Post Election Conundrum

November 13, 2012

11.13.12

The “Fiscal Cliff” versus the increasingly precarious Federal Balance sheet

The election is over, and most of the players remain the same. The expectation that President Obama would be a one termer [like Carter] because of the subpar recovery was shattered. It seems that the better Obama comparison is with FDR.

The market advanced early in the week as the possibility of a Romney win seemed to increase. That hope was shattered by midnight on Tuesday, setting the stage for a 2.4% weekly market slide.

The post-election domestic economic headlines are incessantly chanting “fiscal cliff” [a subject which we first discussed last May 29th]. This cliff is an artificial Armageddon that was created by politicians and will be “solved” by them at the last minute. At its core, the debate is about the size of the federal government, as measured by its spending.

As the following table shows, tax receipts are within 5% of the prerecession level.

However, spending is ~30% higher than 2007 level, and the deficit as a percent of GDP, although declining modestly, is at an unsustainable level. And don’t forget, the accumulated explicit deficit has grown from $11T to $16T in the last four years [now at 100% of our GDP!].

Let’s hope that our Washington leaders come to a resolution that does not kill the goose that has been laying all the” golden eggs” over the last ~236 years.

“The only limit to our realization of tomorrow will be our doubts of today.”
-Franklin D. Roosevelt