There’s a lot of kerfuffle about the “fiscal cliff” right now. And frankly, investors would do well to ignore it.
I recently penned a post on this topic myself, with the headline, “Why the Fiscal Cliff Is Meaningless.” My reasons included:
- it’s not do or die, despite the hysterics;
- “kicking the can down the road” will do just fine;
- the GOP has too much incentive to make a deal; and
- a true catastrophe was averted with the debt ceiling, so why worry now?
Read the entire piece for more of my views, if you care. But more important, don’t take my word for it — read what else is out there. Here are a few goodies I have been reading:
Legislators Have No Reason for a Standoff
Cyrus Sanati at Term Sheet recently wrote “The Fiscal Cliff May Be Overblown.”
And his reasoning isn’t based on the fact that we could go over it without a hitch; in fact, he warns of some severe risks. But he writes, “It is simply irrational for either side to address the deficit in any meaningful way given how cheaply it is for Washington to borrow money.”
In other words, don’t expect a big fight because frankly Washington has no incentive to care that much.
Markets Aren’t Worried of a Deal Failure
Neil Irwin over at the Washington Post’s WonkBlog recently wrote that “Markets aren’t very worried about the austerity crisis.” (That’s the new name that Ezra Klein & Co. have decided to call this thing, rather than keep using the cliff analogy.)
His reasons include:
- No double-dip recession seems to be priced in. Just “routine bumps in the road.”
- Volatility is low, as measured by the VIX.
- Austerity isn’t urgent (echoes of Sanati’s article here)
- Investors trust America, as evidenced by low Treasury yields.
Again, that’s not to say going over the cliff would be OK, just that Irwin thinks markets are optimistic about a deal. Furthermore, Irwin wrote previously about the harsh reality of even short-lived austerity should a deal fail to come through. But he’s firmly in the camp of those who expect this thing to be wrapped up positively.
‘Sense and Nonsense’
ThinkMarkets, a blog run by NYU academics, recently posted a rebuttal to the popular Wall Street Journal infographic that shows the dire dollar amount tied to the fiscal cliff in detail. In “Fiscal Cliff: Sense and Nonsense” they posit these a few realties about the situation to temper anyone’s expectations. Here’s my synopsis:
- It’s dramatic to use figures from 10 years of austerity, but even if Congress fails to act in the next few weeks, do we really think they will do nothing for another 9 years?
- Cuts aren’t that bad. Tax increases are, so it’s not a “this or that” scenario. There’s no reason to expect stalemate.
- Furthermore, nobody has prepared the electorate for serious spending cuts. And the economy can’t bear deep cuts. So expect grandstanding about “efficiency” that is eventually undone by future legislation — especially if a geopolitical crisis prompts a need (or desire) for higher defense spending.
- Look, this is just based on today. Things can and will change, and a lack of political will means nobody will take a hard stance to get something big done. Expect a lukewarm compromise and delay tactics, like always.
GOP Holding Itself Hostage?
For a more provocative and cynical view, the progressive Campaign for America’s Future recently released an op-ed by Richard Eskow that likens the fiscal cliff to the phony hostage situation in Mel Brooks’ Blazing Saddles.
In short, Obama and the Democrats have had this gun pointed at them for the past year or two — all thanks to GOP brinksmanship. But now that the president has won re-election and Democrats gained a little ground in Congress, now Republicans basically have a gun pointed at themselves and are “threatening” to shoot.
In other words, simply calling their bluff will be enough since nobody believes they will actually pull the trigger.
Some Conservatives Say ‘Walk Away’
And lest you think that this is just the pink commie bastard in me trying to warp your point of view, consider the flip side of the argument: Some conservatives (like this one from RedState.com and again here) think that going over the cliff isn’t a bad thing.
Summed up: “I consider the 2013 sequestration to be superior to any ‘Grand Bargain’ likely to be struck for the simple reason that a ‘Grand Bargain’ will take place over a decade.”
In short, many deficit hawks doubt that any meaningful progress will be made on the deficit through negotiations… so tear the Band-Aid off and its better for the country in the long run.
Business Insider compiled the PowerPoint deck of UMKC economist Stephanie Kelton, and it’s a great little presentation. The gist: Government deficits are public sector surpluses. So don’t use conventional household math and let’s not go down the austerity rabbit hole like Europe.
After all, we’ve seen how that works out.
A better scenario, according to Kelton, actually involves a big infrastructure spending push that puts people back to work and props up the private sector to help generate tax revenue — everybody wins.
In other words, focusing on reducing deficits by cutting spending or increasing taxes along is awfully shortsighted.
Take the Long View
In a post for U.S. News & World Report’s Debate Club blog, Alan Barber of the Center for Economic Policy and Research says “The Fiscal Cliff is an Exaggerated Crisis.”
His stance can be summed up in one sentence: “While long-term deficits are a concern, we don’t have to act by January 1.”
In other words, why not take a modest approach to things and see how the economic recovery and deficit shake out rather than cut bone-deep into Social Security and Medicare? After all, a large reason deficits have grown dramatically in the past five years is the recession — so a recovery could have the opposite effect.
I could spam you with further links, but that’s plenty for this week of Thanksgiving. Share your own below!
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.