Are Prepared for the USA Fiscal Cliff

Dear PGM Capital Blog readers,
This weekend I would like to use the opportunity to talk with you about the USA-fiscal cliff and coming debt ceiling.

During a speech before the House financial Service committee at the end of February 2012, the USA Fed chairman Mr. Ben Bernanke, was the first person to use the term
“fiscal cliff”.

Full story:

The “United States fiscal cliff” refers to a large predicted reduction in the budget deficit and a corresponding projected slowdown of the economy if specific laws are allowed to automatically expire or go into effect at the beginning of 2013.

Current laws leading to the fiscal cliff:

The following provisions of current laws are most involved in the fiscal cliff:

  • Expiration of the two-year extension of the Bush tax cuts provided for in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010;
  • Reversion of the Alternative Minimum Tax thresholds to their 2000 tax year levels;
  • Expiration of the 2% Social Security payroll tax cut, most recently extended by MCTRJCA;
  • Expiration of federal unemployment benefits, most recently extended by MCTRJCA

Nearly all proposals to avoid the fiscal cliff involve extending certain parts of the 2010 Tax Relief Act or changing the 2011 Budget Control Act or both, thus making the deficit larger by reducing taxes and/or increasing spending.

Here below you’ll find a video showing the most probable tax increase in 2013 for US citizens as a consequence of the fiscal cliff.

On top of the above the USA is also approaching its debt ceiling of USD 16.4 Trillion by mid December 2012.

From the above we can conclude that the USA is Check-mate regarding its national debt and budget deficit and has to choose between the  (two) following options:

Option 1

  • To choose for a better Economy in the short-term, paid by higher debts, budget and deficits.

Option 2

  • To choose for decreasing debt and deficits paid by higher taxes and spending cuts, which will slow down the economy or even bring it into recession in 2013.

So the USA has to choose between the hard pill of debt decrease in the short term in the hope for a better Economy in the longer term or to continue to live far above its means by keep on borrowing.  The first option will eliminate the confidence of the international bond investor in USA-Treasuries and the US Dollar, with the consequence that they will no longer be willing to keep on lending money to the USA and will demand higher yields.

When this happens, the FED becomes the lender of last resort, which will lead to (hyper) inflation and a flight out of the US-Dollar and other fiat currencies into Gold and Silver as a safe haven.

The issue of the fiscal cliff is a more political one, rather than an economic one, and during the current political campaign for the USA presidential election on November 6th 2012, Republican presidential candidate Mitt Romney indicates to be more in favor of
option 1, while president Barack Obama running for a second term is said to be more in favor of option 2.

The time line for the fiscal cliff shown below indicates a correlation between the fiscal cliff and important political issues and dates.

In accordance with a Goldman Sachs political and economic analyst, the combination of spending cuts and tax hikes will wipe out nearly 4 percentage points of economic growth in the first half of 2013 as can be seen from below chart.

Since the most optimistic predictions for the USA Economy for 2013, shows an economic growth of approx. 3% in H1-2013, it means that if congress does nothing the US Economy will go into recession in H1-2013.

Without wanting to mingle with internal US politics, it should be clear for everybody that the USA has reached the end of the road and that the can cannot be kicked further down the road. This implicates that the result of the coming presidential election of November 6th 2012, may be a crucial one for the USA and the coming four-year period will not be an easy one for the next USA president.

With interest rates near zero, any increase of the interest rate to a normal level will balloon the current USA debt of approx. 102% of GDP even more.

Ladies and gentlemen, in our opinion the USA has reached the end of the road and cannot kick the can further down the road. The time has come for them to deal with it.

Similar situation in other countries have shown that massive money printing invariably leads to hyperinflation and death of the fiat-currency.

With (up to now) disappointing Q3-2012, the coming presidential elections in the USA in November, approaching debt-ceiling in December uncertanties regarding earnings season Q4-2012 and whether or not the USA will go into recession in H1-2013, due the fiscal cliff, will increase the volatility in Global markets and will make them very reactive to political, financial and economic news.

For the sake of humanity we hope we’re wrong in our analysis and think that hoping for the best and planning for the worst is what people should do.

History has proven that those with Gold and Silver stored in countries with a history as safe havens, were the only ones who survived similar financial crises in other countries in the past.

Before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that the price of Commodities, Precious metals as well as the stocks of their producers can be very volatile and that sharp corrections may happen in the short term.

Yours Sincerely,

Eric Panneflek


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