The Fiscal Charade

Over the last several weeks we have heard news outlets and media types telling us that a deal must be struck in Congress over the next 5 weeks, or else we will surely face economic doom. However, most media outlets and members of Congress fail to address just why this would be so catastrophic. Our opinion is that Congress and the media cannot address the results, because the endgames are too similar.

Those who have reported on it or attempted to influence economic policy have done a great job of marketing this alleged catastrophe. Just the name alone “The Fiscal Cliff” sounds quite daunting and even worrisome. Unfortunately many people have not been properly educated on what exactly the Fiscal Cliff is.

The San Francisco Chronicle had a very well done piece last week that put the broad details of the Fiscal Cliff debate in to plain English. Basically, if Congress cannot reach a budget deal by the end of this year, beginning on January 1st, 2013 the Bush era tax cuts will expire and there will be an automatic budget sequestration, meaning automatic cuts to spending. According to CNN, spending cuts tied to the sequestration include (but are not limited to) the FAA, the military, national parks and other federal services.

How big of an impact are we talking about? USA Today reported that defense spending would be cut by almost 10%, non-defense spending by 8%, entitlements by 7.5% and Medicare providers by 2%. Furthermore, the San Francisco Chronicle reported via the Tax Policy Center that middle income families will pay an average of $2,000 more per year in taxes and many deductions will be phased out. On top of that, an estimated 3.4 million federal workers will lose their jobs. However, amongst all of this, the budget deficit would fall to $200 billion from $1.1 trillion in the span of a decade. You read that correctly; amongst all of these cuts, this Congress and administration still cannot manage to operate in a financially responsible manner.

How do we fix it? What can be done by the end of the year in 5 short weeks so that this catastrophic series of events does not lead to the perfect storm of financial crisis? Let’s think about this logically; Democrats are not going to back down on allowing the Bush era tax cuts to expire. No matter how many studies come out that show their negative impact on middle-income families, they are too heavily invested in their “millionaire and billionaires” talking points to back down now. The middle-class has been sold down the river by this administration; we were all lied to. On the opposite side, Republicans will not back down from spending cuts. While they would rather not cut military spending and see more drastic cuts/reform to entitlements, Democrats did a fantastic job of incorporating military cuts in to negotiations.

We have reached a stalemate. Democrats want to raise taxes without cutting spending to raise revenues and will not budge on tax increases. Republicans want to cut spending without raising taxes to raise revenues and will not budge on spending cuts. If a compromise is not met by the New Year, both will happen. In any logical situation in which a compromise is met, both will happen regardless.

So I ask you, the reader; what’s the point? Why all of the hype? In reality anyone who follows politics knows that whether it is a result of sequestration/tax cuts expiring or compromise prior to 2013, it will be the same result. We elected ourselves into this position, now it is time to play the hand that we were dealt. We have had over 6 months to prepare for this, and we can only hope that everyone else has been able to prepare themselves.

Ben Treece is a partner with Treece Investment Advisory Corp (www.TreeceInvestments.com) and licensed with FINRA (www.Finra.org) through Treece Financial Services Corp. The above information is the opinion of Ben Treece and should not be construed as investment advice or used without outside verification.
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