The Fiscal Cliff is obviously a multi-faceted, complicated concept that has no "best" solution. The fiscal cliff is basically a safety default option that will decrease the deficit in 2013 by automatically implementing spending cuts and tax increases. Isn't this exactly what both parties and the most of the public want? The problem is to do so will surely mean a recession of some sort as the market has to realign itself to the new normal of less government spending. Our government, through many different channels, has been propping up many businesses for a long time and the bills for that lifestyle are finally coming due.
I compare this to my own college career. I was a sharp fella with lots of potential, but being from a middle-class family in order to go to college I borrowed money.
Later I found out that I could borrow above the amount for tuition and lived a higher lifestyle than I otherwise should have during college. Being a borrower that is not worried about the future, as most college students and our federal government have the propensity to do is a lot of fun. Instead of working and saving, I was able to enjoy the college lifestyle of drinking and partying, sometimes to excess. I think the same could be said about many government programs. Although the education I was borrowing to receive was a worthwhile investment, the borrowed money I was spending to go on spring break was not. Our elected officials must discern between the two. What is an investment and good for the future, and what is superfluous and a wasteful use of taxpayer dollars?
When the cuts come, and they will eventually, it will be painful, just as it was when my student loan bills came due. I lived in cheap housing, drove an old used car, and didn't have cable, because I had to pay back my student loans. The U.S. citizenry will get the same lesson. The question is should we take the medicine now or shall we defer it until later. We shall see.
Media outlets are quick to point out taxes on the wealthiest citizens as the main point of contention between Republicans and Democrats, but there are other issues affecting the political gridlock surrounding the fiscal cliff. Both sides know that raising taxes alone will not solve our problems, nor will society be able to stand the sort of cuts necessary to solve our problems. The other issues are whose districts are going to be most affected by the cuts, whether they come via the fiscal cliff and "taxmegeddon" or they come through some brokered deal between our two parties. It is amazing that Congress can keep a straight face as they claim to want to address our long-term deficit problem while simultaneously working to avoid any essential action.
If we go over the fiscal cliff, consumers can expect bad news. If they work for a government entity or a private business who sells to the government they should expect to feel the bad news. Taxpayers can expect to pay a larger sum of their income toward the reckless spending of the past. Allowing market forces to rebalance would allow for a swift correction and then a return to stable growth, even perhaps ushering in a cyclical bull market by 2014 to 2015.
If, on the other hand, we avoid the fiscal cliff with a last-minute stopgap, most likely meaning Washington, D.C. has kicked the can down the road, the fiscal cliff will only be far higher and far more dangerous later. But make no mistake; it must be dealt with eventually. Consumers can expect inflation. The government will continue doing what it has been doing and with the help of the Fed it will slowly but surely monetize the debt, which punishes the savers and retired folks and it also punishes future generations as they will be the ones that have to deal with the mess our government has swept under the rug for the time being.
The risks are great no matter which choice we follow, to go over the cliff or avoid it. As for general advice, the old saying diversification is the only free lunch has never been truer. Because there are so many risks to be worried about the only prudent way to manage it is to be as diversified as you can afford to be. This, of course, will vary depending upon your wealth, but seeking professional guidance on how to be properly diversified is the wisest thing a family can do in these uncertain times.
