Last week, the battle for the White House concluded with all thunderous irony of a Shakespearean drama: full of sound and fury, signifying nothing.
After two years and nearly a billion dollars, the status quo held serve. Democrats still own the Senate and White House. Republicans held the House of Representatives.
While President Obama won the electoral college by a significant margin, his more narrow popular vote victory may limit his political capital. Democrats maintained the Senate, but they did not reach the 60 members required for a filibuster-proof majority.
So, Washington in 2013 will likely look much like it did in 2012. Divided and contentious.
When does that become a problem? Well, now.
With the "fiscal cliff" issues looming large, both parties will be forced to table the divisiveness in order to protect the interests of the nation.
The Fiscal Cliff Defined
Last week, President Obama gave a speech on the economy and the fiscal cliff. He spoke of his plan to integrate spending cuts with increasing revenue by raising taxes on the wealthiest Americans.
In his speech, the president drew comparisons to past scenarios, saying that was "how we did it in the 1990s, when Bill Clinton was president."
Yet, the Clinton era was forged by a different set of circumstances.
Following the Cold War, we witnessed the onset of globalization. Markets around the world opened up to competition. Lower labor costs prevailed. Companies began to outsource. Global growth exploded.
As capitalism trumped militarism, the U.S. was able to allocate spending from military purposes to domestic ones. The internet era took off, combining with an increasingly global playing field to create jobs, opportunity and wealth. All of which led to the lowest unemployment rate in decades, a pro-growth, low-inflation environment, increased home ownership, reductions in the crime rates, and lower welfare receipts.
"The era of big government is over," President Clinton exclaimed.
Today, our situation seems to be the antithesis. I'm not blaming the president. I'm simply stating that the two eras are not analogous. Different variables, problems and context.
Further, one can hardly state that Washington has been focused on less government.
Last week, Credit Suisse pointed to the consternation within the American businesses community regarding a less-than-friendly business environment. An environment that finds "big government financed by taxation, more regulation, etc."
Credit Suisse concluded by saying, "It is worth remembering that Clinton was able to do a deal with the Republicans in his second term (with a Republican House and Senate) after the lack of compromise in his first term led to a government shut-down."
So, while we may not agree with the contextual similarities drawn by the president, we can only hope for a similar spirit of reconciliation between the parties.
It is important to remember that elections typically serve as crises of faith. Will the system survive? Will the future resemble the past? If you believe that our systems and institutions are strong enough to survive, then you must prepare accordingly.
The Effect on Your Taxes
These automatic spending cuts, a process also known by the enigmatic moniker, sequestration, will have far-reaching affects.
According to The New York Times, Army operations and maintenance will lose nearly $7 billion. The Navy, more than $4 billion. Educational achievement and special education programs will be shaved by $2.3 billion. Medicare payments to hospitals will fall by $5.6 billion. The National Institutes of Health will lose $2.5 billion. Rental assistance to the poor, $2.3 billion. Nutrition programs for women, infants and children will fall by $543 million. Diplomatic programs and security will be trimmed by $1.2 billion -- tough to swallow after the recent attacks on U.S. embassies.
A White House report explains that, should Washington fail to act, $100 billion in military and domestic spending cuts will begin on January 2nd. The report further states that "Sequestration is a blunt and indiscriminate instrument. It is not the responsible way for our nation to achieve deficit reduction."
While the nation struggles to regain its footing, the Congressional Budget Office estimates that, if we avoid the automatic spending cuts and tax increases, next year's economy will grow at 1.7%. If we can't avoid them, then the economic impact of sequestration and tax increases will cause the economy to contract by 0.5%. The unemployment rate will likely increase from 7.9% to 9.1%.
Bottom line, if Congress cannot get its act together and arrive at some form of compromise, these automatic spending cuts would likely send the nation back into a deep and extended recession.
A Plan for Moving Forward
Investors need consider a more defensive posture for the time being. Too many shifting tectonic plates. To do otherwise is to expose one's self to inordinate amounts of risk.
We recommend that investors consider the following ten steps to bolster their financial plans in case of any and all circumstances:
A Probable Denouement (One Would Hope)
There will be tough talk. Partisan rhetoric. Heavy handed pronouncements. But, as the movie rushes to its conclusion, these two will likely clasp hands and steer away. For even as the point of no return quickly approaches, neither wishes to go the way of Thelma and Louise.
