Having dodged the fiscal cliff and postponed the debt ceiling deadline, Congress decided to let the spending sequesters happen. Will the result be to throw the economy into recession or cause an economic catastrophe? We don’t think so, and neither does Congress. (more…)
I’ve been saying that December 31 was a media deadline, not a real deadline for a fiscal cliff resolution, since Congress could act retroactively. However, I guess I underestimated the extent to which politicians dance to the media’s tune, instead of Wall Street’s or Main Street’s. Given how little turnover there was in Congress, it seemed there was little real pressure to get a deal done in the lame duck session (which ended last night) rather than in the new Congress. But, again, a deal was done – and, like most such negotiations, was done only at what the negotiators perceived to be the very last instant.
The news media is breathlessly counting down the days until the arrival of the fiscal cliff on December 31. It may make for good television (tune in tomorrow) but it’s not good economics…or good political analysis. Here’s why:
• As we all know, “fiscal cliff” is shorthand for a broad array of tax increases and spending cuts scheduled to take effect December 31. It’s a catchy phrase but a misleading metaphor. It’s really more accurate to visualize the so-called fiscal cliff as a hill which the economy must climb if it is to continue moving forward.
• The steepness of that hill is variable: W2 withholding and Social Security taxes start taking a larger bite out of paychecks on January 1, but the higher taxes on 2013 capital gain and dividend income won’t be due until 16 months from now in April 2014. Likewise, the spending cuts, if they happen, will impact the economy at varying times.
• Another reason December 31 isn’t a drop-dead date is because Congress has the power to change tax rates retroactively. If we hit the cliff, the new tax rates would take effect, but they wouldn’t be carved in stone…they could be changed.
The bottom line is, there’s no real need to strike a deal by December 31 …or even during the lame duck session before the new Congress is seated in mid-January.
I was recently asked, “What will be the impact if Bernanke is replaced? Could a new Fed Chairman increase rates sooner than expected and put major pressure on the fixed income market?” My response: I see three scenarios under which rates might rise significantly:
- Fed tightening…highly unlikely in the next year
- U.S. investor sentiment shift…most likely
- Global loss of confidence…least likely, most damaging (more…)
The Household Survey says that 873,000 people started working last month. Really?? If the Fed knew that, would they still have started up QE3? If the rest of the government (e.g. the IRS) knew that, the President probably would have been talking about his ability to create jobs during the debate.
Comments by European Central Bank (ECB) President Mario Draghi caused a little bit of turmoil in the markets recently, when he first stated the ECB would do “whatever it takes” in a speech on July 26, then expressed the ECB’s reluctance to intervene in sovereign bond markets in his August 2 press conference. (more…)