My Thoughts on the “Fiscal Cliff”

12 Dec

By now, unless you live under a rock that is buried under a bigger rock, you’ve heard of the impending “Fiscal Cliff.”  We have heard from many clients that are worried about the impact to their accounts and to our economy.

While I wish to avoid sounding flippant, I don’t truly have many worries about this issue.  Here’s why.

What it ISN’T – It isn’t a cliff. There are the White Cliffs of Dover, UK. Or the Cliffs of Moher, Ireland. Even a famous cliff in Norway known as the Troll Wall.  There are thousands of cliffs around the world.  The one thing they all have in common is if you walk over one of them, you will fall a really long way until you hit the land or water below.

whitecliffs-fp

Cliffs of Moher

 

But what we face here in America is not truly a cliff.  More like a reckless downhill. The kind of downhill only an idiot hopped up on Mountain Dew or Meth would attempt to descend on a mountain bike.  And that is a good allegory for this issue, imagine your local Congressperson, with no helmet or sense of reason, hopping on bike with no brakes and riding down the face of Squaw Valley. Eventually, he or she would crash and split his or her dumb head open like a melon on a beautiful piece of granite.  But that is not the same as riding off a cliff.  In other words, if our elected officials do what they do best – nothing – it will be a slow wreck. it won’t be as if we all go back to work January 2, 2013 and the Mayans were correct, only a few weeks late.

What it IS – This is a completely avoidable, government-made mess. It is the very definition of ineptitude. It is a measure of how poorly our government officials work today. It is ridiculous. And, should nothing be done about it, all Members of the Congress, Senate and the White House should be imprisoned. Democrats and Republicans and their husbands and wives, all.

The folks in Washington D.C. could not figure this all out in 2011 so they punted the issues to 2012, thinking (well, that is too kind, they don’t really do much thinking) with an election, it would force both parties to the table so all the things that go into the so called Cliff could be negotiated and solved.

Rumor has it in 2011, after they punted to 2012, they all made a Grover Norquist-style pact, privately hoping the Mayans WERE correct and that by December, this Cliff thingy would be moot. Like usual, they were wrong.  They do have to deal with it. All of it. If they don’t some very serious consequences will arise in 2013. But, as I stated above, not on January 2.  More throughout the year.

Now that we are all clear on what it is and isn’t (for a more serious look at what exactly the issues are, click here) let’s get down to the brass tacks.

  • Both parties know this can’t be allowed to happen or else they would suffer political death.  The Democrats have the hammer and the GOP is hoping by delaying, they may gain one or two concessions. The one thing any elected official fears is having responsibility for anything and having that cost him a future election. So, the likelihood for compromise, albeit at the final minutes, are good.My guess is by December 21, they get this worked out so they can go home for the Holidays.
  • The media, on both the left and right, LOVE this story.  It is not party-specific, not gender-specific, non-religious, and almost nobody watching truly knows much about the real facts. A veritable perfect storm for the news to pump the hype, fear and worry without offending a single person!  That keeps folks watching.  That makes Rupert Murdoch, Disney and GE very happy.  If you don’t think the news is looking for things they can hype up that don’t offend, think back to our early December rain storm.

So, now what? – Perhaps I’m being silly not to give this Cliff more credence.  My best guess is neither party wants to be pinned with the responsibility of having caused our economy to go over the Cliff.

So, Congress will try to negotiate a compromise or punt it all again to 2013 so we can all play Fiscal Cliff 2013But This Time We Mean It!

I imagine President Obama will budge a bit on extending the Bush tax cuts for at least one more year and the Republicans will give a bit on entitlements they want reformed. Some of the pending spending cuts may go in effect. I figure most will be delayed into 2013 via some arcane legislative procrastination. That said, it is unlikely that we will see a full elimination of these issues, which means that taxes will most probably be going up and spending will be cut, with consequent negative effects on the economy.

The upside, of course, is that if these changes are fully implemented, they will go a long way toward solving the deficit problem. This could cause damage in the short term, but it would, ideally, make way for a silver lining in the future.

Where does that leave your portfolio? – Depends on your portfolio. But if you’re my client, you’re probably invested fairly conservatively at the moment.  So the impacts shouldn’t be grave. We’ll be following this situation closely and helping you plan for the future—whatever it may hold. Please call us if you have questions.

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3 Responses to “My Thoughts on the “Fiscal Cliff””

  1. Derek December 12, 2012 at 9:05 pm #

    There is some discussion about removing (or reducing) the homeowner mortgage interest tax deduction. I’ve heard both sides of the discussion on this subject. Sounds like political suicide anyone voting for that. Do you think any of that will happen?
    The lack of an AMT patch is also disconcerting impacting families earning between $75k-$100k.

    • Matt Everson December 18, 2012 at 9:59 am #

      Derek, it doesn’t seem likely that this sort of big move will go through right now. While it is a benefit that favors the more wealthy disproportionately, it also drives real estate sales. Real estate deals drive the economy in a very large way. And, each time a new home changes hands, property taxes, at least here in California, can be reassessed. This is a boon to local and state tax coffers.

      This is a good example of a policy’s original intention taking on a life of its own and becoming very difficult to control. Perhaps another argument for a long-term tax solution that eliminates all of these deductions in some way. But for this year and next, I’m guessing this has too much electricity for the politicians to meddle with right now.

Trackbacks/Pingbacks

  1. Fiscal Mirage « MJ Everson Financial - January 4, 2013

    […] prevented the dreaded Fiscal Cliff.  What exactly went down? I had written way back in 2012 (Ok, three weeks ago!) that this would most likely involve some compromise and lots of pushing off to 2013.  Please, […]

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