Tuesday, November 20, 2012

Fiscal Cliff - Who Is Cliff Anyway?

The much discussed fiscal cliff about which will fall over (or not based on Congress) is probably misunderstood more than any other jargonistic word in politics today. What is it? Please read further.

About a year ago, or so it seems, Congress and the President couldn't agree on the issue of the national debt - should it be allowed to increase again. Actually, not even the House of Representatives and the Senate could agree (Thank you Tea Party!). A deal was made that allowed the Debt Ceiling to increase by $1-2Trillion. Had it not increased, so goes the theory, we would have defaulted on international and domestic debt. (I guess Bain Capital would have bought the Country for 5 cents on the dollar).

The agreement was simple: "Everyone" agreed to reduce the debt by $1Trillion by a mix of spending cuts and increased revenues (called Taxes). Whether any of the parties would have actually done what they promised is still unknown. IN EXCHANGE for the "put the decision off until after the election" scenario, each "side" accepted the concept that if nothing is done, then Sequestration would come into play - putting everything on hold but with HUGE penalties.

This basically means that budget cuts and revenues generation (taxes) would be forced into being. No turning back. Congress passed the law and the President signed it. $500Billion would come out of spending (defense and social services programs including medicaid etc) and $500Billion would be recovered by eliminating tax breaks in place since G.W. Bush was President, and one or two dealing with payroll taxes that this administration got passed. NO ONE THOUGHT IT WOULD HAPPEN. It was to scare a solution into concurrence by all sides. The cuts would be so drastic and the effect on taxpayers so big in increased payments that a deal would be worked out well before the election or right after. Probably one Political Party thought is would win control of both Houses and maybe the Presidency as well.

We have 16 working days before the end of the year when we fall over the cliff (Congressional calendar of course - I count about 47 which allows for Christmas and Thanksgiving but...). What does it really mean? RECESSION. The cut in federal spending and the increase in taxes which will cut personal and business spending will kick us back to 2009. Unemployment over 9% again - maybe as high as 11%, businesses closing due to no one being able to buy much at all.

The irony - the utter insanity - we would start stimulus packages all over again. It might take a year but that's it and then we'd be back in the same boat. Problem: If we defaulted, our cost of borrowing from other countries (China) would skyrocket. When we "borrow" we SELL TREASURY BONDS. Right now the interest rate we pay on bonds is under 2% for the most common time period - 10 years. We might have to pay 5%-7%. That would keep us in the hole for the rest of the boomer generation's lifetime.

Why do we do this to ourselves? Some would say that "We have THE answer": Cut Spending on the "welfare state" stuff. Well, there is no ONE ANSWER. That idea is just ideology/belief that has nothing more holding it up than does the other main group who say "Don't Cut" but tax the wealthy and eliminate duplication and waste in government.

Author's Copyright by Richard I Isacoff, Esq. November 2012

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