Over the past few years, policy leaders worldwide have grown accustomed to kicking the can down the road with each step in this ongoing financial crisis making incremental moves rather than cultivating viable long term solutions. More recent attempts seem to have evolved into simply just trying to kick the can out of the driveway. Now we fear there may not be enough firepower left to simply kick the can over. [Having done so, we are left between the proverbial rock and a hard place.] If lawmakers do nothing, by all accounts we are likely to see a recession. Should lawmakers extend the Bush-era tax cuts, you make no progress towards long term deficit reduction, potentially raising the risk and magnitude of a future financial crisis. [Let me discuss this predicament further and how best to invest in such precarious times.] Words: 1602
So says Matt Erickson (www.lcptactical.com) in edited excerpts from his original article* entitled The Fiscal Cliff: A ‘Taxing’ Predicament
Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has edited the article below for length and clarity – see Editor’s Note at the bottom of the page. This paragraph must be included in any article re-posting to avoid copyright infringement.
Erickson goes on to say, in part:
What Events Lead Up to Our Predicament?[In the past 4 years] a tsunami of events [have taken]…place that [have] shook the foundation of the global economy. What began as a crisis in mortgage backed securities, morphed into government bailouts and ownership stakes in public companies (banks, automobile manufacturers, insurers, etc.).
In the end, in order to stave off a global depression, central banks from around the world have taken part in coordinated quantitative easing efforts; essentially printing more money/issuing more debt, lowering benchmark interest rates, and establishing themselves as primary buyers of last resort. All of these measures have been taken in an effort to stimulate a slowing global economy, one that as of late has again begun to sputter. Recently, however, many have begun to question what more central bankers can really do? Interest rates are already at or near zero.
This has created a conundrum for both lawmakers charged with the responsibility of managing and drafting fiscal policy, and central bankers navigating monetary policy. It has not been an easy road and certainly each party has taken their turn trying to point their finger at the other, as they struggle to come up with answers, many of which remain unpopular by the masses.
Can the U.S. Consumer Save the Day?
In the U.S., we have witnessed an economy traditionally based on consumer spending for growth, transition to being propped up by government spending yet we all know this can’t go on forever. With government balance sheets bulging out of control they are going to have to step back at some point in time in which case the torch will again be passed to the consumer to provide sustainable economic growth. The question is whether the consumer will be ready. [Read: Are Consumers Prepared to Step up to the Plate?]
With all that has transpired in recent years, the consumer in the U.S. has suffered substantial losses and often incurred significant debts. Many have lost as much as 50% or more on their homes, and perhaps just as much in their investable assets.
At the same time, unemployment remains untenably high, wage growth is anemic, and many consumers continue to face payments on a mountain of debt accumulated during better times (when we all thought things could only go up in value – our investments, homes, incomes, etc.).
In effect, the U.S. consumer is attempting to deleverage their personal balance sheets while governments are massively and unsustainably increasing theirs. Not such an easy task given the circumstances we find ourselves in.
Is a Delicate Balance Between Spending & Taxation Possible?
Elected officials around the world must strike a delicate balance between providing a means to slow down government spending and increase income (taxes levied), without choking off the consumer entirely. Obviously, this is not an enviable task but, as our global leaders grapple with how to solve our long term problems, in the short run they are working to prevent another recession. During the average recession, equity markets historically lose more than 40% of their value. To this point, we have not even gotten back to the highs the U.S. markets achieved in October of 2007. A 40% drop from here would be devastating.
Is There Any Chance for Bipartisan Diplomacy?
So here we are in an election year and, with both parties maintaining such polar opposite positions regarding the fiscal cliff et. al, any chance for bipartisan diplomacy is slim at best. If nothing is done by year end, however, the Bush-era tax cuts will expire, and the ripple effects will be felt far and wide. [Read: Regardless of Who Wins in November the U.S. Is Going Over the Financial Cliff! It’s Just a Matter of Time – Here’s Why]
What May Lie Ahead?
A number of individuals and entities have recently begun to forewarn us about what may lie ahead:
- The Congressional Budget Office has publicly stated that if Congress does nothing to soften the blow of higher taxes and lower spending, the changes would devastate the economy and provoke a recession in 2013.
- Former President Bill Clinton has echoed these statements further, suggesting that tax cuts for people of all incomes, including the rich, should be extended into 2013 to avoid economic harm and allow time for a broader fiscal deal.
- In recent testimony before Congress, Federal Reserve Chairman Ben Bernanke implored lawmakers to take action to address the fiscal cliff, citing that such a “severe” tightening of fiscal policy would “pose a significant threat to the recovery” if it were allowed to proceed. He has also indicated that the Fed would be hard pressed to offset the full effects of such moves.
- The IMF (International Monetary Fund), in its annual review of the US economy warned, “Failure to reach an agreement on near-term tax and spending policies would trigger a severe fiscal tightening… with negative growth early next year and significant negative repercussions on an already fragile world economy.”
While many may look at this as a potential story for 2013, the impact will be felt far sooner.
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Facing what some have estimated to be more than $600 – $700 billion in higher taxes and spending cuts, US companies are already pulling back. Many have already begun to delay hiring and spending, anticipating the impact of pulling hundreds of billions of dollars of purchasing power out of the economy. As cited by Michael Hanson, senior U.S. economist at Bank of America, “You don’t board up the windows when the hurricane is there, you board up the windows in anticipation.”
High net worth investors may soon begin to batten down the hatches as well. With the potential increase in tax rates, many investors holding substantial long term gains may seek to recognize them in 2012 – at what may be substantially lower tax rates than what we are likely to have for the foreseeable future. Pushing profit taking by wealthy investors into 2012 may very well create further selling pressure in the investment markets.
How Will the Upcoming Fiscal Cliff Impact How Much We Pay In Taxes?
Beyond the economic landscape and potential impact on the investment markets, how will the upcoming fiscal cliff impact how much we pay in taxes? According to the Tax Policy Center (a non-partisan research group in Washington), if Congress does nothing, households of all income levels would see their taxes go up:
- low income earners would see their income tax increase from the current level of 1% up to 5%,
- middle income from 14% to 18%, and high income earners from 31% to 38%
- the average tax increase per household would be $3500.00….
I think we can all see where this is going… If lawmakers do nothing, by all accounts we are likely to see a recession. Should lawmakers extend the Bush-era tax cuts, you make no progress towards long term deficit reduction, potentially raising the risk and magnitude of a future financial crisis.
Over the past few years, policy leaders worldwide have grown accustomed to kicking the can down the road with each step in this ongoing financial crisis (making incremental moves rather than cultivating viable long term solutions). More recent attempts seem to have evolved into simply just trying to kick the can out of the driveway and now we fear there may not be enough firepower left to simply kick the can over.
What’s In Store For Us For the Remainder of 2012 and Into 2013?
So what does the mean for the remainder of this year and into 2013? No one can say for sure, but the challenges are formidable, and we all know that US companies as well as the investment markets despise uncertainty. As such, we are currently faced with significant headwinds.
At times like this, rather than engage in a herculean bout of finger pointing, it would be nice to see political leaders come together on a bi-partisan, workable solution. For now, the discord appears too great and in an election year where these guys and gals are trying to get re-elected, it seems to be protocol to try to win by discrediting your opponent, rather than on the virtues of what you bring to the table to solve the problem.
How Should We Invest In Such An Uncertain World?
So here we are:
- bonds are the most expensive they have ever been,
- stocks are up more than 100% in little more than 3 years,
- global growth is slowing, and
- geopolitical risks are on the rise.
Where is an investor supposed to place their hard earned savings for long term growth and preservation of capital?
This is where the investment landscape has changed. What was previously impossible, is now possible. [I’m talking about] ETFs which provide investors with:
- low cost,
- broad diversification….
- the opportunity to implement tactical allocation shifts [or better yet, asset rotation] that can be utilized to side-step prolonged declines in the investment markets thereby protecting the portfolio from incurring a permanent impairment of capital….
*Source of original article: http://www.lcptactical.com/uploads/Understanding_the_Fiscal_Cliff.pdf
Editor’s Note: The above post may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.
Injecting massive amounts of liquidity into the banking system can spur dramatic economic growth if that liquidity is used. On the other hand, if public perception is negative and fearful, that liquidity remains untapped and no growth occurs. We are in a new earnings season and for the most part – based on lowered expectations – the numbers are looking OK so what should we expect based on these modestly improving numbers? Words: 2176
The next few years are not going to be pretty. We’re looking right into the teeth of a rolling global deleveraging recession—the End Game, I’ve called it – and the decisions we make in the next couple years about how to handle our debts and budget deficits here in the U.S., in Europe, in China, in Japan, and elsewhere, are going to be absolutely crucial. Words: 507
QE3 looks like a desperate act to feed money to large banks, offload MBS toxic waste from their balance sheets, devalue the dollar against houses, commodities, and other currencies and create significant collateral damage in the form of consumer price inflation according to a number of respected economists and critical thinkers on the subject of QE3. [let’s take a look at what they have to say.] Words: 1661
Industrialised countries today face serious risks – for their financial sectors, for their public finances, and for their growth prospects. This column explains how, through our financial systems, we have created enormous, complex financial structures that can inflict tragic consequences with failure and yet are inherently difficult to regulate and control. It explains how this has happened and why there are more and worse crises to come. Words: 2434
With the pop from the USFed’s latest attempt at financial shock and awe already seeping from lackluster markets, and the teleprompter news networks losing steam over their promotion of the same, it is time to take a look back at the decisions made on 9/13/2012 and set the record straight on some things.
Timing the U.S. debt implosion in advance is virtually impossible. Thus far, we’ve managed to [avoid such an event], however, this will not always be the case. If the U.S. does not deal with its debt problems now, we’re guaranteed to go the way of the PIIGS, along with an episode of hyperinflation. That is THE issue for the U.S., as this situation would affect every man woman and child living in this country. [Let me explain further.] Words: 495
The Fed professes that QE 3 or as I call it, QE Infinity (QEI), will create jobs but I am not sure how they can expect anybody to buy their rationale. As we know, QE 1 and QE 2 did very little in the way of creating jobs. Might the Fed realize that QE Infinity could actually be counter-productive to economic growth?
The choice facing the leaders of the world’s largest economies is a simple one: Either they engage in massive money printing, or they let the world slip into another great depression. This article examines why they have no choice but to print money, something which will have significant consequences for everyone. Words: 560
There is a clear link between our system of fiat (paper) money, the supply of money and credit in an economy, and the 30-year boom that came to a dramatic end in 2008. It’s only by understanding this link that investors (and anyone with wealth) can appreciate just how fragile our financial system is, and what to do to protect themselves from its inevitable collapse. [Let me explain.] Words: 961
The outcome of the election of 2012 will [only] determine the rate of speed at which we approach the [financial] cliff [because] neither political alternative is willing to change course, to steer away from the cliff. The cliff is so high that whether we go over it at 200 mph (Obama) or whether we merely slip over the edge (Romney), the end result is the same — fatal for the economy and perhaps our entire political system. It is the fall that will kill us. [This article explains why that is going to be the case.] Words: 1135
The deficits aren’t going to stop anytime soon. The debt mountain will keep growing…Obviously, the debt can’t keep growing faster than the economy forever, but the people in charge do seem determined to find out just how far they can push things….The only way for the politicians to buy time will be through price inflation, to reduce the real burden of the debt, and whether they admit it or not, inflation is what they will be praying for….[and] the Federal Reserve will hear their prayer. When will the economy reach the wall toward which it is headed? Not soon, I believe, but in the meantime there will be plenty of excitement. [Let me explain what I expect to unfold.] Words: 1833
…The US Government and its catastrophic fiscal morass are now viewed by the world as a ‘safe haven’. This would easily qualify for a comedy shtick if it weren’t so serious….[but] the establishment is thrilled with these developments because it helps maintain the status quo of the dollar standard era. However, there are some serious ramifications that few are paying attention to and are getting almost zero coverage from traditional media. [Let me explain what they are.] Words: 1150
With the U.S. election just months off, political pressures will mount to favor fiscal stimulus measures instead of restraint. Such action can only accelerate higher domestic inflation and intensified dollar debasement culminating in a Great Collapse – a hyperinflationary great depression – by 2014. [Let me explain why that is the inevitable outcome.] Words: 2766
Whether our current economic crisis will end with massive inflation or in a deflationary spiral (ultimately, either one results in a Depression) is more than an academic one. It is the single most important variable for near and intermediate term investing success. It is also important in regard to taking actions which can prepare and protect you and your family. [Here is my assessment of what the future outcome will likely be and why.] Words: 1441
Daniel Thornton, an economist at the Federal Reserve Bank of St. Louis, argues that the Fed’s policy of providing liquidity has “enormous potential to increase the money supply,” resulting in what The Wall Street Journal’s Real Time Economics blog calls “an inflation inferno.” [Personally,] I think it’s too soon to make significant changes to a portfolio based on inflation fears. Here’s why. Words: 550
The developed economies of the world have opened the money spigots…[and this] massive money and credit creation is sitting in the banking system like dry tinder just waiting for a spark to set it ablaze. How quickly it happens is anyone’s guess, but once it does we are likely to be enveloped in a worldwide inflation unlike anything before ever witnessed. [Let me explain further.] Words: 625
Evidence shows that the U.S. money supply trend is in the early stages of hyperbolic growth coupled with a similar move in the price of gold. All sign point to a further escalation of money-printing in 2012…followed by unexpected and accelerating price inflation, followed by a rise in nominal interest rates that will bring a sovereign debt crisis for the U. S. dollar with it as the cost of borrowing for the government escalates…[Let me show you the evidence.] Words: 660
Interest rates have been manipulated to keep them extremely low in an attempt to stimulate the economy but…unless deficits are dramatically reduced…. interest rates will eventually rise and government interest expense will double or triple from the amounts being paid today. That potentially triggers a debt death spiral, where government has to borrow more than otherwise expected. It also raises the credit risk and could ratchet interest rates up again. It has happened to Greece, Portugal, Spain and other European countries already this year and could well happen in the U.S. too. Words: 595
Everyone who purchases a Treasury bond is purchasing a depreciating asset. Moreover, the capital risk of investing in Treasuries is very high. The low interest rate means that the price paid for the bond is very high. A rise in interest rates, which must come sooner or later, will collapse the price of the bonds and inflict capital losses on bond holders, both domestic and foreign. The question is: when is sooner or later? The purpose of this article is to examine that question. Words: 2600
LOOK! Everyone needs to see this. United States owes a lot of money. As of 2012, US debt is larger than the size of the economy. The debt ceiling is currently set at $16.394 Trillion, estimated to be hit around Sep 14, 2012. In the infographic below that enormous amount is illustrated in $100 bills. It’s frightening! Words: 605
The U.S. already has more government debt per capita than the PIIGS (Portugal, Italy, Ireland, Greece and Spain) do and it just keeps getting worse and worse thanks to both political parties. We are on the road to national financial oblivion yet most Americans don’t seem to care. They don’t realize that we have enjoyed the greatest prosperity we will ever see…and that when the debt bubble bursts there is going to be an immense amount of pain. That is a very painful truth, but it is better to come to grips with it now than be blindsided by it later. [Let me explain.] Words: 1140
Even as I write these words, the world’s largest economy — the E.U. — is coming unglued at the seams, the world’s second largest — the U.S. — is careening headlong toward a fiscal cliff that promises to gut its GDP, nearly all of Asia — including Japan, China and India — is slowing…and yet most investors still don’t get the message. [Let me go on to explain just what that message is.] Words: 1357
The U.S. is one of the worst debt ‘offenders’ in the world [and, as such, unless] dramatic spending cuts and tax increases [are undertaken within the next 5 years,] America’s debt/GDP ratio will continue to rise, the Fed will print money to pay for the deficiency, inflation will follow, the dollar will inevitably decline, bonds will be burned to a crisp, and only gold and real assets will thrive. [Here’s why.] Words: 674