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Mayans Forecast Boehner Fail?

 December 21, 2012 12:57 PM


Is it possible that the Mayans, in their infinite wisdom, somehow anticipated that Boehner would fail to bring any legislation that might patch the cliff? The Boehner "fail" happened last evening, it was already 12/21 in Asia. So far, the Mayans' timing for the Beginning-of-the-End is spot on. The cracks in the system have been spreading ever since the fateful no-vote in Congress last night. At this point, we are faced with the very real prospect that those cracks will get longer and wider in the next few days. If this happens, people will start falling into the widening rifts.

I have watched, read and listened to almost all of the endless discussion on the topic of the cliff. I'm convinced that there is not a single commentator that has properly evaluated the economic consequences of failure to address the deadline that is now just days away.

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All the analysis I've looked at considers the consequences to the 2013 economy of changing tax rates and reduced spending that will occur if no deal is reached. But this does not include the consequences of the retroactive tax increase for 2012 that will take place.

I wrote about this on November 14 (Link). To repeat, if we go off the cliff, as many as 60 million taxpayers will be forced to file a separate Alternative Minimum Tax form (unbelievably complicated). Of the 60 million, as many as 33 million will be faced with a higher 2012 tax bill. This will result in some folks digging into their pockets to pay Uncle Sam the extra $3,000 to $4,000 this will cost (a disaster for some). Others, will get a smaller refund that they think they are due (bye-bye to that trip to Disneyland). The numbers are big. The "surprise" 2012 tax that the cliff will bring comes to a very lumpy $100-120 Billion.

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The drag from the 2012 AMT look-back will be felt in the first quarter. It will "feel" as if this is a 2.5% reduction in 1stQ GDP just from the AMT. By itself, the retroactive AMT tax will produce negative economic growth. ADD to this, the fiscal consequences that kick in on 1/1/13. If spending is adjusted by this much, it will translate into fall in economic activity in excess of 4% in the 1stQ.  If the year gets off to such a dismal start, the US will face a technical recession in the first half of the year, the full year will be lucky to breakeven.

A very steep drop in activity in the USA for the next three-months is not in the market's mind today. It's as if investors have forgotten that Europe and Japan are already in recession and China is still a question mark. Now we face the prospect of a very hard landing for the US.

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