Among the many problems resulting from the US falling into the 2013 Fiscal Cliff, there is a high probability of a serious stock market collapse. But that is only a symptom of a life-threatening ailment.
The Fiscal Cliff's disaster is compounded by the huge public debt and budgetary deficits, and the US faces a gargantuan problem pocking through the debt ceiling that must be raised again this January to avoid default.
"Fiscal cliff" means huge tax increases and non discretionary spending cuts, a one-two punch that would certainly knock the US economy out (followed by the rest of the World) for several years to come. The US is sliding to the edge of the cliff because the President and US Congress have failed to reach a bipartisan debt-reduction plan up to the last few minutes of 2012. Democrats protect spending programs at any cost and higher income-tax increases, while Republicans tend to seek debt and spending reduction and lower tax rates for all. And the US and the rest of the World will fall into depression because the 2011's Budget Control Act will apply if the President and Congress fail to agree on a reasonable and consensual adjustment of spending and taxes by January 1st, 2013.
This 2011 Act will initiate 10 years of massive accross the board spending cuts and tax increases as the only way of stopping the runaway public debt that otherwise would rise to over 18 trillion dollars by December 2013. The problem is that the 2011 Act is too much, too fast and interferes in sound economic decisions in some of the wrong places.
This kind of "solution" will suddenly take $500 billion in government spending our of the economy next year alone just at a time of high unemployment, fragile housing market and higher inflation hidden under a less visible but quite real loss of purchasing power by the US Dollar.
Fuel for the fire is the increasing U.S. national debt, now close to 100% of its gross domestic product (GDP), (i.e., the whole US production during a full year equals the national debt), but while GDP is rising by an additional $440 billion a year, the debt is rising faster at $1.5 trillion a year... adding $4.1 billion per day to the public debt! Therefore, under the present economic policies, by the end of 2013 the US will owe quite more than it can produce during the whole year.
Since Congress has been stubbornly gridlocked, the danger is it may not reach a reasonable agreement or even any agreement at all, and then nobody is happy, consumer confidence collapses and tax rates leap, programs are cut, and the economy plummets.
What will happen if the 2011's Budget Control Act comes into effect in January?
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BUSH TAX CUTS END, OTHER TAXES KICK IN
- Capital gains tax rate rises from 15% to 20%, dividend tax rates rise from 15% to one’s top income tax rate
- Income taxes rise to 15%, 28%, 31%, 36%, and 39.6%--up from 10%, 15%, 25%, 28%, 33%, and 35%
- Estate tax, AMT, The Child Tax Credit, Earned Income Tax Credit, Payroll tax holiday, Marriage penalty relief, many individual and business tax breaks, and others are slashed or expire, while the Social Security tax rate increases 2%
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DEFENSE CUTS
- $55 billion, or approximately 10% of every program, is cut from discretionary defense spending
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NONDEFENSE CUTS
- $55 billion, or approximately 8%, cut from programs including education and food safety
- END OF EXTENDED UNEMPLOYMENT BENEFITS
- REIMBURSEMENT CUTS TO MEDICARE DOCTORS
It is really astounding to see so much government irresponsibility to the point of dragging a solid developed economy to the brink of collapse.
US political forces will eventually come to terms but possible outcomes range from congressional disagreement (enter cuts and taxes, potential recession, distress to the markets) resolved with precarious patches, to delayed measures, to the desirable but unpredictable broad agreement (parts of the fiscal cliff are averted, budgetary deficits are effectively reduced and taxes are not raised ... and markets rejoice!). You guessed it. It is not serious enough for those in power and they bluff as in a poker game. They will not relinquish their political ambitions for the good of the country. I am sorry to annouce that the political weather report is quite stormy.
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