Market Overview

The Fiscal Cliff: Why You Should be Angry

President Obama appeared on NBC's Meet the Press on the last Sunday of 2012. He once again made his case to Republican lawmakers regarding his proposed Fiscal Cliff deal. The key points were that a deal is not likely barring a sudden about-face by Republicans; and equally President Obama didn't seem too worried that we might ‘go over' the cliff and not address the problem until 2013.

Throughout the rest of the weekend various reports emerged that a compromise was close, then conflicting reports surfaced that suggested we weren't any closer to reaching a deal. With the dawn on New Year's Eve a deal is still not completed and seems less likely with every passing hour. Financial markets are indicating their displeasure as futures were down sharply Friday and indicating more of the same before the open on the 31st.

This entire Fiscal Cliff debacle reminds me of something I heard once: if ‘pro' and ‘con' are opposites is then ‘Congress' the opposite of ‘Progress'? Judging by our lawmakers inability to compromise and settle something both sides agree is a problem I would have to agree that it is.

Let's not get caught up too much in what is going on this second and take a moment to remember what brought us to the edge of the cliff in the first place. In August 2011, when our elected officials were bickering over raising the debt ceiling, they contrived a bi-partisan commission whose goal was to solve our spending problems as a nation. Not surprisingly they failed, as they often do, and the result was automatic spending cuts and expiring tax cuts, which all take effect at midnight on December 31st. A crisis of our politicians own creation to which they have no solution.

It is obvious that the only way to solve this is through compromise, which means both increased revenue (a euphemism for more taxes) and spending cuts. Republicans are against the increased taxes, generally speaking, although some are willing to compromise. Personally, I am not a proponent of more taxation, for the rich, the middle class or whoever, but in this case I think we unfortunately need to realize the reality of the situation. Perhaps making the increased taxes phase out at some point would be more palatable to Republican holdouts.

Regardless of which side of the aisle you agree with, and at this point its difficult to make a case for either side, we need to remember this is our money they are talking about and a problem that they created with their out of control spending over many years and administrations. It is not a Republican problem. It is not a Democrat problem. It is a political system problem. We need to make a stand as a nation and call for sanity in spending. I don't think there are many Americans who are opposed to paying a fair tax rate (however that is decided), but not when their hard earned money goes towards funding pork, pet projects, cronies, unpopular and possibly unnecessary foreign wars based on misinformation or otherwise wasted.

To wrap up 2012 on a final sour note, unless something is changed to extend the payroll tax holiday you are likely to still see a smaller paycheck in 2013 as payroll taxes are set to once again go back to 6.2% from the current 4.2%. Don't forget that your very job and the economy could be at risk if a deal isn't reached, not to mention the markets hate not knowing so your investments could also see volatility to the downside. If you're expecting a pay raise… don't hold your breath! If that isn't enough to make you a little angry consider that while you lie awake at night wondering how you're going to pay all your obligations, the pay freeze was lifted for federal employees, meaning Congress (the least effective Congress in generations from the perspective of number of pieces of new legislation passed) will get a pay raise before the end of the first quarter 2013. Happy new year!

About the author: Michael Prus is the President and Founder of Scale Investment Group, LLC, a registered investment advisory firm based in White Lake, Michigan. Scale Investment Group is a leader in providing low-cost institutional investment services, like 401(k) and 403(b) plans, to small and mid-sized organizations and also manages money for private clients. The firm is a champion for small investors promoting low-costs and transparency of the investment advisory industry. For more information visit scaleinv.com or contact Michael directly at mprus@scaleinv.com.

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