Best of the Week
Most Popular
1.Putin’s World: Why Russia’s Showdown with the West Will Worsen - John_Mauldin
2. Stocks Bull Market Grinds Bears into Dust, Is Santa Rally Sustainable? - Nadeem_Walayat
3. Gold and Silver 2015 Trend Forecasts, Prices to Go BOOM - Austin_Galt
4.Gold Price Golden Bottom? - Toby_Connor
5.Gold Price and Miners Soar on Huge Volume - P_Radomski_CFA
6.Stock Market and the Jaws of Life or Death? - Rambus_Chartology
7.Gold Price 2015 - EWI
8.Manipulated Stock Market Short Squeezes to Another All Time High - The China Syndrome - Nadeem_Walayat
9.Gold, Silver, Crude and S&P Ending Wedge Patterns - DeviantInvestor
10.Is the Gold And Silver Golden Rule Broken? - Michael_Noonan
Last 5 days
VIX is Reversing, Other Stock Market Indicators are Faltering - 28th Nov 14
Will The Swiss People Resist The Massive Anti-Gold Propaganda? - 28th Nov 14
Dramatic Increase in Gold Flows into China - 28th Nov 14
Britain's Immigration Catastrophe Continues, David Cameron's Impotent Speech on Stopping In Work Benefits - 28th Nov 14
Netherlands, Germany Have Euro Disaster Plan - Possible Return to Guilder and Mark - 28th Nov 14
Russia’s Gold Monetary Solution - 28th Nov 14
British Government Publishes UK, Scotland DevoMax Smith Report Suicide Note - 28th Nov 14
The Price Of Oil Exposes The True State Of The Economy - 27th Nov 14
Brazilian Bovespa Stock Market Technical Analysis - 27th Nov 14
Gold Price Would Soar on Possible Swiss Yes Vote - 27th Nov 14
Crude Oil Asset Bubble Trouble - 27th Nov 14
Thanksgiving and Puritan Geopolitics in the Americas - 27th Nov 14
The Dow Jones Stocks Index - Beautiful Tree in the Desert - 27th Nov 14
The Digital World, The Opiate of The People - 27th Nov 14
Harry Dent's Simple Strategy for Surviving Withdrawals from Markets on Crack - 27th Nov 14
Socialist France Just Cannot Compete Against Google Freedom - 27th Nov 14
A Short Tale About the Grand Manipulation of Crude Oil Prices - 26th Nov 14
China Secret Gold Buying ... How Could It Happen? - 26th Nov 14
Gold Price Spikes to $1,467.50/oz on Computer Glitch? - 26th Nov 14
Gold - So Bad It's Good: Surviving 2014 - 26th Nov 14
TrueShopping.co.uk Real Customer Experience Review - Online Shopping Lessons - 26th Nov 14
Is There A New Global Consensus About Cheating Investors To Reboot Employment? - 26th Nov 14
EUR/USD – Currency Bulls Don’t Give Up - 26th Nov 14
Swiss Gold Referendum A Golden Opportunity for Switzerland - 25th Nov 14
Silver: What COT Analysis Tells Us - 25th Nov 14
Stock Market Big, Bold and Ugly - 25th Nov 14
U.S. Dollar Near Top? Gold and Silver Trading, Platinum Breakout Invalidation - 25th Nov 14
Buy Fear - Easily Pick Up Profits on Stock Market Dips - 25th Nov 14
The Islamic State Reshapes the Middle East - 25th Nov 14
Gold Price Forecast 2015 - 25th Nov 14
The Swiss Referendum On Gold: What’s Missing From The Debate - 25th Nov 14
Clash of Generations - Why Millennials Still Live at Home; Not Jobs, Student Debt, or Housing - 25th Nov 14
Stock Market Reminiscent of Pompeii - 25th Nov 14
Once Upon A Time There Were Philosopher Kings - 24th Nov 14
The 2014 Crude Oil Price Crash Explained - 24th Nov 14
China Stock Investing - Follow the Money! - 24th Nov 14
122 Tonnes of Gold Secretly Repatriated to Netherlands - 24th Nov 14
What Causes the U.S. Dollar to Move? - 24th Nov 14
Stock Market Indexes New Highs - Will Uptrend Extend Even Further? - 24th Nov 14
All Hail the King U.S. Dollar - Trend Forecast - 24th Nov 14
Where Is China Economy On The Map Exactly? - 24th Nov 14
Most of The World Economies Panic - Is The US Next? - 24th Nov 14
Stock Market Exhaustion Gap? - 24th Nov 14
Gold Golden Gains Come After The Pain - 24th Nov 14
Crude Oil and Stock Market Setting The Stage For The Next Recession - 23rd Nov 14
This Publicly-Owned Bank Is Outperforming Wall Street - 23rd Nov 14
Who’s Ready For $30 Crude Oil Price? - 23rd Nov 14
Strategic, Methodological and Developmental Importance of Knowledge Consumption - 23rd Nov 14
Manipulated Stock Market Short Squeezes to Another All Time High - The China Syndrome - 23rd Nov 14
Gold Price 2015 - 22nd Nov 14
Stock Market Medium Term Top? - 22nd Nov 14
Is the Gold And Silver Golden Rule Broken? - 22nd Nov 14
Malaysia's Subsidy and Budget Deficit Conundrum - 22nd Nov 14
Investors Hated Gold at Precisely the Wrong Time: What About Now? - 22nd Nov 14
Gold and GLD ETF Selloff - 22nd Nov 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Gold Report 2015

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

Interest-Rates

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 :http://moneymorning.com/2012/11/15/facing...

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: customerservice@moneymorning.com

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

© 2005-2014 http://www.MarketOracle.co.uk - 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

Free Report - Financial Markets 2014