELL US where you are cutting 1.2 Trillion from the budget.  We await you cuts.

 

But NO NEW TAXES on anyone that does not include the deadbeat 47%!

Nov 9, 2012 4:47PM
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tax the rich

feed the poor

till there are no

rich no more

i'd love to change the world

but i don't know what to do

so i'll leave it up to you.

Nov 9, 2012 4:47PM
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Let the Bush tax cuts expire for all above 200k,  keep the military budget intact, reduce entitlement programs by 25%, gradual increase in SS retirement benefits beginning now to age 68, gradual increase to age 67 for medicare benefits beginning now.  Require congress and all elected federal officials to participate in the same health insurance and retirement programs as other federal employees

Nov 9, 2012 4:01PM
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Let the Bush tax cuts expire for all above $150k per year, reform Medicare elegibility to 67 or 10-15 years, reform Social Security elegibilty to 67 over 10-15 years and cut defense spending by 20% and foreign aid by 40%.
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