Rodney Johnson | Monday, December 24, 2012 >>

Since the election the airwaves and newspapers of the U.S. have been filled with stories about the horror we all face if Congress doesn’t address the fiscal cliff! We must avoid this doom at all costs… Do anything. Just do something!

Ahem. I have a question: then what?

Let’s do a thought experiment…

The so-called fiscal cliff is a combination of automatic spending cuts (sequestered cuts from a Congressional deal back in August 2011) and a reversion of tax rates back to where they were on items such as income, dividends and interest.

The yammering and hair-pulling is all about the negative economic effects of cutting spending and raising taxes while we bumble along at anemic growth levels. According to both sides in Congress, there are obvious solutions.

For Republicans the solution is: don’t raise taxes, but do cut spending.

For Democrats it’s: don’t cut spending, but do hike taxes.

Of course, the likely outcome is something in the middle.

This is where the thought experiment comes in…

All the panic is about automatic spending cuts and tax hikes, but the solution is spending cuts and tax hikes? Hmmm.

Oh sure, the outcome will be that we have “targeted” spending cuts and tax hikes “only” in certain areas and on certain groups, but isn’t that still spending less and taxing more?

And who are these unlucky souls that get to be the targets?


Those receiving benefits (retirees and those of modest incomes) are certainly on the list, as are some government programs, like defense (which employs a lot of middle income workers).

Then there are those pesky wealthy people, the favored group that earns over $250k a year… Okay, they aren’t really wealthy. They’re “high earners on a national scale” (just don’t tell that to a family of four living in New York, paying for health insurance and private school).

And don’t forget those who receive interest income, or dividends, or capital gains. Those darn investors are going to get what’s coming to them.

Of course, we’re all encouraged to save, and scared into saving by government actions, so eventually this will probably be most Americans.

Suddenly it looks like the “cliff mania” sweeping the nation – that rising tide of public opinion that we must save “us” by sacrificing “them” – is a viscious circle. And the cure we face is going to inflict the same damage.

It all reminds me of the Earth Day poster from long ago when the character Pogo said, “We have met the enemy and he is us.”

Brace yourselves. Because the US deficit is so large, any meaningful attempt to rein it in will hit the entire population. Hard.

Take whatever tax moves you can this year, because next year and beyond is going to hurt.


Ahead of the Curve with Adam O’Dell

The Solution is Simple…

Our problem here in the U.S. is too much debt.

Is Your Portfolio Ready for What's Next?

Investing is no longer a set-it-and-forget-it affair. If you’re still using that outdated approach in today’s irrational markets, you’re setting yourself up for massive losses and a difficult retirement. There’s a much… Read More>>
Rodney Johnson
Rodney works closely with Harry to study the purchasing power of people as they move through predictable stages of life, how that purchasing power drives our economy and how readers can use this information to invest successfully in the markets. Each month Rodney Johnson works with Harry Dent to uncover the next profitable investment based on demographic and cyclical trends in their flagship newsletter Boom & Bust. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. Along with Boom & Bust, Rodney is also the executive editor of our new service, Fortune Hunter and our Dent Cornerstone Portfolio.