Fiscal Cliff, and What's next

Happy Thanksgiving and Black Friday. Instead of Cyber Mondaying, take some time to educate yourself about the state of the economy.

First thing's first. I often get asked "what's this fiscal cliff everyone is talking about."

If you already know, bear with me.

The basics:

When times are economically good (like the 90's, and early 2000s) we (the government) has lots of tax revenues, so it can technically cut taxes (makes people happy) and spend all kinds of money on programs and defense and all that good stuff (makes government happy). When times are not so good (like the last couple years) we (government)  don't have enough money to keep paying for all those things we used to, but its the government, and it is really hard (read SLOW) to change our spending habits. So we over-extend, rack up debt, and get in financial trouble.  Recessions happen, people lose their jobs, markets crash. People's pensions get cut in half.

Enter year end 2012. Here is what happens on New Years:

1. Bush Era Tax Cuts expire at year end.  (ESTATE TAX GOES BACK TO $1 million)
2. Payroll tax cuts go away, Alternative minimum tax changes, other tax breaks go away.
3. Budget Control Act of 2011 (remember the Debt Ceiling?) automatic spending cuts kick in. 
4. Obamacare taxes take effect (increases capital gains tax, dividends tax)

Analysis:

These, amongst others, are the forces pushing the economy and nation up to a "fiscal" cliff.  The general concept is taxes go up and government spending gets automatically cut. The question is what happens when, and if, we go over the aforementioned "cliff."

The Republicans don't want to raise taxes (although they are wavering in their anti-tax pledge) and want "entitlement program" reforms, and the Democrats want to raise taxes and keep their "entitlement programs" (read Obamacare, social security, etc.)

If we go over the cliff, the markets should crash, unemployment should rise again, and we should  have another recession. Or would we?

The last few years have been lean, no question (unless you are one of these kids). These economic reforms sure seem like an anti-stimulus package. But is this what the country needs? We might just cut our deficit, clean up entitlement programs, cut the pork, and prevent having to do this all over again a few years down the road. Tough call. I don't think anyone can honestly say they want to pay more taxes, but a good many don't want to see our debt hamstring the next generation either.  Hopefully they meet in the middle. 

Take Away:

Ok, what does this mean for you and I. If you work in a government funded agency, (for example, scientific research funded by government dollars) you better hope these entitlement cuts don't come down: your job might be at risk. If you are one of the millions of retired Americans who did everything right, saved and maxed out your pension, you better hope the forces in Congress do not push us over the cliff. If your portfolio is still in tact after 2008, it likely cannot handle another huge hit. 

No one knows what is going to happen. However, many people are taking advantage of the current estate and gift tax exemption levels, as well as cashing in on the current, likely lower capital gains rates.  I don't think the estate tax will revert back to $1 million: that just hurts too many people. I do, however, feel the Obamacare taxes on dividends and capital gains will come into effect. Any financial planning based on the fiscal cliff fears is really a gamble, much like investing in the stock market (unless you have insider information, of course).

We have about a month to go. Time to place your bets. 

Congress leaves us hanging, and Tech companies have all the money.

In the days after the crisis of a US default being remedied, the market is still collapsing, and August 4th was one of the worst single days in stock market history. All the hard work Congress put in didn't do much to help the investor or those counting on their retirements to support them in their golden years.

So what do your representatives do, in this time of economic crisis? They go on vacation. Early.

Job numbers are ghastly. When jobs are bad, we try to get more educated. Good luck, seeing as the cost of education has outpaced just about every other comparable sector.

So, in times of crisis, there are no jobs, you can't pay for school, and Congress is on vacation. What to do?

What seems interesting is where the actual money is, and what people are spending it on.
Apple allegedly has more money than the US Government. Or maybe it does not. Either way, tech companies, your Apple/Google/Facebooks of the world have a ton of money, and they take in more than they spend, unlike the U.S. Government. But what, in real terms, are they adding to our economy, except distractions and ipads?

Here is an excerpt from the Founder of Facebook's sister, Randi Zuckerberg, on leaving the most profitable website in history and starting her own new venture:


"My goal is to launch my own innovative programming and work with media companies to develop their programming in new, and more social ways."

What does that even mean? Her brother is one of the world's youngest billionaires, and I have no doubt she is also independently wealthy, and will only become more so as a result of her new venture. But why?

These companies don't make guns or butter. They do not grow corn or pave roads. If your power goes out, your computer crashes, or your internet slows down, they disappear.

However, as much as I despise them, these internet companies and "social media" outlets have become a necessary expenditure for business and commerce. Society now spends the bulk of their waking hours using some form of media. The phone book is becoming obsolete, so now you "google" things or see what sort of review a business has online. If you are invisible in that world, someone else will gladly take what could have been your clients and make them their own (hence why, after years of being anti-website/blog, I made a blog).

Wait, I thought Google and facebook were free? How do you think these companies make money? Advertising, and it isn't cheap.

The story I always heard was the back of the phonebook lawyer gets 80% of the fist calls, the next guy gets 15%, and everybody else picks up the scraps. After reviewing one facet of my own firm's internet advertising, I discovered we were paying about $400 per actual view or click from a potential client, and of those views,  this avenue had generated a grand total of 0 clients since we started using it in 2008.

The takeaway: when thinking of your retirement or how to make your current business grow, there are a slew of new marketing, advertising, and customer feedback mechanism's available. I am very against buying into the hype of Paying a Randi Zuckerberg or the like a king's ransom to develop my company in "new, and more social ways," but maybe that is what is necessary to compete in an internet-driven world. Talk to a professional before you make any decisions, and then talk to a couple more.

Debt ceilings, and taxes. Where will the money come from?

How bad does that chart look? And that is pre-deal.

If you haven't heard what is going on, here is a run down:

The government borrows money to pay for things. It has over-extended itself.  It needs to borrow more just so it can pay for what it has already committed to, as it is not taking in as much tax revenue as it has committed to pay out. However, to borrow more it needs permission.

A partisan (and tea party factioned) Capitol Hill saw this looming crisis as a chance to lobby and push for reforms, budget balances, and tax or no tax agendas.

We have until tomorrow to fix it, else the government won't/can't pay its bills, the markets will likely keep crashing down, our credit rating goes worse, the dollar is further devalued, interest rates spike, social security checks could not come...all bad things and more.

But it was avoidable, and this is why you, the conscientious planner should call and or write your Congressman either way this thing turns out.

Whenever a silly thing like this happens, your retirement gets hit. You could've lost 10% last week, maybe more. What would that have paid for? 2 years of retirement? The boat or RV you have always wanted?

Maybe. Or maybe you hedged and bought gold and silver! What great foresight. But for lots of folks, your golden years took a hit this week, after taking a big hit a couple years ago.  Not to mention the jargon filled "QE1, QE2, and their youngest sibling, QE3" that we have had the pleasure of experiencing, which the government thought that by calling printing more money and further devaluing the dollar "quantitative easing," no one would notice.

Here is the secondary problem:
 
Even if the Republicans are successful in a "no tax raises" compromise, the revenue has to come from somewhere. Congress is too scared to raise taxes, because they want to stay in office. Way too expensive to not get re-elected. Take a step down, to the states: State reps and senators won't raise taxes, because its way too expensive to not get re-elected.

What's left? Cities and municipalities. How do they raise money? Property taxes. Who sets these? Appraisal districts, who are not elected. No accountability, and very little recourse. Have you tried to protest your property taxes/valuation recently? Good luck. Having a bad day, and want to see people more angry than you are? Walk into a county appraiser's office. Its awful.

So, that house you have finally paid off, that second home,  and that little investment real estate you and a partner bought in the 80's just became a little more expensive to own, out of thin air, even in a depressed real estate market. Make sense? It shouldn't, but tax revenues are going to have to come from somewhere, and they will come from the bottom if Congress doesn't force them at the top.

There is no such thing as not raising taxes in a time when revenue is needed as badly as it is now.