Best of the Week
Most Popular
1.Stock Market Continues Defying Gravity, Dow New All Time High - Nadeem_Walayat
2.America Superpower 2016 - Ian Bremmer
3.The US Dollar and the Precious Metals Complex - Rambus_Chartology
4.UK Immigration Crisis Could Prompt BREXIT, Propelling Britain Out of EU Despite German Factor - Nadeem_Walayat
5.The “Real Flash Crash” Will Scare You to Death - Shah Gilani
6.Gold Price Trend Forecast - Bob_Louka
7.UK Deflation Warning - Bank of England Economic Propaganda to Print and Inflate Debt - Nadeem_Walayat
8.Gold Lifeboat to Global Economies “Titanic Problem” Warn HSBC - GoldCore
9.Will Interest Rates Ever Rise? - BATR
10.Who’s Killing the Stock Market? - Shah Gilani
Last 5 days
Stock Markets Buy and Hold is Back! - 28th May 15
We're Now Frighteningly Vulnerable to a Bond Market Crash - 28th May 15
Austerity, Economics and Religion - 28th May 15
National Holidays London and the Magic of Legoland UK Review - 27th May 15
Imminent Stocks Bear Market Signaled by Dow Theory ... - 27th May 15
Gold Price Has Bottomed – More Evidence - 27th May 15
Three Reasons You Shouldn’t Try to Invest Like Warren Buffett - 27th May 15
Gold Is “100% Guarantee from Legal and Political Risks” States Russian Central Bank - 27th May 15
Don't Drown in the Sea of Global Debt - 27th May 15
Three Reasons Why Carl Icahn Is Wrong About Apple Stock - 27th May 15
Crude Oil Price Stochastic Signals - 26th May 15
Why the Stock Market Will Crash - 26th May 15
GDP, Inflation, Employment Economic Statistics: It’s All a Lie - 26th May 15
Introduction to Peak Food - 26th May 15
Should We Dump the Euro? - 26th May 15
A Geopolitical Net Assessment of Europe - 26th May 15
Stock Market Top in Place? - 26th May 15
Best Cash ISA SBI 2.3% - 2.8 Year Fix, UK Interest Rates 2016 - 26th May 15
China Sets Up Gold Bullion Fund For Central Banks - 25th May 15
Is The Silver Trade Getting Crowded? - 25th May 15
Money Murder Mystery: Who Killed the Stock Market? - 25th May 15
Why Do We Celebrate Rising U.S. House Prices? - 24th May 15
Mario Draghi’s Slippery Downward Slope - 24th May 15
Gold : Truth is Stranger than Fiction - 24th May 15
Facebook Stock Price Forecast - 24th May 15
Make a Killing on the Coming Energy "Debt Bubble" - 24th May 15
Stock Market SPX Uptrend Inflection Point - 23rd May 15
What You Know for Certain - Huge Demand for Gold And Silver - 23rd May 15
Are We in Another Credit Bubble? And Is It Different than Before? - 23rd May 15
The “Real Flash Crash” Will Scare You to Death - 23rd May 15
Venezuela: No Rule of Law, Bad Money - 23rd May 15
Robots That Can Beat the Market by 100% - 23rd May 15
Why Shake Shack Stock Is a Bad Investment - 23rd May 15
Gold Price Primary Driver Bullish - 23rd May 15
Time To Get Real About China - 22nd May 15
Gold Lifeboat to Global Economies “Titanic Problem” Warn HSBC - 22nd May 15
One Investment Could Save Two Generations' Retirements - 22nd May 15
Investing is About Identifying Gifted and Talented Camps - 22nd May 15
One of Europe's Latest Debt Nightmares - 22nd May 15
UK Immigration Crisis Could Prompt BREXIT, Propelling Britain Out of EU Despite German Factor - 22nd May 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Biggest Debt Bomb in History

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