Okay, that may be too flippant a headline. But it’s not far off. The two candidates’ positions are obviously diametrically opposite on fiscal matters. The solution to America’s fiscal problems is structural. And therefore bigger than the man in the Oval Office. Congress’ cooperation is essential.
Obama likes central planning and “spreading it [the wealth] around.” And so he has tried: bailouts, stimulus packages, etc… and that has resulted in $4.93 trillion in new debt since he took office.
Mitt Romney says he’d reduce the role of government, which has reached into almost every nook and cranny of a citizen’s life. (You heard it here first: At this rate, the government will tell us how many grams of protein and carbohydrate we can consume a week, or a month, and how many calories. We might all be wearing ankle bracelets some day, or be issued debit cards allowing citizens to buy only a limited amount of calories a month. I am kidding, but I am sort’a not.)
Anyway, my point is this: The Fiscal Cliff is scheduled to hit on Jan. 1, 2013 when the Bush tax cuts from 2001 - 2003 are due to expire and mandated spending cuts begin. And don’t forget the new 3.8% tax hike to fund the Affordable Care Act.
A continuation of Obama’s “eat the rich,” central-planning political philosophy has not really done much. If nothing is done about these issues, Bessemer Trust estimates that about $491 billion might be added to the 2013 deficit. The National Debt now stands at almost $16 trillion. (It was $10.626 trillion on President Bush's last day in office.) A digression: I always have trouble understanding what a trillion is. Oh, it’s a thousand billion. Yeah, that helps one get one's head around such a huge order of magnitude.
The fiscal impact if nothing is done: The U.S. GDP would take an $807 billion hit. That’s about a 5.1% impact on GDP, according to a BlackRock Investment Institute Research study released yesterday. A hit of that magnitude, dear reader, is called a pretty nasty recession.
It’s true that Romney has a better economic policy, in my view: Tax increases would be cut retroactively (having had them already been allowed to return on 1 Jan.) and he says he would cut government spending. BlackRock argues that the “realistic scenario” is that “the extension of most tax benefits but a hike in payroll taxes and a few spending cuts—would hurt GDP growth by 2% in 2013.”
Another digression: BlackRock calls the Fed’s open-ended quantitative easing as “QE Infinity.”
Back to the point; The U.S. government is so in the hole that a structural change must take place. Mandatory spending (ahem, entitlement programs) represents 88% of the federal government’s expenditures in 2011. To change those programs would require an act of Congress.
Either Congress mans up and works with whoever is in the Oval Office to tackle the big structural problems, or the nation becomes tax slaves, or there truly is a political revolution (a velvet kind) when Gen X and younger realize they are paying into the Ponzi scheme called Social Security and resolutely attack the current welfare state.
That’s a tall challenge. Americans, as BlackRock amusingly put it, say take a curious stand, one that isn't economically possible: “Don’t raise my taxes.” But they also say: “Don’t cut my benefits.”
In my view, promises must be broken. So, what to do? How do you adjust financial plans to account for a recession or at least slow growth? Buy munis?
Bessemer Trust offered what it calls its “Balanced Growth Portfolio Asset Allocation.”
· 32% large-cap equities
· 22% bonds
· 16% small- & mid-cap equities
· 12% credit
· 12% hedge funds
· 2% cash