We have finally reached the end of the fiscal cliff drama. Tomorrow
is the last day, or so we are told. this fiscal cliff is nothing more
than an opportunity for ego driven politicians to get on TV. It is a
manufactured crisis that draws the nation’s attention to the
politicians, rather than where it usually resides like the Dancing with
the Stars finals or the latest Kardashian rumor.
I think the best course of action for the country is to go over the
cliff. Why? It all has to do with Lucky Charms. I was the type of kid
who would eat the grains in my Lucky Charms and leave the colorful
marshmallows to the end. My sister, like most kids, would eat the Lucky
Charm marshmallows first and then try to get out of eating the “bad
stuff.” Mom always made her finish the grains even if she sat at the
kitchen table for an hour. While I enjoyed my colorful, marshmallow
ending, my sis gagged down the soggy wheat globs (if you ever let cereal
sit in a bowl of milk for an hour you know what I mean by wheat glob). I
could delay gratification while my sister could not. As I look at the
fiscal cliff, my Lucky Charm behavior emerges: take a little pain now
and enjoy the ending. The politicians, and most Americans, want their
marshmallows now. Their hope is the wheat bits can be avoided
altogether. Unfortunately for them, the economy, starring as Mom in this
instance, forces you to eat the wheat at some point.
But the media says the fiscal cliff will cause a recession
It might, but it might not. To understand the ramifications, let’s
look at the cliff and the two opposing plans out there today (graphs
courtesy Agora Financial). If we ride over the cliff, we will experience
a $607 Billion event in 2013 ($504 in tax increases and $103 in
spending cuts). Our economy is just over $14 Trillion. The cliff amounts
to 4.3% of our GDP. Certainly, we would be eating some wheat now as
this could retard economic activity, but a $14 Trillion economy won’t be
waylaid by a 4% event.
The current plans offered by the President and Republicans are
certainly less taxing on the economy today. President Obama wants $1.8
Trillion in tax increases and spending cuts over the next 10 years while
the Republicans call for $2.2 Trillion over the same ten year period.
Both plans derive the vast majority of spending cuts from
Medicare/Medicaid savings. History has shown that these savings never
appear. Projected cuts to doctor payouts, thesignificant savings in both
plans, are usually overturned at the last minute. So the spending cuts
by both plans probably won’t emerge.
If the President and Republican plans would spare the economy in 2013
more than the fiscal cliff, why would I want to recklessly drive over
the cliff. It has to do with Lucky Charms. I prefer the whole grains now
while they are crunchy, rather than later when the grains are soggy
glumps.
Learn From History or Repeat It
In
This Time Is Different: Eight Centuries of Financial Folly,
economists Ken Rogoff and Carmen Reinhart examined 800 years of debt
fueled financial crisis. Every single case of currency collapse, high or
hyper-inflation, or government defaults happened when a government
breached these two metrics: borrowing 40% or more of annual government
spending and government debt to GDP of 100% or more. It doesn’t happen
immediately upon reaching these levels, but if governments do not alter
behaviors shortly after surpassing these metrics, calamity has always
ensued. Today, the US government violates both of these metrics.
While the fiscal cliff may harm the economy today, it would reduce
our annual deficit from $1.2 Trillion (40% annual borrowing) to $600
Billion (20%). To put this in perspective, a $600 Billion annual deficit
would have been a record before 2009. As if I haven’t depressed you
enough, Social Security and Medicare spending will strain our budget no
matter what in the coming years as the baby boomers retire in mass. The
President and Republican plans maintain trillion dollar deficit levels
even if the Medicare savings magically appear. A recession today would
certainly hurt. However, a normal downturn today certainly trumps a
default or currency crisis down the road. We can eat our whole grains
now or wait until they turn into a soggy, disgusting mess.
Kirk Kinder, CFP® is the Founder of Picket Fence Financial,
a fee-only financial planning and investment management company
dedicated to saving folks from Wall Street. Picket Fence Financial does
this through a few different ways. One, our fee-only approach ensures
our advice is tailored to our clients needs and not driven by
commissions. Two, we minimize costs for clients by utilizing low cost
Exchange Traded Funds (ETF) and aligning our internal operations to keep
our company costs down (and passing this along to our clients). Third,
we offer a la carte planning, which means our clients decide how they
want to work with us. Rather than forcing clients into our model of
planning, we offer hourly, retainer, or asset management options (or a
combination thereof).
All information on this site are the opinions of Kirk Kinder,
CFP® and should not be construed as investment, tax, estate or insurance
advice. Please consult your own specialist for personal assistance.
