Poll: Which class should perform falling off the fiscal cliff?

[craigr]

This was another thread, but I thought would make a fun poll. Answer above and feel free to elaborate below with specifics so you can validate your predictive powers!

[Pointedstick]

I think the market has already priced this in, and it seems the mood is pretty gloomy. Rather, I suspect that stocks will shoot up if a deal is miraculously reached at the last minute. Gold is a wild card, as always.

I don't see bonds or cash doing much of anything in particular.

[Arturo]

I think it will be cash.

After fiscal cliff --> unemployment --> less grouth --> more debt --> unemployment --> more debt --> recession --> cash is the king ;-)

[AdamA]

Bonds.

Strangely, it seems like bad press for the US economy is good for the US treasury bond.

[mmaurice]

I have to agree with Cash is king.

If you believe the press, going over the Cliff with no intervention will be a drag on the economy resulting is a direct hit to GDP and a rise in unemployment resulting in recession. While no asset class prevails in recession, cash will soften the blow.

Even if there is intervention, we still have a spending problem. Cut backs need to occur which means slowed growth. And, while I am not for it, the huge debt burden does have to be paid down, which means higher taxes.

Of course there will be a short term pop to the market but that euphoria will burn off over time as earning reports show real slow down and unemployment reports show an uptick.

As my final answer, who knows, only time will tell. Best bet is to bet on everything.

[Pointedstick]

Even if there is intervention, we still have a spending problem. Cut backs need to occur which means slowed growth. And, while I am not for it, the huge debt burden does have to be paid down, which means higher taxes.

Cue Monetary Realism thread-jacking in 3… 2… 1…

[Peak2Trough]

Upon review of the answers, I think some clarification is in order for one of the options.

The market cannot have priced in a *certainty* of going off the cliff because it has not happened, and is not 100% certain to happen.  What the market has priced in is the current likelihood of going off the cliff coupled with the likely consequences of such.

The way I read the poll, it asks what happens to these assets if *we do actually fall off the cliff*.  In other words, assume it's now certain, or it has happened.  This would make for markedly different asset prices from the above, non-certain, asset price assumptions.

[Xan]

True.  But what does it mean to fall off the cliff?  Congress has until April 15, 2014 (with many caveats) to change the rules for tax year 2013.  The only thing really pressing at this point is the AMT for tax year 2012.  It's true that the specter of unresolved taxes will cause a lot of uncertainty and hand-sitting, but not all at once, and will start out slowly and reach a crescendo only when the actual deadline approaches.  You can fall off a cliff and still be saved, as long as you haven't landed at the bottom yet.

[melveyr]

True.  But what does it mean to fall off the cliff?  Congress has until April 15, 2014 (with many caveats) to change the rules for tax year 2013.  The only thing really pressing at this point is the AMT for tax year 2012.  It's true that the specter of unresolved taxes will cause a lot of uncertainty and hand-sitting, but not all at once, and will start out slowly and reach a crescendo only when the actual deadline approaches.  You can fall off a cliff and still be saved, as long as you haven't landed at the bottom yet.

It appears as if our politicians fancy themselves as base jumpers.

[mmaurice]

True.  But what does it mean to fall off the cliff?  Congress has until April 15, 2014 (with many caveats) to change the rules for tax year 2013.  The only thing really pressing at this point is the AMT for tax year 2012.  It's true that the specter of unresolved taxes will cause a lot of uncertainty and hand-sitting, but not all at once, and will start out slowly and reach a crescendo only when the actual deadline approaches.  You can fall off a cliff and still be saved, as long as you haven't landed at the bottom yet.

There are serious problems with this thinking. As a business owner and individual investor, I am holding back money that could be used because I don't know how much cash I will have to send to Uncle Sam. As a matter of point, I have opportunity to buy some great investment property but only if my effective tax rate stays the same. 

Same with cutting spending. Once you hit the e-brake on gov'ment spending, the flywheel takes a long time to start moving again.

[Xan]

There are serious problems with this thinking. As a business owner and individual investor, I am holding back money that could be used because I don't know how much cash I will have to send to Uncle Sam. As a matter of point, I have opportunity to buy some great investment property but only if my effective tax rate stays the same. 

Same with cutting spending. Once you hit the e-brake on gov'ment spending, the flywheel takes a long time to start moving again.

Your points and examples are all correct.  I'm not arguing that we're in a good situation, just in one that isn't flipping a switch on January 1.  The markets won't suddenly jump to a new state.

[MediumTex]

Bonds.

If the government confiscates more wealth in the form of higher taxes in the midst of a secular period of private sector deleveraging, how can that be anything but deflationary?

[Kshartle]

Gold.

Can the government get away with more tax revenue? They can raise rates but that will certainly change behavior. If they raise rates on dividends, companies will likely shrink their dividends. Wealthy people will concentrate more wealth in munis to escape federal income tax. Business owners will defer taking income, wealthy people may just choose to work less and enjoy more time off rather than get hit with the higher tax.

I'm skeptical that the government can squeeze much more out the Americans through direct taxation. I know you guys are all familiar with the Laffer curve, at a certain point higher rates decrease the revenue. I don't know if the feds are at the optimal confiscation point but I bet they're really close.

The best option for the government to confiscate more wealth is to steal the purchasing power of people holding dollars by printing up a lot more to finance the deficits.

The "Cliff" only has about 100 billion of cuts to proposed increases so I doubt even going over it will reduce the deficit at all. The government is going to have to borrow a lot of money no matter what. Where will it all come from?

[Kshartle]

I agree that we're in the midst of a long-term deflation except I think it's in terms of real money, not funny money slips of paper.

[edsanville]

I think the HBPP will go up in 2013.

[Pointedstick]

The "Cliff" only has about 100 billion of cuts to proposed increases so I doubt even going over it will reduce the deficit at all. The government is going to have to borrow a lot of money no matter what. Where will it all come from?

Foreigners, Americans, or the Fed. 

[Kshartle]

The Fed has no money to loan. So it's really Foreigners, Americans, or theft of dollar holders through printing. I think the WSJ had an article last March saying the FED is purchasing over 60% of new issues. With QE unlimited announced I'll bet that number is going up. At some point they will have to accept the collapse and subsequent crash or be the only buyers and collapse the dollar. At least that's what it looks like to me. How long can the government keep growing the debt? It's obvious that is not the path to recovery.

[Pointedstick]

Sure they do. They just print it. That's what they've always done. Where do you think they got the money to purchase 60% of newly-issued treasuries?

The federal government can keep growing the debt practically indefinitely so long as the fed prints money to purchase treasuries. We live in a debt-based monetary system. All money (except for coins) comes from debt. If the private sector doesn't create it (through bank loans) then the federal government has to (through deficit spending).

This is of course only true at the federal lavel where the government is a currency issuer (through the Fed). It doesn't apply to the states, or to Euro-saddled countries, who are currency users, not issuers. Currency users have every reason to be terrified by an every-growing debt and its attendant threat of default or higher taxes. Currency issuers have no such fear because they are constantly issuing more to cover it. Ask yourself why we've seen virtually no inflation over the past half decade despite the money supply expanding by more than a trillion each year.

[Kshartle]

If you really could print money then why isn't Zimbabwae the richest country on Earth?

They can only print dollars. Every dollar they print devalues the onthers in circulation. Everything priced in dollars will go up as they are devalued unless offset by increased productivity or decreased demand or other factors.

Prices of nearly all goods and services certainly haven't been flat. The US has been exporting a lot of it's inflation to other countries. We have the largest trade deficit in the world. Other coutries send us goods, we send them electronic equivalents of slips of paper. The foreign central banks buy up the paper with currency issues of their own creating inflation in their home countries while Americans get to enjoy lower import prices and a dollar that hasn't fallen by as much as it would have without the foreign banks intervening.

[Pointedstick]

Kshartle, fiat money is just a shorthand for the production of value. Printing money in the absence of production is ruinous, which is why Zimbabwe exploded. First the government destroyed all the prosperous farms, then they expanded the money supply. More money chasing fewer goods = inflation.

Things are different in the USA. We have positive GDP growth. We have vast productive capacity. And we have a shared monetary arrangement whereby the government creates some money (through deficit spending, propped up by the Fed) and the private sector creates some money (through bank lending). 100% of the money supply comes from either the Fed or the private banks. In normal times, private banks are supplying the majority of the money through their lending so people can start businesses, pick up a third car, buy houses they can't afford, and fill them with furniture charged to their credit cards. All of this expands the money supply, totally absent any Fed or government action.

Now imagine that the banks stop lending and people start to default on their loans. The privately-created monetary base thus falls off a cliff. The money supply is being reduced! What we now have is a lot less money chasing slightly more goods. This is deflationary.

The only way to make up for this is through government deficit spending. The government can stop deficit spending when private lending makes up the difference, or when we do away with this ridiculous system whereby all non-coin money must be created through someone becoming indebted so someone else.

[melveyr]

[biro]

After all that has been said, I guess HB would have said that nobody can predict the future and that the best we could do is rebalance and stay the course 

[Kshartle]

Ok they can print dollars/FRNs. Whether or not you consider them "money" or "real money" is a debatable topic and really a matter of opinion. Obviously dollars are being used as a medium of exchange. Obviously there is demand for them because the Government requires us to take them as payment and we are forced to pay taxes in them. As a store of value they work ok sometimes, other times they are awful. If you simply held onto them for a long time without interest it would be obvious how bad they are compared to real money like gold.

If you really consider FRNs money then I can see why you would believe they really can print money. I'll give you that. Do you believe they can create something of value out of thin air? That would be quite a magic trick. If they can't create something of value out of thin air then you must concede that what they are creating either has no value or no additional value has been created. It's only been transferred from the value of the other dollars in existance through devaluation.

It's an important point because 50% of the PP is placing it's hope on something that can essentially be devalued rapidly. What looks to be safe assets on the surface in reality carry the most risk of loss.....total.

To quote Harry Browne from his 1974 classic "You can profit from a monetary collapse" page 54: "Paper isn't money"

[Pointedstick]

If you really consider FRNs money then I can see why you would believe they really can print money. I'll give you that.

The last thing you bought… did you pay in gold, or FRNs? When you pay for your groceries, do you whip out your coin purse and pull out a few 1/10 oz gold coins… or your debit/credit card?

I know what's going through your mind because I was there too 8 months ago. The fact is, no matter what the constitution says, no matter what the Mises Institute or Hans Hermann Hoppe says, no matter what we might want to believe, FRNs are the currency in the USA. We're not on a gold standard anymore. We can't pay our taxes in gold. We can't buy houses or cars or computers or food or internet access or carpet-cleaning services in gold. That era is over. It ended 1971 with the Nixon Shock. And in the era we're in right now, all our money is created by debt, issued either by private banks, or by the federal government. There's no gold backing them. Gold is just another commodity now.

Beyond that, I'll leave it to melveyr, moda, gumby, and others. I've got to go itemize my business expenses now. 

[Kshartle]

What are you talking about? You're creating a strawman argument to knock down, certainly not one that was part of the discussion thus far.

The point is you can't create something of value out of thin air. You can't do it and neither can the FED. They can create FRNs. If those FRNs have value then it must have been taken from somewhere else. Where did the value come from?