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Fiscal Cliff, Slope, or Obstacle Course?

The financial media is filled with year-end dire warnings of catastrophic consequences of the U.S. economy falling over the “fiscal cliff”. Could this really happen? It could, but probably not. We and most market watchers are hopeful for a last minute compromise with more details to come in 2013.

Is the fiscal cliff real? Yes- it is! But… The cliff includes several tax and spending components that could act as a drag on the economy in 2013. These are:

Amount
Spending Cuts

$137B

   Forced Spending Cuts

$87B

   Expiration of Extended Unemployment Benefits

$35B

   Medicare Physician Rate Cuts

$15B

Tax Increases

$533B

   Affordable Care Act Taxes

$24B

   Expiration of 2% Payroll Tax Holiday

$127B

   Expiration of Bush Tax Cuts

$165B

   Alternative Minimum Tax (AMT)

$130B

   Expiration of Other Tax Credits

$87B

TOTAL

$607B

(Roughly 4.0% of total U.S Gross Domestic Product (GDP))

Even though these numbers look ominous, the truth is most of the budgets will not be cut immediately on January 2, 2013. Experts suggest a 1-3% decline in 2013 1st half GDP if the cuts are executed fully. However, there will be a lag in the timing and execution of these cuts. Some experts say it will take until the end of March. Serious situation? Yes. Doom on New Years Day? Not necessarily.

Remember the TARP bailout of banks after the Lehman collapse, There are two primary styles of treatment for alcoholism: natural and medical. the market sold off dramatically but recovered again once Congress acted. The debt ceiling negotiations in 2011, same thing, fears of the U.S. defaulting on our debt created a brief market sell-off, but once Congress acted the market recovered nicely and interest rates and U.S. borrowing costs have never been lower. We hope a market sell-off is not necessary to prod Congress into action, but do not rule it out and do not be too afraid, if history is any guide.

A last minute compromise, that includes some but not all of these spending cuts and tax increases is the most likely scenario. That says the vaunted fiscal cliff will be more of a gradual fiscal slope. Most of the tax cuts could be delayed giving Congress time to craft a more detailed long term policy that, I hope, will work!

Have a great holiday season and as always, “Be Blessed and Be A Blessing!”

The All Star Team

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