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The Cure Might Be Worse Than Falling Off The Cliff

 December 17, 2012 06:14 PM


(By Commodity Trade Mantra) Only 17 days to the Fiscal Cliff deadline & before the US plunges over the Cliff into deep recession, but there seems to be no sense of urgency. In all probability, what the Political Leaders & lawmakers may concoct at the last minute in pretense to save the US from immediate Fiscal Cliff pain may turn out to be a more frightening & a more severe strain of the currently looming crisis at the Fiscal Cliff. The US has always preferred massive doses of painkillers, irrespective of its drastic side effects. 

[Related -Initial Jobless Claims Rose Unexpectedly]

In my opinion, its time the US faces reality & goes over the Fiscal Cliff. It may open a lot many eyes & minds – Also open more doors rather than the flurry of doors closing rapidly due to the tried & repeatedly failing methods of the past few years. The bad news is, in large part, we've seen the market ignore relatively good news in the economic data stream as we focus on the Fiscal Cliff.

While a deal is expected to be reached eventually, a drawn-out debate – like the one seen over 2011's Debt Ceiling - can erode confidence. The divide between Republicans in the House and Senate has become increasingly apparent in recent days. Publicly they say they are still far apart, but that is to be expected: serious negotiations seldom take place in front of cameras. While House leaders have roundly rejected any strategy that would let tax rates rise, the ranks of Senate Republicans who are willing to accept a small tax hike and continue the fight over spending early next year continue to grow. 

[Related -All Quiet on the Record High Front]

House Speaker & the lead Republican negotiator, John Boehner has drawn a rhetorical line against higher tax rates for top earners, even as he negotiates with President Barack Obama, because he can't be seen as conceding too much too soon. A slow-walk approach to averting more than $600 billion in tax increases and spending cuts set for January is crucial for Boehner whether the Fiscal Cliff talks succeed, according to Republicans in Congress. Boehner is maintaining a tough posture, saying the President "isn't serious" about spending cuts, without ruling out a deal on taxes to shield his party from criticism. 

Almost half of Republicans now say Obama has an election mandate to raise rates on the rich, according to a Bloomberg National Poll. Boehner returns to his home state of Ohio for the weekend but he and the rest of the legislators will return Monday to work the congressional equivalent of overtime on reaching an agreement to reduce the nation's chronic federal deficits and debt by the end of the year, then less than 14 days away. The inability to reach a deal so far reflects the ideological divide between Democrats and Republicans over the size and role of government. Fears that the Fiscal Cliff negotiations could end without a comprehensive agreement, like the deficit reduction talks between Obama and Boehner in 2011 is causing jitters among consumers and investors. Stock prices fell at Friday's opening after a down day Thursday as it became clear neither side appeared willing to budge.

The Issue over the Fiscal Cliff issue:

The tax rates, lowered temporarily during the administration of former President George W. Bush and extended in 2010, are the major sticking point. Obama insists on raising additional revenue through tax reform and higher rates on top income brackets as part of a package that would include spending cuts and cost savings from entitlement programs. His plan is to extend most of Bush-era tax cuts set to expire as part of the Fiscal Cliff, but letting rates on income over $200,000 for individuals and $250,000 for families return to higher rates of the 1990s.  Republicans want them kept in place for all taxpayers while Democrats insist they be raised for high earners. 

The failure of Democrats and Republicans to break the impasse over the Fiscal Cliff is raising the possibility of Congress going beyond the year-end deadline to agree & implement a plan to avert steep tax hikes and budget cuts that experts fear could push the nation into another recession. The two sides may eventually agree in principle on a Fiscal Cliff deal but run out of time to draft and pass the legislation implementing it. Congress could then pass a temporary measure and work out the details in the following weeks. But a failure to even agree in principle over the Fiscal Cliff would prevent a temporary extension & the US would then run into a hard-and-fast deadline of December 31, when a lot of things expire – And all Hell breaks loose. 

In mid-2011 amid budget talks with Obama that failed, Boehner faced a rebellion from members of the anti-tax Tea Party wing of the party who warned that they wouldn't vote for a tax increase as part of a deal to raise the debt ceiling. A deal that includes tax rates "could create more churning in his caucus and mean he doesn't get the votes necessary" to renew his speakership in January, said Maryland Representative Chris Van Hollen, the top Democrat on the House Budget Committee. Boehner's removal earlier this month of three Tea Party- backed Republicans from their committee posts is also creating tensions. On Dec. 3, FreedomWorks, a group that supports Tea Party candidates, issued a statement calling the move a "remarkably hostile act" and asking members to call Boehner's office to "stop the fiscal conservative purge." 

By all accounts, Boehner appears to be in a stronger position with his rank-and-file than he was 2011 during the debt-ceiling debate, when it was uncertain whether House Majority Leader Eric Cantor of Virginia would back the speaker in a deal that included new revenue.

Republican reluctance to raise tax rates stems from the conservative quest to shrink government and the percentage of federal spending as part of the overall economy. Traditionally, raising taxes to fund increased spending is much easier than lowering rates to reduce the money feeding the federal belly. Democrats argue that Republican efforts to reduce federal deficits through cost-cutting alone would worsen an already difficult situation for middle-class Americans facing stagnant wages, rising costs and reduced opportunity. 

No deal reached in Obama – Boehner Fiscal Cliff meeting:

President Barack Obama and House of Representatives Speaker John Boehner held a "frank" meeting Thursday for about 50 minutes at the White House to try to break an impasse in negotiations over the looming Fiscal Cliff, tax hikes and spending cuts set to kick in early in 2013. The meeting, also attended by Treasury Secretary Timothy Geithner, was announced after frustration broke out on both sides at a lack of progress and stocks turned negative due to fears the economy could dip into recession again if politicians fail to break the Fiscal Cliff gridlock in Washington. 

At a meeting earlier last Thursday, Obama's top economic adviser, Gene Sperling, delivered a downbeat message to Democratic senators about the status of the Fiscal Cliff talks. A Democratic aide described the presentation as "bleak," saying Sperling told the senators that "we don't have anywhere to go until Republicans move on (income tax) rates, reported Reuters." Republicans offered similar gloom. "Based on the White House's current approach, it looks like we're in for a protracted conflict until the snow melts," Illinois Representative Peter Roskam said in an interview. "They (the White House) are pushing us over the Fiscal Cliff," said Roskam, a member of Boehner's leadership team. Before the meeting, Boehner told reporters the president has yet to offer a plan that "is truly balanced and begins to solve our spending problem." 

Republicans note that 71% of every tax dollar now goes to support Social Security, Medicare and Medicaid, as well as paying interest on the national debt, and they say the cost of those items would equal all federal tax revenue in 2026 unless changes are made. "The president wants to pretend spending isn't the problem," Boehner said. "That's why we don't have an agreement." Obama's top economic adviser, Gene Sperling, confirmed the gloomy outlook in a closed-door lunch meeting Thursday with Senate Democrats, according to those present. 

Senior Senate Republicans, meanwhile, were at work on a fallback plan that would not significantly restrain the national debt but would at least avert widespread economic damage by canceling tax increases scheduled to take effect next year for the vast majority of Americans. That strategy calls for Republicans to capitulate to Obama's demand to let tax rates rise on wage and salary income for the wealthiest 2% of taxpayers. But the approach would also seek to thwart the Democrats by trying to block other steps that would increase taxes paid by wealthy taxpayers, including higher rates on investment income and limits on the value of itemized deductions. 

This strategy would produce only about $440 billion in new taxes and give the Democrats even less revenue than Republicans had previously put on the table. In his initial offer earlier this month, Boehner had said he could support $800 billion in new tax revenue. With a relatively low price in new taxes, the strategy, if successful, would represent a tactical victory for Republicans and shift the political burden onto Democrats to make greater concessions on federal spending.

Last Minute Deals:

"I'm not concerned about my job as speaker," Boehner said at a news conference yesterday. "What I'm concerned about is doing the right thing for our kids and our grand-kids. And if we don't fix this spending problem, their future is going to be rather bleak." The up-to-the-deadline negotiations are also part of the culture on Capitol Hill. Last year, Congress reached an agreement to extend the payroll tax cut days before it was set to expire. In 2009, Senate Democrats passed Obama's health-care legislation on Christmas Eve. "Ninety percent of lawsuits are settled on the courthouse steps the day of the trial," said Representative Lynn Westmoreland, a Georgia Republican. "What you are going to look at is a settlement coming around December the 29th." Nearly half of Americans — 49% — approve the President's handling of the talks, compared with 25% who say Boehner is doing a good job, according to an ABC News / Washington Post poll released last Wednesday. Meanwhile, a Bloomberg National Poll found nearly two-thirds of respondents, including nearly 50% of Republicans; believe Obama's re-election gave him a mandate to seek higher taxes on the wealthy.

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