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Who Is Afraid Of The Fiscal Cliff?

Are you tired of hearing about the US "fiscal cliff"? This is when a combination of tax cuts and spending increases expire, essentially pulling $600 Billion out of the US economy. This would reduce GDP by an estimated 3% or more in a short period of time. (4)(5) Given that the US economy is already treading water, this could mark an official recession as of January 1, 2013 as opposed to an unofficial one.

The most concerned group of people in the United States seem to be the wealthiest. The largest expected effect of the fiscal cliff is tax increases for estates, dividends and capital gains. Advisors are telling the wealthy to gift to their heirs before the end of 2012. (1) The wealthy are also concerned about the election outcome, since President Obama has been talking about taxing the rich for some time. (1) (2) There are also possible tax increases for investment and business income, and the wealthy are dumping their assets in droves. (3)

How legitimate are their fears? Given that fiscal problems are not new, and taxing the rich is not new, this scenario may all be a pile of smoke. On the other hand, time is running out to actually do something about the deficit, and sooner or later there will be a downward spiral on the US dollar. If American politicians are serious about reversing the current trends, they should act in the next 12 months. How they are going to act is anyone's guess. If money is what is needed, the logical thing to assume is to go where the money is. The wealthy are thinking the same thing.

How will this affect the rest of the world? If the wealthy start dumping assets, prices of many investments may go down. Given the mob psychology that accompanies a panic, this may cascade into a correction around the world. The good news is that the correction may be short lived and prices may rebound in 2013.







Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.