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The "Fiscal Cliff" and the European Crisis: How Will These Events Impact the Average

The "Fiscal Cliff" and the European Crisis: How Will These Events Impact the Average

The Problem

“Fiscal cliff” is the popular shorthand term used to describe the conundrum that the U.S. government will face at the end of 2012, when the terms of the Budget Control Act of 2011 are scheduled to go into effect.

Among the laws set to change at midnight on December 31, 2012, are the end of last year’s temporary payroll tax cuts (resulting in a 2% tax increase for workers), the end of certain tax breaks for businesses, shifts in the alternative minimum tax that would take a larger bite, the end of the tax cuts from 2001-2003, and the beginning of taxes related to President Obama’s health care law. At the same time, the spending cuts agreed upon as part of the debt ceiling deal of 2011 will begin to go into effect. According to Barron's, over 1,000 government programs - including the defense budget and Medicare are in line for "deep, automatic cuts."

Simultaneously, the governments of Europe face deadlines for instituting austerity programs and complying with the terms set forth by the European Union regarding bailout efforts and fiscal stimulus plans. There are not many financial news stories covering the potential serious impact of these two events; the fiscal cliff in the USA and the deadlines for austerity programs in Europe. We have many things in common with our European neighbors regarding our respective bleak financial positions. Simply stated, all of us have sought more services from government and made more personal expenditures than we can justify given current tax receipts and current levels of our personal savings. Unchecked, these events will have serious impact on the global economy, not just our personal finances here in the USA. The most we can say about the financial media is that, collectively, they are calling for quick action long before the end of the year. I'm not sure anyone is listening so far.

One common trait the USA shares with countries of the European Union is that our respective economies have long been driven by consumer spending. There was a belief on my part at the height of the 2008 – 2009 financial crisis, Americans would be weaned from our traditional spending habits and be more encouraged to save. I have written many columns about the importance of personal savings to the financial well being of all of us. Unfortunately, the continuous drubbing of the various interest rates by the Federal Reserve Board (FED) to record low levels, and the initial response of sending out additional tax refund checks by the current administration was a coordinated response by government to have us spend more, not less. At the same time, the citizens of Greece, Spain, and Italy (the three countries within the European Union which are essentially bankrupt) have taken to the streets repeatedly protesting any cuts in governmental services and any increase in taxes.

When America Sneezes, the Rest of the World Catches Cold

The headline of this section was originally written to describe France during the mid 1800's, when France drove the economies of the world. Certainly, now we can expand the saying even beyond America, as the European Union also has a huge impact on the global economy. Therefore, we face the near term scenario of the two most powerful economies in the world, the USA and the European Union, coming to a screeching halt at about the same time. If all of the above stated economic potentialities come to fruition, we can expect a traumatic blow to the global economy and a most certain return to a "double-dip" recession environment here at home. There are some latent attempts in certain circles to forestall these events. Just last week a group of CEO's from America's largest companies appealed directly to the Congress asking them to take decisive action on these events. They requested an extension of the tax cuts involved, and a renewed effort to review the overall Federal budget to initiate cuts that will begin to address the deficit—and eventually the debt. As these problems surface at election time, my opinion is that we do have a chance at getting the attention of the Legislature in time, but there are no guarantees.

What Do We Do About Our Personal Finances in the Meantime?

If you have followed this column, you know that I have advocated a very conservative investment approach over the last three years. I continue to maintain this stance as, in my opinion, the level of uncertainty is actually greater now than at any time in recent years.. A conservative approach to our finances includes saving as much as we possibly can each and every month; securing our jobs by every means possible, such as taking on new assignments, working unpopular shifts, and getting the most out of those who may report to us; making major purchases only as needed and only after a thorough search for the best pricing or financing terms; and by continuing to monitor our investments, favoring well established companies with strong balance sheets and who are paying dividends. Of course the advice of an investment advisor during these times gives you an added possibility for success. I find it helpful to rely on BCU Investment Advisors, as well as the ongoing information flow from investment brokers such as TD Ameritrade® who continuously provide information on the mechanics of securing different types of accounts and investments.

TD Ameritrade, Inc., member FINRA (www.FINRA.org) /SIPC (www.SIPC.org) /NFA (www.nfa.futures.org)

Related Audio

Preventing the World from Catching a Cold When the USA Sneezes (11/15/12)

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©Patrick J. Catania 2012
The views and opinions expressed herein are solely those of the author and do not necessarily reflect those of Baxter Credit Union, its Board of Directors, or its employees. The author is responsible for the content. Readers should consult with, and seek professional advice from their own attorneys, accountants, and financial advisors with respect to their individual financial needs and circumstances.

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