Best of the Week
Most Popular
1.China Crash, Greece Collapse, Harbingers of Stock Market Apocalypse Forecast 2015? - Nadeem_Walayat
2.Gold Price Awaiting Outcome of Greece Crisis - Clive_Maund
3.Gold Price Peculiar 6 Month Cycles - Rambus_Chartology
4.Gold Price Just a Little Bit More - Bob_Loukas
5.8 Unprecedented Extremes Indicate a Stock Market Bubble in Trouble - EWI
6.Gold And Silver – Without Either, You Will Be Greeced - Michael_Noonan
7.Lies, Damned Lies and Statistics - James_Quinn
8.China Crash, Greece Crisis Harbingers of Stocks Bear Market? Video - Nadeem_Walayat
9.Gold and Silver Record Shorting - Zeal_LLC
10.Markets Big Deflationary Downwave Quick Reference Guide... - Clive_Maund
Last 5 days
I’m Ready for a Stocks Bear Market. Are You? - 4th Aug 15
Top 6 Myths Driving Oil Prices Down - 4th Aug 15
Is This Stocks Bull Market Summit? - 4th Aug 15
EURUSD: An Ending Diagonal Triangle in Action - 4th Aug 15
Crude Oil Price at Levels Not Seen Since March - 4th Aug 15
The Troika Loan Shark Stock Market Rally  - 4th Aug 15
Plan for Surviving Gold's Summer of Discontent - 4th Aug 15
Stock Market SPX Triggers Sell Signal - 3rd Aug 15
The Gold Investment Demand Juggernaut - 3rd Aug 15
Stock Market Pullback at Hand, Gold About to Rally? - 3rd Aug 15
Gold – The More Hate, The More Bullish We Become - 3rd Aug 15
Stock Market Critical Week Ahead - 3rd Aug 15
Gold Price Near Intermediate Bottom - 3rd Aug 15
Stock Market Reluctant Primary Wave IV? - 2nd Aug 15
Power and Compassion - 2nd Aug 15
Preparing for The Stock Market Crash - Inverse ETFs and Puts Timing... - 2nd Aug 15
Commodity Prices Slump Signals Slow Economic Growth Outlook - 2nd Aug 15
BSE Sensex Stocks Bear Market Underway - 2nd Aug 15
What Microsoft’s Dismal Earnings Report Really Tells You - 2nd Aug 15
Gold And Silver Charts Are The Compelling Story. Fundamentals Do Not Apply - 2nd Aug 15
The Fed Can't Stop the Commodity Bear Market - 1st Aug 15
Meet the Leader Who Turned Google Into a “Buy” - 1st Aug 15
The Greek Coup: Liquidity as a Weapon of Coercion - 1st Aug 15
Gold’s Amazing Resiliency - 31st July 15
Silver – A Century of Prices - 31st July 15
Demand for Gold Bullion Surges – Perth Mint, and U.S. Mint Cannot Meet Demand - 31st July 15
Reasons Why the Greek Crisis Will Only Get Worse - 30th July 15
The War On Cash: Why Now? - 30th July 15
Greece - The IMF Experts Flunk, Again - 30th July 15
Threat Of Cyber Warfare the “Other Reason To Own Physical Gold” Warns Rickards - 30th July 15
The 5 Biggest Myths and Lies about the Middle East - 30th July 15
Greece, Diversion, and the New World Order - 30th July 15
Ibuprofen Warning - The Pain Killer that can Kill You! - 29th July 15
More Ritholtz on Gold, and Another Response - 29th July 15
Crude Oil Price Is Lower – and You’re Richer - 29th July 15
U.S. Home Sales Market Is Dead – This Chart Proves It - 29th July 15
Greece- What Happens When Economists Talk Politics - 29th July 15
The Gold - U.S. House Prices Ratio As A Valuation Indicator - 29th July 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Stock Market Bubble in Trouble

It’s Only a Fiscal Slope Not a Cliff!

Stock-Markets / Financial Markets 2013 Dec 28, 2012 - 11:35 AM GMT

By: Sy_Harding

Stock-Markets

Why are Congress and the White House not panicked about the looming fiscal ‘cliff’? Why has the Dow pulled back only 2% rather than plunging 2,000 points as time to forge an agreement by year-end has foolishly dwindled down to just a couple of days, and odds of it happening have become remote?


Probably because the markets and politicians are aware that the economy is not going to suddenly plunge over a cliff into an abyss on January 2 if an agreement has not been reached by then.

Fed Chairman Bernanke did the country a disservice in February when he used the term ‘fiscal cliff’ to describe the problems the economy would begin to face at year-end. The media was even more irresponsible by jumping on the phrase with such fear-inducing drama as year-end approached.

It’s true that if an agreement isn’t reached by year-end, tax increases and spending cuts will begin to kick in which if not amended fairly quickly, would begin to remove roughly $600 billion from the economy next year, enough to take an estimated 2% to 3% out of GDP growth and potentially put the economy into a recession.

However, it isn’t that the $600 billion will abruptly disappear from the economy on January 2 in a cliff-drop plunge.

Some effects would take place quite quickly, such as the loss of unemployment benefits for the long-unemployed if the extended benefit period is allowed to expire.

But most of the effects would come out of economic activity over the course of the year, at approximately $50 billion a month, as employees find less in their paychecks due to income-tax increases, investors pay higher taxes on their dividends as they are received through the year, and pay higher capital gains taxes if and as they sell holdings through the year. And of course businesses would receive fewer orders through the year as federal spending cuts increasingly take effect, resulting in lay-offs.

For instance, it’s been pointed out that tax-payers would face an increase in combined taxes of approximately $500 billion in 2013. But that does not mean taxpayers would send a check to the IRS for their share on January 2. It means that if an agreement is not reached fairly soon into the new year the average taxpayer would see their taxes increase by about $3,440 for the year.

Further, keep in mind that is an average. Those who can most easily afford it would pay the most. Remember the complaints when the Bush era tax cuts became law, that the richest were getting by far the biggest benefits? Well, having those cuts expire would bring those chickens home to roost, as the biggest tax increases would fall back on those richest tax-payers. It’s estimated that those with taxable income (after all deductions) of $10,000 would see an annual tax increase of $217 ($18 a month), those between $50,000 and $75,000 an average annual increase of $2,399, those earning $500,000 to $1 million an average increase of $38,969, and those earning over $1 million an average increase of $254,637.

Not only would those increases not be an over-a-cliff event but spread over the year, they would probably not kick in right away in January for most working people. Most employers would wait until the IRS gets around to calculating new withholding rates and sends out notices.

I’m not saying that politicians are not self-serving idiots in the way they have once again inflicted needless stress on the country. Nor am I saying that some damage has not already been done to the economy as a result of the uncertainties the delay has created.

But the stress that has been put in the minds of many on Main Street (and some investors), that if an agreement is not reached by year-end they will wake up Tuesday morning to an economy that is a heap of rubble at the bottom of a cliff, is a huge exaggeration.

I even like the thought that allowing the economy to go over the supposed cliff for a few days will make it easier for a better agreement to be reached.

Right now to reach agreement politicians have to debate how much to allow taxes to rise and for whom, apparently difficult for many. But once large tax increases kick in at year-end for everyone when the Bush-era tax cuts expire automatically, they will be debating how much to cut taxes to correct the situation, more appealing to their politicking nature of trying to look like they’re working to help their constituents.

So the markets (and yes even the politicians) just might have it right by not panicking at this point.  

Sy Harding is president of Asset Management Research Corp., and editor of the free market blog Street Smart Post.

© 2012 Copyright Sy Harding- All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Sy Harding Archive

© 2005-2015 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

Biggest Debt Bomb in History