Tuesday, October 25 , 2016, 6:23 am | Fair 51º


Craig Allen: Unfortunately, Rumors of Demise of ‘Fiscal Cliff’ Are False

The looming “fiscal cliff” — the expiration of the Bush-era tax cuts, and the spending cuts that Republicans, especially Tea Party members, demanded as part of the debt-ceiling increase — coming at the end of 2012 will have dire consequences for the United States and global economies. Many pundits, economists and talking heads in the political sphere are now claiming that both sides of the aisle will be forced to compromise to get something done to avoid the fiscal cliff. Don’t count on it!

After last week’s election, these commentators are speculating that Congress and President Barack Obama will be motivated — and forced — to come to an agreement that will address these dire consequences. But the reality is that they are much more likely to do nothing, to agree to nothing — which will result in all Bush-era tax cuts expiring (tax rates on income, capital gains and dividends reverting to where they were before the tax cuts were enacted) and all of the spending cuts that were included in the debt-ceiling agreement going into effect at the end of 2012.

One need only look at the contentious nature of the debt-ceiling debate, and the resulting stalemate that resulted in a government shutdown, to recognize this likelihood. Maybe, if things were the opposite — if Congress and Obama would have to vote on and sign a bill into law that would then force taxes up and spending cuts to go into effect — I would feel much more comfortable with our current situation.

Unlike these talking heads, I do not believe that Congress or Obama are highly motivated to compromise. While they all recognize the risk to the economy, they are far more interested in their personal agendas to act in the best interest of the country.

On the surface, the results of the presidential election might seem to some to be a mandate for Obama. After all, he received 332 Electoral College votes (if we count Florida) to Mitt Romney’s 206 (270 are needed to win the presidency). This may seem like a decisive victory, but the reality is that, at least with the popular vote, Obama won by less than 3 percent. This means that almost half of the country voted against him. We are a highly divided country facing some enormous problems that will not be easy to fix and that, even with everyone working toward a common goal, will take many years to address. And this assumes we all work together, which in politics is not just rare, it’s unrealistic.

I wish I could be more optimistic. I wish I could agree with those who believe that Obama has a mandate and will reach across the aisle to the Republicans and find a way to compromise to get something done. But he has already stated that he will not sign any bill that includes an extension of any tax cuts for those earning more than $250,000 a year. It is also unlikely that Democrats will be willing to cut entitlements. Republicans will be unwilling to cut taxes only on the middle class and lower income earners, pushing the entire burden onto the so-called wealthy. Republicans will also refuse to agree to any extension of tax cuts without significant spending cuts, which the Democrats will likely refuse to accept. If we add all of this up, the result is deadlock.

A stalemate on the fiscal cliff will spell certain pain for the U.S. economy. That means you and me. We are basically guaranteed to fall back into a recession early in 2013 unless the tax cuts are extended and the spending cuts are postponed. Few will disagree with this assessment.

I would love to believe that Obama and Congress will act in the best interest of the country as a whole, rather than according to the interests of their constituencies or their own personal agendas. Unfortunately, this is simply not the way politics works today. I believe our Founding Fathers intended for all members of Congress and the president to make decisions with the best interest of the country as their first and probably sole concern. They also intended for those who vote to do the same — to vote for what is best for the country, not for what or who will serve their own personal best interests. I strongly believe if they were alive today, they would feel that all of their hard work, sacrifice and noble intentions were wasted on us.

Perhaps Obama and Congress will pull a rabbit out of the hat and will surprise us with a compromised solution that averts disaster. I would like to believe this is possible. My stance is to hope for the best and plan for the worst. The clock is ticking — there are only 49 days remaining in 2012. Will time run out? A compromise, if reached next year, could be retroactive to the beginning of 2013, (which is what I would expect, if a compromise can be reached in the first place).

Regardless of whether Obama and Congress eventually take action, the uncertainty surrounding the fiscal cliff may be enough to send the economy back into recession. Only time will tell, but time is quickly running out.

Craig Allen, CFA, CFP, CIMA, is president of Montecito Private Asset Management LLC and founder of Dump Your Debt. He has been managing assets for foundations, corporations and high-net worth individuals for more than 20 years and is a Chartered Financial Analyst (CFA charter holder), a Certified Financial Planner (CFP) and holds the Certified Investment Management Analyst (CIMA) certification. He blogs at Finance With Craig Allen and can be contacted at .(JavaScript must be enabled to view this email address) or 805.898.1400. Click here for previous Craig Allen columns. Follow Craig on Twitter: @MPAMCraig.

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