By Charles Biderman
As we get ready for Thanksgiving, I have a great deal to be thankful for in my personal life. But as to the world, particularly the global economy, there does not appear to be much to look forward to as we approach year end.
Before I talk about our fiscal cliff, the rest of the world seems like bad news. It looks to me as if Iran is hell bent upon creating a war between Hamas and Israel that takes attention away from Persian nuclear weapon building. Greece and Spain are going no where fast. And Japan is now committed to destroying what is left of its economy by undertaking even more massive money printing.
Then there is the fiscal cliff nonsense. Am I alone is noticing that most of the media appears focused on taxes as a fairness issue, rather than how to cut bloated government spending. Today’s Wall Street Journal says without a deal taxes will go up by about $400 billion and spending will go down by all of $100 billion. So if spending cuts are only $100 billion – out of a $3.5 trillion budget – and taxes go up by $400 billion – compared with $2.4 trillion currently being collected – how is that about spending at all?
If we go off the so called cliff, government spending supposedly will get cut by a miniscule $100 billion. In other words, the cut in government spending that is supposedly first and foremost in all the fiscal cliff discussions will be less than 3% of a massively swollen budget. And to make that $100 billion cut even more of joke, in all likelihood the already committed to growth in entitlements will swamp any cut in spending.
So the so called fiscal cliff is not really about reducing government spending. No, without any deal, taxes will go up by at least $400 billion, an increase of about 17% on the $2.4 trillion in currently collected taxes. That $400 plus billion swamps the $200 to $250 billion current year over year growth in after tax income before inflation. That means that if we go over the cliff, it follows logically that we will be in a recession. Remember I define a recession as declining year over year after tax income, having nothing to do with government generated GDP BS numbers.
Even if there is some “deal”, and taxes only go up by $200 billion or half the cliff amount, that means the government will still confiscate virtually all of the increase in after tax income and certainly more than any after inflation gain in incomes. Given the slumping rest of the world and the slowdown in planned capital spending, it will be virtually impossible for the US to avoid a recession even if taxes only go up by $200 billion.
I keep harping on and wondering why there is no ongoing conversation about the quality and efficiency of government spending. As I said before, it seems to me the all of the media and market analysts, do not even ask why should we give more of our income to a government that uses $3 to $4 to provide $1 of actual services? The answer is that they are not focusing on, or aware of, of these real time numbers.
Am I alone in saying that fiscal cliff conversations focusing only on tax rates are hiding the real problem. Are those not talking about government spending as the major issue simply ignorant? It could be that in an economy where nobody cares about real time data, that reality is just not as important as feeling good about ourselves, whatever that means and implies.
Stopping the increase in government spending is the only one real solution to the fiscal cliff. A solution that focuses mainly on tax increases will end the fiscal cliff conversation, but will certainly not keep us from falling off the cliff. So without serious spending cuts, we will keep ignoring reality, hoping for a miracle and we will keep kicking the can down the road. At some point, of course, the can will become too heavy to kick.
President & CEO TrimTabs Investment Research
Portfolio Manager, TrimTabs Float Shrink ETF (TTFS)
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