What the Fiscal Cliff Deal Really Means for Investors
In the end, after weeks of hearing about the fiscal cliff, it was over. Taxes on rich Americans went up, and spending was untouched. But guess what? It doesn’t matter…it makes no difference to America’s debt crisis!
Raising the tax on the rich (individuals making over $400,000 and couples making over $450,000 combined annually) and doing away with some tax loopholes only bring in another $60.0 billion a year to the government. (Source: New York Times, January 1, 2013.)
While $60.0 billion sounds like a big number, it is a paltry amount when compared to four consecutive years of trillion-dollar-plus annual deficits. The $60.0 billion puts a very small dent into the government debt crisis problem. Our analysis shows that a half-percent increase in the interest rate the government pays on its debt would cost it more than $60.0 billion!
What we needed to bring the debt crisis in check were cuts to government spending. That didn’t happen. That “can” was just pushed down the road once again into “debt crisis infinity.”
So what does this really mean to you, dear reader?
It means more of the same. The path of creating a welfare state out of America continues. In 1965, the national debt was equal to 38% of gross domestic product (GDP). Today, our national debt is close to 100% of GDP. (Source: Congressional Budget Office, last accessed January 3, 2013.) For this novice economist, the majority of our debt has been put on by the Obama Administration. Since Obama came into power, the national debt has increased about 60%; hence, the often-mentioned debt crisis that America faces.
But the American people are not stupid. They know we are headed toward more trillion-dollar-deficit years. They know the debt crisis will result in a national debt of $20.0 trillion by the end of this decade.
More money will need to be created by the Federal Reserve so the U.S. can deal with its debt crisis. The U.S. dollar will continue its fall in value against other world currencies as more money is printed. Precious metals like gold bullion will rise in price, as fiat paper money succumbs to inflation. In essence, “more of the same.”
In the U.S. economy right now, consumer confidence is bleak and consumer spending is dismal, meaning the idea that we are experiencing economic growth is simply far-fetched.
Consumer confidence in the month of December continued its decline from the previous month. It fell to 65.1 in December from 71.5 in November—a decline of almost nine percent. (Source: The Conference Board, December 27, 2012.) Why did consumer confidence fall so much in December? Of those who replied to the consumer confidence survey, 18.7% of them expect their income to decline, 27.3% believe there will be fewer jobs for them, and 35.6% believe it is difficult to get a job.
If consumer confidence is low, U.S. consumers will spend less. Generally, November and December of every year tend to be good months for retailers because of the holiday season. During this time, consumers spend and buy goods. But this year, retail sales were far from robust.
According to MasterCard Advisors’ SpendingPulse, from October 28 to December 24, holiday-related sales only rose by 0.7%. During the same period last year, the sales rose two percent. (Source: The Globe and Mail, December 26, 2012.) This is significant, because retailers generate about 30% of their annual sales during the holiday season, and the majority of the time, this same period accounts for 50% of their corporate earnings.
ShopperTrak reported retail sales declined 2.5% and foot traffic decreased by 3.3% during the week ending December 22, 2012 compared to last year. (Source: ShopperTrak press release, December 27, 2012.)
Right now, consumer confidence in the U.S. economy is very weak. As I have been harping about in these pages, if we want economic growth, consumer confidence must increase. But consumer confidence is stuck, because unemployment is high, real incomes are falling, and personal savings are declining.
Where the Market Stands; Where It’s Headed:
I give very little credence to yesterday’s up-shot day for the Dow Jones Industrial Average. The market’s reaction to the pathetic fiscal cliff deal was one of relief that spending was cut. I expect 2013 to be a very difficult year for the stock market.
What He Said:
“Interest rates at a 40-year low: The Fed has made borrowing as easy as possible, resulting in a huge appetite for loans and mortgages. We are nearing a debt crisis.” Michael Lombardi in Profit Confidential, April 8, 2004. Michael first started warning about the negative repercussions of then-Fed Governor Greenspan’s low interest rate policy when the Fed first dropped interest rates to one percent in 2004.