May 11, 2012

Fiscal Cliff

May 11, 2012

Fiscal Cliff

If his most recent press conference, Bernanke warned that there was nothing which the Fed could do regarding the “fiscal cliff.” Bernanke said:

And I am concerned that if all the tax increases and all the spending cuts that are associated with the current law which would take place, absent any Congressional action, that would occur on January 1st that that would be a significant risk to the recovery. So I am looking and hoping that Congress will take actions that will address … both requirements of good fiscal policy.

Bernanke is referring to the fact that under current laws, at the start of 2013 a bunch of things have been legislated to happen. These are:

(1) the end of the “Bush era” tax cuts the most notable of which is an increase from 15% to 43.5% in the top tier of tax on dividends,

(2) a 3.8% tax surcharge which combined with the expiration of the “Bush era” tax cuts would move the top capital gains rate from 15% to 23.8%, and

(3) massive spending cuts.

What we have is a formula for disaster. Those tax increases on dividends and capital gains are going to have a very significant negative effect on equities and may also drive interest rates up as investors demand real positive after-tax returns.

Bernanke is making one gigantic point: There is nothing which the monetary policy of the Fed can do in face of insanely irresponsible fiscal policy. Forget everything else. If one increases taxes and decreases spending per what is in place then GDP will take a sizable hit because both consumers and government will be spending less.

I have no idea what anyone is talking about the 1%’ers when we already have in place a great plan to increase their taxes.

The worse part is that there is an election coming and the imbeciles in Congress cannot be bothered with this trivia before mid-November. Reelection is more important to them than the economy. This is, in my mind, the heart of the problem.

Also, I apologize to imbeciles for the politically incorrect act of comparing them to Congressmen.