Well here we are one week post election and what is different? Not a thing except the market has been down almost every day since the election. You might ask is it because of the election? No I don't think so. It's about the ability of our government to get anything passed and of course the onslaught of the Fiscal Cliff. Congress convenes today and top of the agenda is how to avert the budget cuts and tax increases facing us on January 1rst and of course the continuing resolution need to keep government functioning beyond February. I am convinced that we have already developed the plan back in 2010. It's called the Bowles-Simpson plan. Remember The National Commission on Fiscal Responsibility and Reform? President Obama commissioned this study and if I seem to recall this bi partisan committee would release its findings and there would be a vote up or down and if up it would be implemented. It never received the vote. The President and Congress walked away because the pain was too great. As I have written in the past this was one of many commissions over the last 20 years hired to identify the same old issues. Like the rest it appears that this too, for the most part, will unfortunately find the grave yard were the others rest. What a shame.
I spent some time dusting off the Bowles-Simpson Plan and drilled down to see if this could possibly be revived as an answer to our Cliff dilemma. Here again it depends how serious all branches of government are about fixing our countries long term deficit issues. The plan called for 2.6 trillion in revenue increases (taxes) and 2.9 trillion in spending cuts. They also proposed a long term fix to Social Security separate from the Fiscal Budget. Did you know back under the Clinton Administration the government balanced the budget and claimed to have a surplus only to find they had included the Social Security Trust deposits in with the general budget? That my friend was as close as we have come to being fiscally responsible in a long time. It's important to point this out because the Bowles-Simpson keeps them separated. Congress in years past has used the trust fund to mask the real shortfalls in the budget.
The Bowles-Simpson combines the spending cuts and revenue increases over a 10 year period 2013-2022. The interesting thing to note is that Congress has enacted 70% of the spending cuts in discretionary programs outlined in Bowles-Simpson. That could be interpreted that 70% of the 2.9 trillion in spending cuts is already in place. The remaining cuts are going to be the tough ones. It does however seem to be a start in the right direction. Congress has picked the low hanging fruit and further cuts will be painful. The 2.6 trillion in tax increases has not been touched at all which brings us to where we are today. If the Bush tax cuts were to expire on January 1, the 2.6 trillion would be taken care of, but at the expense of a recession in 2013let alone the $3500 in new taxes on every household in America.
Congress at this point is telling the President there will be no tax increases and of course the President is saying he will veto any plan that does not include a tax increase on those that earn $200k or better. Now it seems there may be a move to some middle ground which may very well be a resolution to this good ole fashion stand down. Congress is considering adjusting deductions and eliminating loopholes in the tax code prorated according to income. I have even heard of further reduction in the mortgage interest deduction. They seem to propose this in lieu of an increase in the marginal tax rates the President proposes. Whether you move the marginal tax rate or the effective tax rate it's still a tax increase. Do they really think we are that dumb? That's like saying if we extend the time in which you can start drawing your Social Security , say by 2 years, we have not increased your taxes. The loss of 2 years of benefits isn't a tax? Of course it is. I know you have heard this saying before "If it Quacks like a duck it is a Duck". Well "if it takes money out of your pocket, it's a Tax."
I expect something along these lines to be the basis of a compromise reached between the President and Congress. This should allow the government to avoid the so called Fiscal Cliff. They will extend the remaining Bush Tax cuts out for maybe another year but once again fall short of fixing the long term viability of Social Security, Medicare and of course other entitlement programs. Then they can write home to their constituents and say we were able to work together and avoid the inevitable recession of 2013. They will put a little duct tape on it then kick it down the road once again. Next year this time we will be having the same discussion.
By not putting our fiscal house in order we risk a protracted recession, probably a 15-20% fall in equity markets and worse yet the potential for double digit unemployment again.
It is beyond me why they will not just implement Bowles-Simpson. This plan would fix many of the issues on a permanent basis. We have the solutions and have had them for many years. Come on Congress, do the right thing.
It seems as the old Elvis Presley song goes, " Were caught in a trap and we can't go back" We are not fools. We understand " Austerity Hurts". We simply want the ability to feed, shelter and protect our families. We live within our means we think the government should also. We are tired of partisan politics, and all the drama that goes with it. We simply want you to do the job we hired you to do and that is fix this broken economy and don't put all this debt burden on the backs of our children and grand children. Its time to stop the trickery, smoke and mirrors, and all the political demagoguery and do the right thing to put our country back where it belongs as the true leader of the free world and not a third world country depending on others for our economic survival.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.