Fiscal Cliff

Courtesy of Russ Winter of Winter Watch at Wall Street Examiner

My underlying game theory holds that the great majority of income earned by consumers, and especially the big crony capitalist corporatist sector is directly attributed to government largess from the massive unsustainable deficit spending. Quoting from Charles Hughes Smith: "Roughly 40% of all households receive a check or equivalent from the Federal government, while at the top Power Elite crony capitalists skim capital gains and pay an average of 17% of all income."

Adding insult to injury, banks are willing to lend once again to overstretched consumer. Consumers are now borrowing well in excess of their income gains and have been doing so for a year and a half. The credit bubble du jour, where lenders have found a new scam to work, has been student lending. Some might argue (I think correctly) that big student debt hurts normal new household formation, and thus housing demand.

Much of the government's borrow, spend and transfer largess is scheduled to run off automatically without a major legislative effort to extend them. What is now required is going to be a bipartisan effort to deliberately budget another FY 2013 trillion deficit in an election year. That would actually have to be legislated, passed and signed by the President. The default steep cuts and tax increases are automatic, if there is no legislation.

I posted in comments a few days ago an email I received from the progressive group MoveOn.org on the issue of extending the Bush tax cuts. It is a fight to the death for MoveOn. I am also receiving emails from Tea Party sources that also make spending a fight to the death issue. A strange political compromise around continuing the status quo spending and tax regime almost looks impossible to implement.

The next Nomura chart shows the effect of loopholes in the corporate tax code. When you hear that the statutory rate is among the highest in the world, that would only be for those who don’t have tax lobbyists or the best tax accountants and lawyers. IBM has had a substantial stock run, and Tuesday reports flattish YoY revenue, and still faces the fiscal cliff. Incredibly the tax rate compared to last year was down five points from 25% to about 20%. Too much of the value of these companies are the tax angles, financial engineering, and government largess.

Nomura puts the effect of the fiscal cliff at almost 5% of GDP in 1H, FY 2013, which starts October 1, 2012. I would argue that government spending addiction is so ingrained that the GDP drop will be much larger depending on the degree of the cutbacks either in terms of taxation and largess. Still this gives us a good idea of the impact of trillion dollar deficits year after year. It’s back to the Herb Stein sustainability theory once more. Put simply, if the US Government can’t run these huge deficits, the addicted economy will swoon. And if it continues to run them, ditto.