The Mayan calendar ends tomorrow. Millions believe that a huge rogue planet named Nibiru will collide with Earth tomorrow. Astronomers with telescopes tend to disagree. But don't be too apathetic. If the world somehow lasts until the weekend, the Fiscal Cliff is just 10 days away. And if we dodge all three of those threats, then a year ending in "13" is about to start. Is mankind's luck finally running out?
My hunch is that nothing special will happen tomorrow except a lot of last-minute Christmas shopping and a winter solstice that will be followed by gradually longer days until next June 21. But what happens on January 1, 2013 is of immediate concern to most investors, so let's take a closer look at that "threat."
What if the Coming "Cliff" Turns out to be a Minor Speed Bump?
What if January 1, 2013 turns out to be no more eventful than January 1, 2000 (Y2K)? What if all our worries of higher tax rates and mandated spending cuts turn out to be a minor speed bump, not a cliff?
First off, we're liable to see some kind of compromise in the next 10 days, which could spur a big market rally. Economist Ed Yardeni said that the fiscal cliff is "likely to be the latest apocalypse-postponed scenario. If so, that should set the stage for yet another relief rally." Ever since this bull market began on March 9, 2009, he said, "we've seen a series of such rallies following corrections triggered by apocalypse now panic attacks." He also reminded us that the S&P 500 is now above where it was on Election Day.
But what if Congress and the President continue arguing in public and fail to compromise before January 1? What's so bad about a return to the Clinton-era tax rates and the Clinton-era spending restraints?
Do you remember the Democratic National Convention, when speaker after speaker (including former President Clinton) wanted us to vote for Obama so that we could go back to the Clinton-era tax rates and Clinton's prosperity? Well, that's what the "cliff" represents: A return to the Clinton tax rates, before the Bush tax cuts of 2001 and 2003. Why would Democrats fear a return to the 1990s, a prosperous decade?
According to the President, the Bush tax cuts reduced middle class taxes - only he didn't quite put it that way. President Obama said that the middle class will suffer if we repeal the Bush tax cuts. Here's one example of his recent rhetoric: "A typical family of four would see its income taxes go up by $2,200… less money for buying groceries, less money for filling prescriptions, less money for buying diapers." So the President is saying that the Bush tax cuts created a massive windfall for the middle class, isn't he?
So let's do it, Democrats. Let's go over the cliff and get back to the good old Clinton years once again. Bill Gale of the Brookings Institution says that going over the cliff would raise about $2.8 trillion over the next 10 years: "Going over the cliff is the only way to get the economy on a good long-term budget path with a deficit-reduction package that balances revenue increases and spending cuts."
But What about those Draconian "Mandatory Spending Cuts"?
The other half of the fiscal cliff scare story is the sequestration (or lowering) of expenditures, but that's no more scary than going back to the Clinton tax rates. Cutting expenses means we'd go back to the Clinton "spending rates," a time when Clinton said "the era of big government is over." Congress should like that.
You may not be aware of the latest trend in federal spending, but after two years of progress in reducing government hiring and spending, the federal government has increased spending since last July. From June to November this year, America created 847,000 new jobs of which 621,000 were government jobs (73% of new hires). The budget deficit for October and November (the first two months of the new fiscal year) came in at 24% above the federal deficit in the same two months of 2011, and in September, the food stamp rolls increased by over 600,000, the largest gain in 16 months.
Cutting costs sounds difficult, but it just takes some resolve and honesty. Any spending "cuts" are really just smaller increases ("cuts" from a bloated base-line budget). Cutting costs is like going on a fiscal diet.
Last August, I began a new diet. Over the years, I failed on several previous diet plans, so I decided to move outside of my comfort zone and go without food entirely for one day per week - something like a diet cliff. Fasting reduced my appetite the other six days. Fasting was uncomfortable at first, but now I look forward to my starving day of water and rest. I've lost 35 pounds since August. The federal government can go on a diet, too. All they have to do is nothing - pass no laws - simply go over the cliff.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.