Caution: That first step into 2013 could cost you more than a glass slipper…
Written for Ventura Magazine
It’s been labeled ‘The Fiscal Cliff.’ And it’s man-made. Headlines are appearing at an exponential rate. Moving past the elections, we approach a not-so-Cinderella Midnight in December. The sound and volume surrounding this ‘event’ will become deafening. As rightly it should. Your wallet will be affected.
No matter which side of the ’aisle’ one sits on, this freight train has been heading right for us since The Bush Tax Cuts of 2001 and 2003 with their built-in ’Sunset’ clauses. This means these laws and their tax breaks were set to expire, but not until the administration that put them into place is long since out of office…and out of the way of the consequences of the expiration. Combine this with ‘The Compromise’ reached to raise the debt ceiling that will impose massive spending cuts across the board at the same midnight moment.
The United States Congressional Budget Office has prepared, as it always does, baseline projections that start with the assumption that current laws generally remain in place. However, this time their August 22, 2012 update states: “The outlook for the budget deficit, federal debt and the economy are especially uncertain now because substantial changes to tax and spending policies are scheduled to take effect January 2013.” So the CBO has also prepared projections under an “alternative fiscal scenario.”
If not stopped, a perfect storm (pun intended) will be created from four directions:
- Expiration of the Bush Tax cuts
- Expiration of the payroll tax cut
- New healthcare reform taxes
- Spending Cuts
This storm (my term-not theirs), according to the CBO, “will lead to economic conditions in 2013 that will probably be considered a recession, with real GDP (Gross Domestic Product) declining by 0.5% between the fourth quarter of 2012 and the fourth quarter of 2013.”
Yes, there are quite a few variations. Many respected economists and financial experts have this GDP effect going from the CBO’s 0.5% up to a 3.5% reduction. Even CNN financial anchor, Ali Velshi is looking for a 1.6% reduction.
Now the good news from the CBO (really!): “the rate of inflation as measured by the personal consumption expenditures price index (what you are expected to spend) will remain low in 2013 and interest rates on Treasury securities are expected to be very low next year.”
And none of this needs to happen.
Yes, there are a lot of ‘ifs’ to avert the storm. We will probably get wet, but at least hopefully, we won’t get drenched.
We are unlikely to see any significant legislation before Election Day given the current working relationship on the Hill. Then ‘The Decider’ (thank you for that one, Mr. Bush), if at all, will be a lame duck Congress convening between Thanksgiving and Christmas 2012. Regardless of who gets elected to Congress, it will be the current Congress that will be called to session.
Presidentially speaking, the inauguration isn’t until January 21, 2013 (never on a Sunday!), so it will be Mr. Obama at the helm.
The hope is that, standing on the edge of the fiscal cliff, the parties and their leaders will negotiate a compromise during the lame duck session. Compromise is possible on all four issues. And with both Standard & Poor’s and Moody’s having announced that a failure to implement the spending cuts agreed to in August 2011 will result in another downgrade in U.S. debt, the toughest compromise will be on those spending cuts.
And markets that usually calm down once the uncertainty of the election is past, will probably remain in turmoil as Cinderella’s Midnight draws near. Hopefully, your portfolio has the storm fences in place.
Will the American people ‘win’ this one or will it be dogmatic ideology? We have a say this November. I encourage you to be informed from multiple sources and speak up.
It’s up to us to make sure insulated Washington hears us. The alternative will be most unpleasant.
Chicken Little was, and is, wrong. With vast amounts of information, we’re just more aware of the issues affecting multiple facets of our lives on many levels. Knowledge is power. Use yours with intention.
References:
- ‘An Update to the Budget and Economic Outlook: Fiscal Years 2012-2022,’ Congress of the United States, Congressional Budget Office, August 2012
- U.S. Fiscal Cliff Notes, J.P. Morgan, April 26, 2012
- “What is the ‘Fiscal Cliff’?”, Andrew H. Friedman, The Washington Update, Legislative Update, Eaton Vance, May, 2012
- ‘How Much Will It Cost You If Bush Tax Cuts End? A Lot,’ Jeff Cox, CNBC.com, Senior Writer, August 15, 2012
- ‘The Cliff We All Saw Coming,’ Edited by Weston Kosova and Kristen Hinman, Bloomberg Businessweek, August 6-12, 2012
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Securities and asset management offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC. Financial Planning offered through The Renaissance Group, LLC, a registered investment advisor and separate entity from LPL Financial. SWAN Investing ® is a federally registered investment philosophy and the sole property of Merle R. DiVita, CFP®, CIMA®.
Copyright © 2012 Merle R. DiVita, CFP®, CIMA®