The Fiscal Stiff

Marc To Market's picture

US Vice President Biden
and Senate Minority leader McConnell brokered an agreement that was approved by
the Senate that seems to avoid the full fiscal cliff.  It now is before
the House of Representatives.  


While the Jan 1 deadline
is passed, the more significant one, we had argued was Jan 3, when a new
Congress is sworn in.  A failure by the 112th Congress to finalize the
legislation would mean that process would have to begin anew with the 113th


After what is likely to
be intense though short debate, the House of Representatives can either approve
the same exact bill the Senate approved, which be the quickest resolution.
 It can seek to amend the bill, in which case it must return to the Senate
for their approval.  The process could be cumbersome and require
reconciliation and would risk the Jan 3 deadline.  Alternatively, a
majority of the House could fail to ratify the Senate bill, in which case, it
will be up the next Congress to claw back from the other side of the cliff.


This sketches the procedural
course in the coming days; let's turn to the substance of the Senate deal.
 The key highlights include, a 4.6 percentage point increase (to 39.6%)
the marginal tax rate on those households earning more than $450k ($400k for
individuals), tax deductions.  Although credits begin phasing out on $250k
incomes, the dividend and capital gains tax will only be hiked to 20% (from
15%) on households earning $450k ($400k for individuals).    The
payrolls saving tax, which had been reduced by 2 percentage points during the
financial crisis, will be restored to 6.2%, which will impact all private sector
employees.  There was full year extension in unemployment compensation.
 The Alternative Minimum Tax was permanently indexed for inflation.
 It delays a 27% cut in payments to Medicare providers for a year.  


One of the reason why
this agreement is not a slam dunk in the House of Representatives, once over
the hump of tax increases, is that there are no spending cuts.  Instead
the Senate agreed to delay for two-months the $110 bln in the automatic
spending cuts that were part of the fiscal cliff.  Even the $30 bln for
the extension of the unemployment benefits has not been offset with spending
cuts.  The idea being that after a cooling off period, fresh negotiations
will be required to secure spending cuts.  


On the other hand, one
of the reasons that the Republicans can approve the bill is that they may still
have a trump card:  the deb ceiling.  The federal government reached
the debt ceiling at the start of the week, which limits the government's
ability to borrow.  The US Treasury has begun taking "extraordinary
measures" to minimize the immediate impact.  These maneuverings are
not limitless, but a several weeks.   It appears that an increase in the
debt ceiling is needed by late February or early March, though creativity of properly
incentivized politicians and bureaucrats should not be under-estimated.  


We have outlined the
procedural process, the substance and limits of the agreement, now let's
briefly sketch out an evaluation.  


1.   The capital
markets have seemed to have generally looked past the self-inflicted fiscal
cliff debate in the US.  As we have noted, fiscal consolidation was not
being forced on the US via a capital strike the way it was in the periphery of
Europe.  It was more a political problem than an economic problem. Yet, until
the House of Representatives play their hand, there may be not big market
reaction.  This is also consistent with the thinner market conditions.
 The economic data in the coming days features the monthly PMI readings
and US auto sales and employment report (at the end of the week).   


2.  The economic
slowdown that the US appears to have experienced in Q4, which appears to be
about half of the 3.1% pace seen in Q3, seems more a product of inventory draw
down, rather than the uncertainty of the fiscal cliff.  Core durable goods
orders rose at a healthy clip in Oct and Nov and private sector job growth did
not slow.   Without going fully off the cliff, we continue to expect the
US economy to be among the strongest in the G7 in 2013 with a little more than
2% growth.  The ECB and EC have have successfully reduced some of the
extreme tail risk in Europe.  China's economy has begun strengthening.
  These three issues had been among the chief concerns for investors.


3.  We had thought
investors would have sense of closure on US fiscal policy early in the new
year.  Now it does not seem likely until late Q1.  In a larger sense
many structural issues that are needed to ensure the US is on sounder fiscal
footing, while at the same time, addressing the weakness in its physical
infrastructure and ensuring people have skills necessary to participate in
competitive marketplace, have not been addressed.  


4. Many Republicans will
not be happy with the agreement, but Obama had all the cards.  The
Democrats have the executive branch and a majority in the Senate.  While
the Republicans enjoy a majority in the House of Representatives, Democrat
candidates as a whole actually received more votes.  Moreover the
Republicans are split as the failure of Boehner's Plan B illustrated.
 Ironically, the split is very much like in the German Greens.  There
is a realos faction that wants to govern.  There is a fundos faction that
puts principle ahead.   


5.  The real
question is why didn't Obama push his full advantage?  The answer, as we
have implied before, on economic policy Obama is not very different than some
Republicans.  Others, like Bruce Bartlett, an official in the Reagan and
Bush I governments, recognizes this in a piece in the Fiscal Times " How Democrats became Liberal
.  None less than Obama himself recognizes
this.  He explained recently to an Hispanic audience that he was not a socialist
as some of his critics assert, but rather his economic policies, would have
made him a moderate Republican in the 1980s.  


6.  One of the
great unspoken truths during a debate that seemed to speak a lot of untruths is
that the raising of the taxes on the wealthy (however defined) is not
sufficient to close a $1 trillion deficit or reduce the America's debt.
 The driving value was not fiscal correctness, but a sense of fairness.
  The concentration of wealth and income in the US increased during the
credit crisis (and some like ourselves and others, like Jim Livingston at Rutgers, see it as a
critical cause of the crisis) and is increasing in the
post-crisis period.   


Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
MickV's picture

You guys just don't get it. There is no more law, or Constitution or America. The Presidency has been Usurped by a non natural born Citizen, whom was born a British subject of a British subject father (It would not matter if Obama was born on the Oval Office desk--- he was born with foreign allegiance). Obama was specifically picked for the task of dismantlization because he has no allegiance or attachment to America, or its ideals. The first step in restoring the Republic is removing the Usurper from office, or not letting him take the office again. However there are too many moron "Conservatives" that do not understand this fact or how the US has been taken over from the inside. The quickest way to dismantle the sovereignty of a people is to make the chief executive, who is the executor of the laws, an illegal entity--- then, of course, there will be no law, and the criminal bankers and various other Oligarchally sanctioned parasites can do whatever they want with impunity, until the host dies. Get A CLUE!!!! DUH.

bayou_plumber's picture

swmnguy, you have put together a compelling description of the state of the state and the talking heads that represent elites who drive policy. What methods do you see to avoid falling into the role the machine would prefer us to follow? It would seem to me that people in their 60s have a lot to worry about since SS will go broke as CPI stays at some fraction of reality. It would be better to own real property out right and grow your food it seems based on your analysis.
Clearly we can not trust any part of our government or the financial sector.

swmnguy's picture

Dear Lord, I wish I knew.  I live in a city, which runs counter to some of the things I think we would do better to do, but not all.

Above all, pay down debt.  Use today's "money" to buy actual things that will be of use, if not what is usually concerned "of value."  The usual mild-prepper ideas; have plenty of food and non-perishable goods on hand.  Have a chest freezer and fill it with things you would actually eat.  Enough solar panels to at least recharge some batteries.  If you have debt, make it the kind you can dodge out of, rather than the kind that you can't (like student loans; your own or co-signed), or the kind that would get you put out on the street if things went pear-shaped.  You wouldn't want to put the balance of a mortgage on a credit card even if you could, but that's the sort of thing.

I think in general the idea of retirement for me (I'm 46) is just not gonna happen, and I'm more or less OK with that.  I'm not sure how best to store wealth other than PMs, but the potential for the utter collapse of our whole system within my lifetime makes me wonder if even that will be too beneficial.  I do have an IRA, and the conventional retirement plans.  I try to keep my mind open to things I can do regardless of physical attributes, which might be useful to other people, so I can keep earning some sort of income in some form for a very long time.  This as opposed to thinking of things in terms of tradiitional jobs, which seem kind of shaky to me.

I think there isn't going to be a way to avoid the fallout from this, without reverting to a very primitive lifestyle that I'm not sure would be much of an improvement over trying to make do and get through it.  I may find myself very much regretting that opinion someday, too.

My mindset is to be aware of what is going on, first and foremost.  Live where I don't need a car.  Avoid using debt to buy things that won't last (food, consumer goods, etc.).  Grow some food as I can.  Know my neighbors.  Shop within bicycle range, for a variety of reasons.  Get used to doing things by hand, for myself.  I'm not expecting an Apocalypse; just expecting things we take for granted today to become a lot more expensive and unreliable.  Most of the things we do today work very well, and require a lot of energy and capital inputs we take for granted.  That may change, and when it does it may change quickly.

Really, as I think of it, I'm reminded of a lot of the things my Grandfather told me about surviving and running a hardware store through the Great Depression.  He had a morbid and well-earned fear of debt.  He didn't have any faith in the government either, but he preferred them to bankers.  He's lucky he didn't live to see them become the same thing, maybe.

It's really hard to think outside the constraints of this financialized political/economic system.  It's become very pervasive.

JamesBond's picture

The GOP will lose the house next round of elections if they pass this...  



Go Tribe's picture

They'll lose it anyway. GOP met its Little Bighorn; its ground game is stuck on stupid.

swmnguy's picture

To the extent that that matters, I suppose you're correct.  You could make the same argument about Democrats and the Senate, too, probably.   Does it make any difference?  The outcome is the same either way.

swmnguy's picture

There is no crisis, and our economy has not collapsed.  Oh, sure, for you and me there is and it has.  But that's neither here nor there in the big picture the elites are bringing into fruition. 

Watching Obama/Reid/Pelosi/Biden vs. Boehner/Cantor/McConnell is almost unbearable as they play out their Big Brother/Emmanuel Goldstein staged ritual.  Seriously, WWE Pro Wrestling is more spontaneous. 

It doesn't matter what the particulars  of this round of 3-Card Monte are.  The result will be that more wealth will be extracted from the lower 99% of the population and propelled upward to the global elites.  In each country it has to be couched in terms peculiar to the local mythologies and traditions, but the result is the same.  Now that debt is money, and can be bought and sold, the economy itself is just an impediment to the true accrual of wealth to the top.

Humans can't possibly create enough wealth through productive means to be siphoned off to satisfy the elites; not compared to the enormous wealth they can be milked of by hooking them up to the debt extraction system.  That's the key.  You only serve a function to the extent that you can be saddled with debt that can then be sold.  Whether or not you ever pay it back is irrelevant now, and nearly irrelevant forever into the future, as long as the debt created for and by you can be sold.

It's all a charade.  The money will move upward steadily.  The most cunning part is calling Obama a "Socialist."  This is the key "tell" to show the Big Brother/Goldstein partnership between all factions of the elites in this country.  That this absurdity passes muster at all is a dead giveaway.  That's why you see absurditiies like the banks agreeing to pay $10 billion to settle the millions upon millions of cases of real-estate document fraud once and for all, while receiving $85 billion per month of debt/money in exchange for the same face value in intrinsically worthless MBS's etc.  And the blame for our fiscal situation is put on extended Unemployment?  Hah.  Peanuts.  Obamacare requires employers to provide access to family healthcare coverage, but does not require that the coverage be in any way affordable?  Now you're talking.  More avenues for the creation of unpayable debt.

Bill Clinton and Barack Obama have done more to advance the fascist agenda than any bogeyman on the Right could ever have done.  All Obama has been put in place to do is to make sure Americans are hooked up to the wealth/debt extraction system, just like the humans in the "Matrix" movies were hooked up to the energy extraction systems the aliens used.  We're being farmed for debt, in a process more depleting than anything we do to hogs.

The plan is going just fine.  Nothing to see here.  Go refinance your house, and take out a little extra to buy yourself something nice.  Get your kids an iPad Mini and your wife a Maxi iPad or whatever.  Doesn't matter if you pay it back or not; all the money is coming from the Federal Reserve, so you'll pay it back one way or another, for generations to come.  And the more you think Obama is a Socialist, or any Republican fundamentally disagrees with any of this, the smoother it all goes down.

hooligan2009's picture

sounds completely bass ackwards to me.

you have 50% of the population who are disenfranchised and dont earn enough money to contribute one red cent to their country, another 40% who are getting by, but contribute only a little and the remaining 10% earning less than 200,000 a year and struggling to feel well off.

do you really think its all the top 1%'ers fault?

i suggest its everyones fault for eelcting such dumbass politicians year in/year out..and the mob voting for them. reagan, bush, clinton, bush..all very popular and unable to place the US on a sound fiscal footing.

you get the govrnment you deserve.

pay no taxes, take no hand-outs!! no representation without taxation!! become a spartacus or you are wasting your life.

swmnguy's picture

I understand your position.  I used to think that way myself.  That was before I understood the thing we call "money."  I don't mean to be condescending, or mystical either.  It just ain't what you think it is, and I used to think it is. 

You're right about the 50% disenfranchised, and the 40% barely getting by, and the 10% (I'd say 9.9%, myself) struggling to feel well-off.  That's not who's driving this.  Their contributions, in what they think is "money", don't matter at all in this process.  Sure, I need to have "money" in my bank account to pay my bills, and to operate on the level to which I'm accustomed, but policy isn't being made on my level.  My needs and operations aren't the least bit relevant to the big picture.

Here's what does matter.  I have a $119,000 balance on my mortgage, a $30,000 balance on my HELOC, and $0 on credit cards, student loans, personal loans, car loans, and everything else.  Despite making somewhere this side or the other of $100,000 a year, I have a (small) positive net worth.  That makes me worthless to the global financial elites who are driving this thing.  With my numbers, I could have $500,000 or even $750,000 in debt.  Then I'd be worth something to them.  Indeed, my current existence pisses them off mightily.  I'm using air and water, and I even grow some food in my garden, using sunlight and soil.  Those resources are not being properly leveraged to suit the aims of the global debt extraction system.  I'm like a big wooden shoe, jammed in the gears.  The opportunity costs manifested by my positive net worth, small though it is, are positively galling to the elites.

Just having a garden, paying ahead on the debts I haven't been able to avoid, and understanding that money in its debt form is what really drives the system makes me a Spartacus, as you put it.

The politicians are not dumb, as you put it.  And we're not electing them.  Did we get a choice between Ron Paul and Jill Stein this past November?  Those two would have posed a much more realistic representation of the philosophical positions of most Americans, and the differences between us.  But no.  We got The Nature Boy and The Iron Sheikh, or maybe it was Gorgeous George and The Crusher?  Who's the "face" and who's the "heel" this time around?  It's hard to keep track.

Taxes, handouts and representation are meaningless to anyone living at above a merely physical level.  That's what abstract money, or as we call it now, "Finance," means.  Sure, you need some "money" to get along.  But that's not where the power is, nor actual wealth.  All the talk is just a distraction from the real power play going on.

hooligan2009's picture

seems like you shoud be able to go galt in about three there already

cosmicinsight's picture

Well said.You have hit the nail on the head more accurately then all the other pundits so far.Nailing the issue firmly for all those who will read and realise how doomed the 99%er's are as the forces of mega con are pitted against them sucking the life out of them bleeding them dry excruciatingly till nothing is left.

Hannibal's picture

US Constitution; Article 1, Section 7:
"All Bills for raising Revenue shall originate in the House of Representatives,..."

Cynthia's picture

It looks like the fiscal-cliff bill that passed the Senate today will extend the "doc fix" one more year (see link below). But to offset these costs, hospitals and other large healthcare providers will be paid for “evaluation and management” visits in their outpatient departments at the same lowly rate as for those visits when performed in doctors’ offices. This will reduce Medicare costs by roughly $10.5 billion a year and will hopefully put an end to the incestuous relationship that the American Medical Association (AMA) has with the American Hospital Association (AHA). Pitting the AMA against the AHA is one sure way to reduce healthcare costs, IMO. And if robbing Peter (i.e. the hospital) to pay Paul (i.e. the doctor) will significantly lower the overhead or administrative costs in hospitals, I'm all in favor of it!

bunnyswanson's picture

Doctors may end up working directly for hospitals.  Locally, the city hospital is buying all small clinics and smaller rural hospitals, putting urgent care centers owned by hospital beside privately owned or franchises and chargiing less for same treatment (for now). 

Oldwood's picture

No. What collapsed our economy is people thinking they could get rich by gambling with other peoples money. Leveraging the thing so large that it crashed. This has less to do with rich people than people trying to get rich quick. Easy money is always what brings it down

geno-econ's picture

You said it .. An increase in the concentration of wealth AT THE TOP as a result of the credit crisis and subsequent bailouts without a corresponding increase in economic growth in the US .  So play the currency markets until the whole thing collapses.   Unsustainable debt of Empires has always led to default or currency devaluation.  Great Britain took 200 years-----we will not be as lucky, unless we form a Pan-Sino Capitalistic system with China which might give us a few more years of pretending and partying 








gilroyp's picture

In the last month or so all we have heard from both sides was that the most important thing above all in the fiscal cliff negotiations was that there must be no tax increase on the middle class. Has anyone noticed that the only ones apart from the 1%'er who have got shafted in this deal are the very middle class the say the had to protect. Payroll-TAX?

Everybodys All American's picture

Obama is not a socialist? What is further to the left then?

Reptil's picture

no Obama is not a socialist. Obama is a right wing totalitarian ruler with a "socialist" label stuck on, so everyone doesn't even bother with socialism, just rants about it.

"liberals" also have NOTHING in common with liberalism, and "conservatives" NOTHING with conservatism.

it's a great pity that common language has eroded or bent into "newspeak".


swmnguy's picture

To transfer the entire wealth of a people to the finance sector is not Socialism in any way.  To put the wealth of the finance sector into the hands of the government (and to call the government "The People") would be Socialism. 

People have a hard time with numbers, so they think that since it costs a lot to give food stamps to 40 million people and unemployment to at least 20 million, that must be the cause of what we're calling the financial crisis.  That amont of money, while considerable, is pennies on the dollar of the wealth transfer that is really going on, with the wealth being created by government as debt owed by the people, and ownership transferred to the finance sector.  $85 billion per month; nearly a trillion per year; just in the Fed's buyback of morgage-backed securities.  That's w-a-a-a-y more than is being paid out in social programs. 

Social Security and Medicare are next.  Medicare is already an enormous transfer of wealth from the people, through the government, to the finance elites.  Social Security is clearly on the table, though it's so popular it's proven hard to openly subvert.  Instead it wiill be allowed to wither on the vine, via devices like "chained CPI" to reduce cost of living increases, to the point that at some time in the future it will no longer represent a meaningful portion of the money individuals need to survive, at which point it can be quietly dismantled once and for all.

None of this is Socialism.  To merge Corporate and State power; or more accurately, to subjugate the State to Corporate elites; is more properly called Fascism, but maybe more accurately something like Neo-Feudalism, with membership in the financial elites taking the place of the Great Chain Of Being of more primitive times and cultures. 

Whatever Obama is, he sure as hell ain't a Socialist, nor is he "Left."  He and his handlers are darned clever to use terminology still associated with "Left" philosophy, and the "Right" plays its dutiful role in calling Obama's policy direction "Socialist."  It's hard to discuss these things now that the marketing wordsmiths have had their way with the language for so long, but some words still mean some things.  And Obama, by cloaking himself iin the debased lexicon of our times, has done more as President to advance the agenda of the financial elites than any Rothschild, or Blankfein, or Dimon could have done in the Oval Office.  Just as Clinton delivered Reagan's agenda far more effectively than Reagan could.

Dingleberry's picture

Excellent swimguy.

Poltics is money. More specifically allowing the financial elites to keep and make more of it. Period. End of story. 

The only way this can happen in a democracy is for relatively effective propaganda and indoctrination to take place amongst the unwashed masses in order to get them to vote their own suicide.

Obama is the latest example. Bernays would be so proud of his handlers.

Clinton signed NAFTA into law. Obama and Holder failed to prosecute the banks that ripped his own community of the "disenfranchised" to shreds.

And to top it off, white chicks (and men that think like white chicks) put their trust and faith into a man that came from the most corrupt political machine known to this country (i.e. Chicago). 

The people have voted. TIme for their (self-induced) punishment.


The Miser's picture

You must work for MSM. 

Jam Akin's picture

Obama is "the Frontin' Front Man" who very pragmatically studied the effective organizing methods of the left while actually representing the key interests (both left and right) that propelled him into office.  He has been serially underestimated by his opponents and misunderstood by his supporters every step of the way.

At the same time, there has been a general leftward collectivist shift over a period of decades in US mass/popular opinion/culture that has facilitated the linguistic difficulties you speak of Reptil.

Everyman's picture

The GOP and Independents need to start a NATIONWIDE BOYCOTT of paying Federal Taxes until there is a.) a balanced budget, b.) a plan for paying off the debt, c.) a National Economic Policy inline with the constitution, d.) a National Energy Policy, e.) a plan for restructuring the SS and Meidcaid/Medicare issue.

Very Simple and THE ONLY SOLUTION outside a full on revolution. the GOP has let us down (again) and the Dems will never see the light until it is dark.


The IRS can't get to all of us. Remember, they are government employees.

SKY85hawk's picture

That's fine for people who are self employed and understand their options.

What do you recommend for the majority that were tricked into signing W4 and W9s?

Snakeeyes's picture

The Senate bill is a typical lie from Obama/Reid/McConnell. It is a juggernaut towards fiscal insolvency because the media and the Fed enable their populist/big corporation agendas.

$330 billion in new spending and $4 trillion in additional budget deficits? JEEZ!!!

Elmer Fudd's picture

And so...?

(good analysis tho)