Best of the Week
Most Popular
1.Scottish Independence YES Vote Panic - Scotland Committing Suicide and Terminating the UK? - Nadeem_Walayat
2.Independent Scotland Will Disintegrate as Unionist Regions Demand Referendum's to Rejoin UK - Nadeem_Walayat
3.Bank of England Panic! Scottish Independence Bank Run Already Underway! - Nadeem_Walayat
4.Gold and Silver Price Ready To Go BOOM - Austin_Galt
5.Gold and Silver Potential Price Meltdown Scenario - Rambus_Chartology
6.Scottish Independence UK Catastrophe - The Balkanisation of Britain - Video - Nadeem_Walayat
7.The Price Of Gold And The Art Of War Part I - Darryl_R_Schoon
8.Main Reason Why Scotland Will Vote NO to Independence, 70% Probability - Nadeem_Walayat
9.Heavy Gold and Silver Shorting is Bullish - Zeal_LLC
10.10 Year U.S. Treasury Short Best Place to be Remainder of 2014 - EconMatters
Last 5 days
Stocks Bull Market Resumes - 20th Sept 14
Gold And Silver - Current Price Is The Story - 20th Sept 14
Can the U.S. Economy Withstand Another Housing Market Breakdown? - 20th Sept 14
Nervous Investors Will Hate the Money You Make With This Strategy - 20th Sept 14
Cheap Gold Stocks Upleg Intact - 20th Sept 14
Monetary Policy Killing The System - 20th Sept 14
Scotland and the Spirit of Our Time - 20th Sept 14
Bitcoin Price Charts In-Depth Analysis - 19th Sept 14
Alibaba is Focused, Will Use Money in Emerging Areas - 19th Sept 14
Bird's Eye View of the Gold Stocks - 19th Sept 14
Scotland Independence Result NO Win 55% to Yes on 45% - 18th Sept 14
Silver Price: A Collapse and a Rally - 18th Sept 14
Here's Why Trendlines are Your New Trading Best Friend - 18th Sept 14
Silver Buyers Keep Stacking And Demand Higher Despite Falling Prices - 18th Sept 14
The "Hidden" Billions in the Alibaba IPO - 18th Sept 14
Russian Union Of Engineers Accuses Ukraine Airforce In MH17 Crash - 18th Sept 14
Monetary Policy Weighs on Gold and Silver - 18th Sept 14
Global Currencies Analysis...The World According to Chartology - 18th Sept 14
Gold Price Hammered by Strong U.S. Dollar - 18th Sept 14
Is Citigroup the Dumbest Bank Ever? - 18th Sept 14
Scotland Must Vote Yes! For All Of Us - 18th Sept 14
Scottish Independence Referendum Result NO 55%, YES 45% - Vote Forecast - 18th Sept 14
A Public Bank Option for and Independent Scotland - 17th Sept 14
The Charade of Independence for Scotland and UKIP - 17th Sept 14
Gold Report - U.S. National Debt Surges $1 Trillion In Just 12 Months - 17th Sept 14
How to Find Trading Opportunities in ANY Market Using Fibonacci Analysis - 17th Sept 14
Why Money Is Worse Than Debt - 17th Sept 14
Can Gold Price Finally Recover? - 17th Sept 14
Scotland Independence - Europe Holds Its Breath - 17th Sept 14
The Energy Prices at Risk with Scottish Independence - 17th Sept 14
Scottish Independence SNP Lies on NHS, Economy, Debt, Oil and Currency - 17th Sept 14
The Truth Behind the Dangerous "Helicopter Money" Delusion - 16th Sept 14
Central Bank Balance Bullying: Investor Implications - 16th Sept 14
U.S. Dollar and Gold Elliott Wave Projection - 16th Sept 14
The Origins and Implications of the Scottish Referendum - 16th Sept 14
The Collapse Of U.S. Silver Stocks As Public Debt Skyrockets - 16th Sept 14
Emerging Markets Are Set Up for a Crisis, What’s on Your Radar Screen? - 16th Sept 14
Scottish Independence Bank Run Already Underway - Video - 16th Sept 14
The Emergence of the US Petro-Dollar - 16th Sept 14
Economic GDP Drives Stock Prices Inestment Myth - 16th Sept 14
Don't Miss This Gold Buying Opportunity - 16th Sept 14
Why ECB QE Is Bearish For Gold Prices - 15th Sept 14
Property Rights and Property Taxes—and Countries That Don’t Have Them - 15th Sept 14
Junior Miners Breaking Out Higher Forecasting Gold and Silver Price Bottom? - 15th Sept 14
Stock Market Patiently Waiting for Mean Reversion - 15th Sept 14
A Closer Look at the US Dollar - 15th Sept 14
The Silver Price Sentiment Cycle - 15th Sept 14
Stock Market Correction Underway - 15th Sept 14
Marc Faber - “I Want To Be Diversified, I Want To Own Some Gold” - 15th Sept 14
The Myth of Nuclear Weapons - 15th Sept 14
US Dollar Forecast to Go Much Higher - 15th Sept 14
Analysis And Price Projection Of The Uranium Market - 15th Sept 14
Bank of England Panic! Scottish Independence Bank Run Already Underway! - 15th Sept 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

You've never seen this before and may never again

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

© 2005-2014 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