On the Cliff

Bruce Krasting's picture


Absent some earth shaking event between now and November, Obama is going to win, the House will remain in the hands of the Republicans and the Senate will continue to be equally divided. The war between Reds and Blues will be just as bad as it was a year ago. The day after the election, the fight over the fiscal cliff will commence. I expect it will be ugly.


-I think there is zero probability that all of the issues now on the cliff will be pushed off to some future period. (Ultimate-can-kicking) Some of the cutbacks/tax increases that are now scheduled, will happen.


-I put the odds on falling off the cliff without any compromises at 40%. This scenario comes about if the Reps and Dems can’t agree on anything. If that is the case, we fall very hard on January 2. (No-can-kicking)


-Therefore, I see a 60% chance of a compromise that softens the consequences of the fiscal cliff, but does not eliminate it entirely. (Semi-can-kicking, but still kicking ourselves in the face)


If there is to be a compromise, it will be interesting to see who gets what, and who gives up what. It might play out with the following results:


I) The 2% reduction in FICA taxes is history. As of 1/1/13 every worker is getting hit with a 2% tax increase. This is a very regressive tax increase.



II) The Bush tax cuts for those making more than $250k are gone. This is a very Progressive tax increase.


III) The Bush tax cuts for those making less than $250k will be retained. This “centrist” compromises is the result of the "give" on #s I and II. Both sides will be able to claim that they did their best for “Middle Class Workers”.


IV) The Alternative Minimum Tax will be adjusted for inflation and will be fully phased in over a period of three years. This tax will hit 40m taxpayers (up from only 4m today). This is most definitely a middle class tax increase.


V) The capital gains tax rate is going to go up to at least 25%.



The result of I – V is that everyone who works, or has investment income is going to be paying more. No one will escape higher taxes.


Then there is the spending side of the ledger. The so-called, “sequestered” amounts. Here is where the real horse-trading will happen. Keep in mind that the timing of this critical argument debate will be in November and December. What else will be happening in those months that will influence the budget compromises? Talk of War.


It is almost certain that post the election, Iran is going to be front and center. Israel has promised to hold off on an attack of Iranian nuke facilities until after America votes. After November 6, the headlines will be about war. There will be big NATO/US Navy activity all over the Straits of Hormuz. This will shape the debate on military cutbacks.


With this as a backdrop, I don’t see the mandatory cuts for the military sticking. Most of the promised cutbacks will get eliminated, or pushed forward. Obama would welcome this, as it would allow him to trade more military spending for a deferral of the cuts in non-defense spending.

We will get a half loaf of spending cuts and increased taxes. The results will not significantly change the trajectory of the deficit, it will create an additional drag on the economy.


If all of the tax increases/spending cuts now pending are allowed to happen (we fall off the cliff) it will result in a drop in economic activity of at least 1.5%. It will bring about a recession that will last a minimum of six-months. The compromises that I outline above will still result in a contraction of economic activity. If we get (more or less) of what I see coming, then ¾% of annual GDP will be lost; for a long time.


What does a lousy ¾% mean? It means sub-stall speed. It means GDP will be well below 2% for 2013 and beyond. It could mean that growth falls below 1%. (Functional recession; unemployment up, tax receipts down)



There are two issues related to the "cliff" that are of interest to me. These are minor matters (in the scheme of things). They are Wall Street related. They go by the odd names of:






Grant Anticipation Revenue Vehicle (GARVEE) bonds are tax free, issued by states and are backed by anticipated future revenues from D.C. for dedicated highway construction. The Fed backing (not a guarantee) makes these bonds trade rich relative to straight state debt.


The federal money to pay Garvee bondholders is at risk. Future payments from Washington are part of the sequestered amounts that will be on the negotiating table come November 7.



The rating agencies have been downgrading Garvees because of the risk of repayment. There is only $10B of Garvee bonds outstanding. I think this problem will be patched up (it's too small a matter to cause muni defaults). I also think that there will be no more Garvees issued. The fiscal cliff showed the flaw in the construction of these “bullet proof” bonds.


Build America Bonds are taxable state debt issues. This hybrid security was a child of the crisis of 2008. It died in 2010 after $180B of BABs were issued. Republicans hated BABs, Democrats (led by Tim Geithner) loved BABS.


There is an odd feature to BABs; they become callable if sequestration takes place:



BABs were issued in the terrible days of 2009/10. Recall that the likes of Meredith Whitney were calling for massive muni defaults back then. As a result, the $181b of BABS that were issued all had nice fat coupons on them. The States would love to call that paper at par; they could replace it with much cheaper debt today. The losers would be the bondholders. They would see their nice yielding bonds called away. No one cares about bondholders anymore, so BABS are dead.


Garvees and BABS are inventions of Wall Street. They are structured financial transactions that allow states to borrow more money by accessing different investor bases (tax vs tax exempt). In the end, Garvees and BABS will be throwaways in the horse trading. Their loss does not add up to much. However, if you are thinking that the solution to America’s economic problem is a major infrastructure build out, forget it.


A program big enough to create a few million jobs and modernize our roads, bridges, seaports and airports can’t be done with more federal borrowing. It has to come from the states. Shutting down BABs and Garvees is also saying “no” to that infrastructure plan.


The worst case outcome would be that there are no compromises; and we fall off a fifty-foot cliff, and die. The best case is that we fall off a twenty-five foot cliff, and only suffer a few broken bones and a concussion. Options that were once available to the country to dig out of an economic hole will have been lost. A long period of economic mediocrity is the most likely outcome.




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matrix2012's picture

See following for a glimpse of such trouble.

21 Facts About America’s Decaying Infrastructure That Will Blow Your Mind


You can tell a lot about a nation by the condition of the infrastructure.  So what does our infrastructure say about us?  It says that we are in a very advanced state of decay.  At this point, much of America is being held together with spit, duct tape and prayers.

Our roads are crumbling and thousands of our bridges look like they could collapse at any moment.

Our power grid is ancient and over a trillion gallons of untreated sewage is leaking from our aging sewer systems each year.

Our airports and our seaports are clogged with far more traffic than they were ever designed to carry.  Approximately a third of all of the dam failures that have taken place in the United States since 1874 have happened during the past decade.

Our national parks and recreation areas have been terribly neglected and our railroads are a bad joke.

Hurricane Katrina showed how vulnerable our levees are, and drinking water systems all over the country are badly outdated.

Sadly, at a time when we could use significant new investment in infrastructure, our spending on infrastructure is actually way down.  Back during the 50s and the 60s, the U.S. was spending between 3 and 4 percent of GDP on infrastructure.  Today, that figure is down to about 2.4 percent.  But of course we don't have any extra money to spend on infrastructure because of our reckless spending and because of the massive amount of debt that we have accumulated.

. . .

NorthenSoul's picture

The elites know what needs to be done to fix this economy. Iceland did it.

Alas, it goes against their immediate interests.

But don't counfound Iceland with the US; they think overe there!

Cathartes Aura's picture

indeed they do. . . they think racism is foolish, they think women are equal human beings, they think a person's sexual life is of no interest except to the individual (elected a lesbian for prime minister), all this despite even having a religious base within the half million people who inhabit the space, peacefully.

in other words, as you say, they think over there - they don't let a media think for them. 

divide 'n' rule.

Umh's picture

You could describe Iceland as one big happy family and not be far wrong. Of course this may contribute to their getting along so well.

Widowmaker's picture

100% Krasting bullshit.

Study history, Bruce.  Long periods of "economic mediocrity" have never once occurred.

I'll give you a hint of what has, it's got a lot of anger, fire and violence, and it's not a toaster.

Like a banker, total-fucking clueless when it comes to managing crisis.


Hedgetard55's picture

Romney is like a case of hepatitus B.


Obama is terminal brain cancer.

geno-econ's picture

Don't know about your neck of the woods, but in my neck there are very few Obama or Romney bumper stickers.  A sure sign of complacency and lack of interest or confidence in the political system. Executive Orders further testify to gridlock

kaiserhoff's picture

I commented on this last week.  Just came back from a lunch meeting, and passed easily 1,000 election signs: for Congress, Governor, city council, etc.  Not one Romney or Obamy.  Stealth election?  This is spooky as hell.

Carl Spackler's picture

SUCH yard sign/bumper sticker observation is because you do not  live in a "swing state."

Over here, in the 11, or so, swing states, the elction signage and bumper stickers are everywhere. 

The late night tv news ads are even more nauseating.

If there is "silver lining" in this, it is that not every state is considered to have drones for voters.

Umh's picture

I live in a swing state (VA) and it is odd to see more signs for local races like city council and school board than for federal positions like President, Senator & Representative.

Helix6's picture

Ya, well that makes sense really.  No one is going to game the electronic vote over a school board position, so people can actually cast their votes for such offices with some degree of confidence.  So those candidates actually care whether people vote for them or not.

Votes for national office are another matter.  In fact, the outcomes of most races have already been decided, but we'll play out the charade anyway.  Candidates for national office long ago learned that the place to use their campaign funds was definitely not for yard signs and bumper stickers.

As Papa Joe quipped, it's not those who cast the votes who count, but those who count the votes.

onlooker's picture

------Executive Orders Issued---

Teddy Roosevelt 3

Between Teddy to FDR NONE

FDR 11 in 16 years

Truman 5 in 7 years

Ike 2 in 8 years

Kennedy 4 in 3 years

LBJ 4 in 5 years

Nixon 1 in 6 years

Ford 3 in 2 years

Carter 3 in 4 years

Reagan 5 in 8 years

Bush 3 in 4 years

Clinton 15 in 8 years

George W. Bush 62 in 8 years

Obama 923 in 3 1/2 years---------VOTE and think before you do it

Binko's picture

I can't think of much that brands a person more completely as an idiot than mindlessly posting the contents of viral emails. What's next, retard? Are you going to tell us about the woman who gave birth to a horse? Or maybe that Obama is really an extra-terrestial? Elvis walks the earth as a zombie?

kito's picture

its bad enough we have to deal with bullshit propaganda from the mainstream media that infects the minds of the masses, but i dont need to see it here on zh....most people do their homework here...... yes, obamney is bad, but stooping to outright lies makes you NO BETTER THAN ANY OTHER PROPAGANDIST...there is enough truth on obamney  that already makes the point.......



hardcleareye's picture

Thank you for the link Kito, I was just going to check up on that statement myself!

Disenchanted's picture




"If the American people ever allow private banks to control the issue of their money,
first by inflation and then by deflation, the banks and corporations that will
grow up around them (around the banks), will deprive the people of their property
until their children will wake up homeless on the continent their fathers conquered."


Above quote attributed to Thomas Jefferson(in 1802 in a letter to then Secretary of the Treasury, Albert Gallatin)

Below an excerpt from(my emphasis):

The Fed’s US Land-Grab Hidden Within Purchase of Mortgage-Backed Securities


The latest scheme of the banking cartels has been introduced as QE3, which is nothing more than a massive land-grab in the domestic US by the technocrats under the guise of purchasing the mortgage-backed securities through the Federal Reserve to alleviate the pressure the banks are feeling from the bait-and-switch they caused.


Essentially, as the Fed buys the mortgage-backed securities, the central bankers now own all those properties which were bundled and securitized. The experts are still coming to terms with how many homes, small business, small farms and other lands were mixed-up into this Ponzi scheme. The actual total numbers of victimized Americans are continuing to rise and are currently unknown. However, it is clear that as this monster grows, it will be the Federal Reserve at the helm, making sure that more Americans are displaced and foreclosed on.


It is not the value they are after. Bernanke sets the tone for that with interest rates. It is the physical property that interests the central bankers. And this is a massive land-grab – the likes of which has never been attempted in the US and are likely to be a major contributor to our downfall as a sovereign nation. Through the mortgage-backed securities, the central bankers will literally own most of the domestic US.


DCFusor's picture

Care to back up any of that? 

#1 - most of the land isn't mortgaged, especially where I live, Fed has no access to loans never made or already paid off.  Don't project!  One of the worst cognitive biases.

#2 - foreclosing is often much more expensive than fixing the problem, if possible.  The fed is doing this to get things off the balance sheets of others at "unicorn" pricing, not mark to market.  Why would they insist on losing money fast, just to get a bunch of disconnected and often low value land?

Abandoned homes aren't worth much after a very short time...even banks don't want to be in the real estate business, really - too much mowing, fixing broken windows, tossing squatters, fixing frozen pipes....

One of us is really missing something here.


falak pema's picture

How the Oligarchy wins off the back of people's misery and thanks to crony capitalism : 

Exclusive: Glencore, Vitol keep oil flowing to Greece | Reuters

And its going to get worse with this merger that will make commodity concentration ratchet up even more : The immenent marriage at the end of year between swiss mega Trader Glencore and swiss mega miner Xstrata.

Matières premières: Glencore et Xstrata d'accord sur les termes de leur mariage

BK : Any take on the consequences of this huge swiss commodity concentration? 

Bruce Krasting's picture

It's not about the money. It's about the money...

MountainMan's picture

I see dead people.

GolfHatesMe's picture

Top picture is the Buffalo Bills, Mario Williams is leading the rush.

CH1's picture

Lots of them, in sandy places,

and many of them with white faces,

and then maybe in other places.

Roger Knights's picture

"A long period of economic mediocrity is the most likely outcome."

IOW, the new normal.

Panafrican Funktron Robot's picture

"The worst case outcome would be that there are no compromises; and we fall off a fifty-foot cliff, and die."

For holders of US federal debt, this is actually the best case outcome.  Perspective.

FMR Bankster's picture

Only disagreement with you Bruce is your statement that all will be paying more taxes. Lots and lots of the soon to be unemployed will likely see their taxes go down.

falak pema's picture

the bonfire of vanities in one single graph; the essence of the hopium/dopium meme :

The Single Most Bullish Data Point Since The Beginning Of The Iraq War - Business Insider


Hoping to make the USA what it was in 2003; when the crazy financialista train really picked up momentum and got us into the current QEn swing. 

The supercycle fiends of greed is good, whatever the route we take to get there. Delusionary corrupt illusion, like Crusader Holy grail.

malek's picture

Bruce, I disagree.

I'd put the probability that neither tax cuts expire at 90%.
Even Congress has slowly picked up that
1. they can finance everything with Benny's printers, so why angry voters with tax raises
2. even if they did all the rights things regarding those tax increases and spending cuts, the US budget situation still would remain completely unsustainable. So why bother.

Cole Younger's picture

Washington is a big dog and pony show. Politicians will always kick the can down the road..There is to much money at stake..

odatruf's picture

And, politicians are much more rational then they are given credit for being. Those who kick the can and go along get reelected at 90% + rates.  Why would they do anything different?

onelight's picture

Malek, Bruce good points and thanks - here is Neil Howe's take on the fiscal cliff - worth reading imho..


alex_g's picture

Bruce, quite a few of the BABs have a make whole call if they lose the subsidy payment.  The 2 issues that I am familiar with state a NPV calculation using yield of commiserate tsy +100 bps.  that's a lower yield than they are currently trading at, so if they got called, owners would receive a premium to current trading price.

ebworthen's picture

I vote crap, a total shit-storm in 2013.  Gridlock, higher taxes, post election crash in the mahkets, more unemployment and more on food stamps and disability.

masterinchancery's picture

Mediocre?  This economy is in recession fo everyone except politicians, bureaucrats and a few crony capitalists, and going to get worse when taxes go up.

Widowmaker's picture

Bingo.  This is the smartest comment on this thread.

Bruce will misdirect the point to Japan when history points to Rome or tulips.

Changes happen in spurts not "managed central planning incompetence."

falak pema's picture

mediocre and recessionary like the Ryder Cup golfers! 

Tax the millionaires of money time winners and cup losers.

ebworthen's picture

Epic fail there; complete choke on home turf.

They must have forgotten to watch Caddyshack the night before.

"We're all NOT gettin' laid!"

Time for a sex strike wifey's!

boiltherich's picture

Balance the budget.... er, well we have to have a budget first, but if we ever get one again I want it balanced.  To do that will require BOTH revenue increases and spending cuts.  The government could do everything it now does for 30% less if the fat and waste and frauds were cut out, it is like a patient with a thousand tumors that need to be carefully excised with a steady hand and a scalple, what we are facing instead is a butcher with a meat axe. 

Ditto revenues, they can be enhanced through closing loopholes and alowing the retarded BushCo welfare for the rich to lapse, but most of all I want an end, total and complete, of all forms of corporate welfare and a minimum tax rate paid in by those with more than 500k gross income no matter the source of 30%. 

But, if all we can get is the MAD policy they cooked up in congress in order to cook each others goose called the fiscal cliff then I will settle for that!  In fact make that fucker bigger.

Bear's picture

The problem is that the Feds will impose all the taxes that you propose and do nothing to reduce their expenses. I have no problem paying higher taxes (to reduce our debt), but I refuse to pay higher taxes to fund the fat, waste, and fraud that you speak about.

Anyone who says reducing expenses means reducing the rate of increase is guilty of lying and cannot be trusted with our hard earned wealth.

Don't get me started! 


Offthebeach's picture

Please. If I hear one more cut waste, fraud, abuse I'm going to order Double General Tso Kitten from the chink joint and throw it away. In 1980-81 Reagan and the GOP " leadership" went before Congress and asked GOP members to approve crossing the 1trillion debt ceiling. Some pitchforks revolution. Then it was the kinder gentler "we can grow our way out" with prescription drug and House ownership, the info economy of Fatso Dennis Hasteret, Lott and Bush. Now we have taxes to fund Wall Street with the Obama/Romney care cash/tax stream.( it will be there for you, later ) "Savings, thrift " are boob bait for a historical conservatives. A piety. It's what we love to hear.
Please, fraud, waste IS the system. It's the feature, not the bug. There's no hiding. Like a Chicago Monstrosities Outer Limits, they control your fiat, they control your debt/prices/ savings for.....We Have Entered The Central Banking Zone.

malikai's picture

I have a serious problem with paying more taxes. I cannot fathom why I should be paying an extortion racket which uses my money to drone attack brown children nor why my money should be paying lazy SOBs to sit on their asses. More importantly, like you say, they will not reduce spending. So paying higher taxes, at any time, only means one thing: paying yet higher taxes later; because they will keep spending more, period.

OneTinSoldier66's picture

I'm with you two above, Bear and malikai. To paraphrase Charles Hugh Smith, or perhaps it was a guest of his, the Government has clearly displayed that it has no mechanism to shrink in size and scope.


This is what happens when the Government captures control of money itself in order to grow it's regulatory and power capture, while making all kinds of promises that have the appearance of being able to be kept. But in order for those promises to be kept you cannot look behind the curtain at the man pulling the levers of the financial system. In late 2008 reality came along and pulled the curtain back and a lot of people saw what was behind the curtain.


It is hard not to fret or get angry about the current state of affairs. For me, especially about the bombing and killing as malikia pointed out above. But, as Jacob H. Huebert said...


"We should all be glad we're living in a time and place that's allowed us to discover libertarianism and austrian economics. Unlike most people who have ever lived, we can see things clearly. We can see the State for what it is. Unlike most peole, we can see what's going on in the economy and understand what's going on. Unlike most people we have the truth. In many respects, the truth has already set us, free."


Is There Hope For Liberty In Our Lifetime? | Jacob Huebert

masterinchancery's picture

Yes, spending will go up 5-7% as all the govt employees get pay increases and programs get larger.  And the powerful will get bailouts and subsidies, as usual.

Bear's picture

I think we should privatize the Federal Government

Umh's picture

Shrink it; that sounds good. Privatizing it just makes it harder to see where the money comes out, Check out any "public private partnership" near you. Think about our outsourcing of military functions, highway maintenance....

OneTinSoldier66's picture

It has been privatized. It's called 'The Federal Reserve System', a private central planning corporation that is neither Federal nor has any Reserves.


I realize that you are probably already aware of this but I just couldn't help but take this wonderful opportunity to point it out and make certain! :-)

Dr. Sandi's picture

I want the parks. I want the parks.

Anusocracy's picture

I'll take the Smithsonian.

GlobalCtzn's picture

I want the Gold, I want the Gold!

What do you mean I am too late?

CH1's picture

I'll take a few of those great old armories!