As I’m sure you’ve heard…

Tax increases and government spending cuts in the U.S. are set to take place on January 1, 2013.

Originally, the purpose of the payroll tax cuts was to stimulate the U.S. economy; government spending programs (like extending unemployment benefits) were also aimed at getting the economic recovery going.

The tax cuts and government spending initiatives that were enacted to help the economy “rebound” from the crisis and recession of 2007 add up to roughly $433 billion, or approximately 2.9% of U.S. gross domestic product (GDP) (source: Bloomberg).

If GDP growth is expected to be in the two-percent range in 2013 and we subtract 2.9% from it, then we automatically get a recession number of -0.9% for GDP growth.

As we get closer to the U.S. Presidential election and to the first day of 2013, the press has paid closer attention to the tax cuts and government spending initiatives being reversed, because of the recession implications…so much so that January 1, 2013, is now being referred to as the “fiscal cliff.”

Just this week, the U.S. Congressional Budget Office (CBO) put out a note stating that Congress needs to address the fiscal cliff or the U.S. economy could be in a recession in the first part of 2013.

Of course, the issue will most likely not be addressed until right after the election, giving Congress very little time to act. (It might not matter anyway; a recession-plagued Europe, a slowing Chinese economy, and a slowing U.S. economy might put us in recession before 2013). (See: Economic Growth in the Second Half of 2012 to Deteriorate.)

It’s ironic that the combined end of the payroll tax and government spending incentives are referred to as the fiscal cliff, because of the assumption it will surely send us into a recession. But should we look at this differently? Should we say yes, let’s end the payroll tax cuts; let’s end government spending? If we did let the initiatives lapse, the U.S. would get its first “light version” of austerity measures.

We can look at most of recession-plagued Europe and say that it’s a mess. But Germany at least was attempting to rein in some of the massive government spending and debt that got us all into trouble in the first place.

It can be argued that Germany’s austerity measures went too far and plunged most of the eurozone into a recession. But here in the U.S., we are not even attempting to pay down our massive debt, which stands at over $15.7 trillion today.

Over the past months, in theses pages, I have made the prediction that the U.S. will experience its fifth straight consecutive year of trillion-dollar deficits in 2013.

In the end, I believe most of these tax cuts and government spending programs will remain, adding to the problems of rising massive debt. I have been also predicting that, by the end of this decade, the official U.S. national debt will surpass $20.0 trillion. I think I was too conservative—we will hit the number much sooner than 2020.

Personally, I believe many areas of the U.S. economy never exited the Great Recession of 2008. The U.S. employment numbers mask what’s really going on in this country, because they exclude people who have given up looking for work and those people stuck with part-time jobs who really want full-time jobs.

Rising government debt and expanding money supply; we can’t hold-up the U.S. economy forever with these two principal sources of support. I guess the real question has become, “How long can we go on masking the recession?”

Michael’s Personal Notes:

Like a household selling its personal belongings to pay its debt, some eurozone countries are leasing their historic sites to pay their debts.

I have been writing about the European debt crisis. Besides the unemployment rates being at elevated levels in the eurozone, many southern eurozone countries have such high debt levels that they are literally running out of money.

To pay down some of the debt and to prevent from defaulting on their debts, Greece is thinking of selling its islands.

While Greece hopes to hold on to its national treasures and what made the country what it is today, another southern eurozone country is going the leasing route.

In the eurozone country of Italy, the government of Sardinia is initiating a program to create 30-year leases to interested investors who would like to restore and create exclusive hotels and resorts with the country’s historic lighthouses (source: The Telegraph, May 23, 2012).

There are 15 such picturesque lighthouses nestled in coves overlooking some of Sardinia’s major tourist areas and some of the most beautiful ocean and beaches in the world.

The government does not have the money to restore these sites, and since they are only accessible by boat, they have been left abandoned; the problems of the eurozone taking precedence.

However, one Italian businessman finally convinced the government of Sardinia to lease one lighthouse to him. The businessman pays the government rent, which helps the government pay its debts to the eurozone.

Not only did the businessman restore one lighthouse, but he also converted it into a hotel where tourists feel like they have their own little island resort during their stay.

Since the government needs more money to appease the eurozone, they have thrown open the doors to any foreign investor; the European debt crisis demands more austerity.

This might actually be better for the government and for people in general. Keeping empty lighthouses doesn’t help anyone, while restored ones pay rent and there is further money generated from tourists visiting them and staying on the islands.

The only fear I have is that this talk of Greek islands and now Italy’s lighthouses doesn’t lead to eventual sales. The European debt crisis will hopefully not escalate to the point of countries in the eurozone having to sell their identity to bondholders. That would be a crying shame.

Of course, before they get to that point, one can see these eurozone countries exiting the eurozone instead of conceding to such demands.

Where the Market Stands; Where it’s Headed:

It’s a totally ridiculous situation…

This morning, the yield on the 10-year U.S. Treasury hit a low of 1.77%. As the situation in Europe continues to deteriorate, as investors see growth in China coming down fast, investors are flocking to the “safety” of U.S. Treasuries. This is where it gets confusing.

The U.S. is a stone’s throw away from its own recession. So why would investors flock to U.S. Treasuries for safety? It’s a very simple answer. The U.S. central bank is the only one in the world that openly said, “If the economy gets worse, we will expand the money supply again.” That’s not an exact quote from the Federal Reserve, but rather my ballpark understanding of what they are saying. Obviously, other investors see it the same way, because they are buying 10-year U.S. Treasuries below the inflation rate!

In the eurozone, Germany will not let the European Central Bank (ECB) print money. Hence, the run on European banks and the blatantly difficult eurozone economies.

In the wake of the 10-year U.S. Treasury hitting a new low today, something different is happening. Gold is up $28.00 an ounce as I write. Usually, as the yield on the Treasuries falls, gold falls in price. Maybe investors are catching up to the fact that the only way to pay back these Treasuries is with even more inflationary money printing. (Also see: Paying the U.S. Government to Hold Your Money.)

What He Said:

“As investors, we need to take a serious look at our investment portfolios and ask, ‘How will my investments be affected by an American-grown recession?’ You should take what precautionary steps you can right now to protect yourself from a recession in 2007. Maybe you need to cut your own spending or maybe you need to sell some stocks that will take a beating during a recession. You know what tidying up you need to do. Don’t procrastinate…get to it now. And please remember: Recessions can happen quickly, stock markets don’t go up during recessions, and the longer the boom before the recession, the longer the recession. Just based on my last point, we have plenty to worry about in 2007.” Michael Lombardi in PROFIT CONFIDENTIAL, November 13, 2006. Michael was one of the first to predict a U.S. recession, long before Wall Street analysts and economists even thought it a possibility.