Best of the Week
Most Popular
1.RED ALERT: Paris Terror Attacks - What to Expect Next - STRATFOR
2.Paris Terror Attacks, Death Pangs of a Dying Religion, and Impact on BrExit EU Referendum - Nadeem_Walayat
3.Paris Terror Attacks, Islamic State Attempting to Spark Civil War in France - Nadeem_Walayat
4.Three Shocking Charts That Prove Gold Price Rally Is Coming - Sean Brodrick
5.Stock Market Nifty-Fifty Becomes Fab-Five; Return of the 'Four Horseman' - Mike_Shedlock
6.Africa Population Explosion - Why Europe's Migrant Crisis is Going to Get A Lot Worse - Video - Nadeem_Walayat
7.Gold Mining Stocks May Be The Buy Of The Century - Jeff_Berwick
8.Grandmaster Putin Beats Uncle Sam at His Own Game - Mike_Whitney
9.BRICS? No, CRISIS - Raymond_Matison
10.UK Housing Market Affordability, House Prices Momentum and Trend Forecast - Nadeem_Walayat
Last 5 days
Stock Market Mixed Expectations Ahead Of December, New Economic Data Releases - 30th Nov 15
The First Prophet - The Day God First Spoke to Man - Video - 30th Nov 15
America's Rendezvous With Destiny - The Fourth Turning - 30th Nov 15
Stock Market Consolidation Week - 29th Nov 15
A Black Friday for Gold Prices - 29th Nov 15
Politicians Driving The World Towards War - Fourth Turning - 29th Nov 15
Stock Market Down Monday, Gold Price Bottoming? - 29th Nov 15
Turkey Downs Russian Jet to Draw NATO and US Deeper into Syrian Quagmire - 28th Nov 15
Stock Market Quiet Week as Primary 5 Continues - 28th Nov 15
Black Friday, Weekend for Europe's Migrants - 28th Nov 15
HUI and Gold - Who's Leading Whom? - 28th Nov 15
Gold And Silver - No Ending Action, But End May Be Near - 28th Nov 15
Social and Cultural Distress Dividing The Nation - Fourth Turning - 28th Nov 15
Sheffield Houses Prices 2015, Best Estate Agents As Rated by Buyers and Sellers - 28th Nov 15
Stock Market Top Valuations, at a Critical Juncture - 27th Nov 15
The Top Shopping Opportunity on Black Friday - 27th Nov 15
Economics Is About Scarcity, Property, and Relationships - 27th Nov 15
UK Immigration Crisis Hits New Extreme of 336k Net Migration, up 32% on 2014 - 27th Nov 15
Vauxhall Zafira B Fire Danger Recall - What to Do Video - 26th Nov 15
Triggers In US Dollar Collapse - 26th Nov 15
Apple Stock is a 10-Year Short - Bear Market Environment - 26th Nov 15
U.S. Federal Reserve Rate Hike - 26th Nov 15
George Osborne's War on Buy to Let Sector Trending Towards Doomsday - 26th Nov 15
Will Turkey Drag NATO into War With Russia in Syria? - 25th Nov 15
George Osborne’s Autumn Statement and Spending Review Full Text - 25th Nov 15
Will Fresh QE From ECB Boost Gold? - 25th Nov 15
Sheffield, Yorkshire and Humberside House Prices Forecast 2016-2018 - 25th Nov 15
Investors Watch Out For The Auto Industry… - 24th Nov 15
BEA Revises 3rd Quarter 2015 US GDP Economic Growth Upward to 2.07% - 24th Nov 15
Stock Market Supports Are Being Broken - 24th Nov 15
Is Gold Price on the Verge of a Breakout? - 24th Nov 15
Fed’s Tarullo: U.S. Interest Rates Liftoff Should Wait for Signs of Inflation - 24th Nov 15
Silver Price, COT, US Dollar Updates and More - 24th Nov 15
UK Regional House Prices Analysis - Video - 23rd Nov 15
Crude Oil Swinging For The Fences - A 20 to 1 Option Play - 23rd Nov 15
US Dollar, CRB, Oil, Gas, Copper and Gold - The Chartology of Deflation - 23rd Nov 15
UK Regional House Prices, Cheapest and Most Expensive Property Markets - 23rd Nov 15
Stock Market Rally Losing Momentum? - 23rd Nov 15
Will Gold Price Drop Below $1000 Soon? - 23rd Nov 15
Gold and Silver Sector Big Green Light and Low Risk Entry Setup... - 23rd Nov 15

Free Instant Analysis

Free Instant Technical Analysis

Market Oracle FREE Newsletter

Reasons to Get Excited About Japanese Stocks

Facing the Fiscal Cliff Solves 77% of the Deficit Problem in One Move

Interest-Rates / US Debt Nov 15, 2012 - 09:32 AM GMT

By: Money_Morning


Best Financial Markets Analysis ArticleMartin Hutchinson writes: With the election over, Wall Street is now obsessing over the possibility that the "fiscal cliff" negotiations may end in stalemate.

Well I have news for them: a stalemate would be good for the U.S. economy, and any deal that does not preserve most of the fiscal cliff is not worth having.

Here's why.

By ending Social Security tax relief, the Bush tax cuts and cutting spending on both defense and domestic programs, the "fiscal cliff" cuts a deficit projected by the Congressional Budget Office (CBO) at $10 trillion over the next 10 years down to $2.3 trillion.

Contrary to all of the media caterwauling, that's not a dreadful fate.

In fact, it is exactly what we ought to be doing, since it solves 77% of the deficit problem in one fell swoop.

Of course, lovers of low taxes (which includes me) will claim that we should not support the "fiscal cliff" because it will raise taxes on everybody. But honestly, what's the alternative?

The reality is that President Barack Obama won the election and that he passionately wants to raise taxes on the rich. It's more important to him than any other outcome from this negotiation.

In setting out his objectives he twice reiterated that he was non-negotiable on tax hikes for the rich, and wanted to close the budget gap primarily by tax increases.

And guess what: Tax increases in budget negotiations are much more real than spending cuts, because once the legislation is written, they always happen, whereas politicians often find a way to weasel out of a spending cut deal once the klieg lights are off.

Thus, given the Republicans' weak negotiating position, it's likely we'll end up with the tax increases on the rich anyway.

However, tax increases alone will do little to reduce the deficit.

That will leave the deficit as a real problem, and may well produce yet more tax increases on the rich as a precondition to solving it. To increase taxes on the rich, even modestly, without solving the deficit problem seems a very bad idea indeed.

A Fiscal Cliff Reality Check
The worst outcome of the negotiations would be four more years of trillion dollar deficits.

That would push the federal debt to around 150% of GDP, making it a gigantic problem for the next president in 2017.

In addition, when combined with Fed chairman Ben Bernanke's easy money policies, it would drain away the U.S. capital base still further, as the country runs huge balances of payments deficits and sells huge amounts of Treasury securities to foreigners.

By 2017, the U.S. would be a much poorer country, with high unemployment and a huge recession to come, probably accompanied by a financial crisis.

Obama, out of office in January 2017, may not care about this, but the rest of us should.

If tax increases are required, it's better to impose them on everybody. U.S. voters have effectively been running up the national credit card bill in the last four years, even while trimming their own credit card balances. Middle-income voters must be taught that they cannot simply vote to expand government ad infinitum and not pay for it.

By enduring the fiscal cliff tax increases, the public will finance its spending wishes on a pay-as-you-go basis (or closer to it), keeping the country's debt position under control.

The tax increases will also lessen consumption, thereby reducing the balance of payments deficit and our dependence on foreigners.

The Republicans in Congress cannot get tax cuts, but they do have the ability to stop massive new spending programs. If they hadn't that ability, I would not favor the fiscal cliff; there's no point raising more money through taxes if the feckless administration is only going to spend it on new rubbish.

But with spending controlled, the extra money raised will go to improving America's fiscal and debt positions, as it should.

The Fiscal Cliff Comes With Pain
Admittedly, the fiscal cliff does include some painful changes.

The rate of estate taxes goes back up to 55% as the limit falls to $1 million. Dividends will also become fully double-taxed again. But those things can be changed in a later negotiation, when the Republicans can put limits on tax deductions for housing, health insurance, charities and state and local taxes, all of which (if only limited, not eliminated) affect mainly upper-income voters.

Making dividends tax deductible for corporations (and keeping full tax for investors) would be the ideal corporate tax reform, because it would eliminate most corporate tax loopholes and force management to pay most earnings out to shareholders. But this negotiation could be done in a revenue-neutral way, since the deficit problem would be more or less solved.

Of course, people worry that the fiscal cliff would cause a recession, but why is that a problem?

We're bound to have another recession before 2017 anyway, so the Democrats should want to get it over with.

For Republicans, a mild fiscal cliff recession, without an accompanying financial crisis, is a price well worth paying to solve the deficit problem. It will also provide a "learning experience" for the electorate on how government overspending damages the economy.

The slogan for 2013 is simple: No more free lunches!

You just can't kick the can forever. Now is the time to deal with the fiscal cliff.

Source :

Money Morning/The Money Map Report

©2012 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email:

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2015 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Biggest Debt Bomb in History