Economic Outlook: Test of nerves

By ANTHONY HALL, United Press International  |  Dec. 24, 2012 at 9:25 AM
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For all intents and purposes there is a half day of shopping left before Christmas and six days left before an economic disaster sets itself in place.

This is the most generous count available. It allows that lawmakers would be loath to even announce a deal to avert the so-called "fiscal cliff" on Christmas Day, given it would sound like they were turning their back on a religious holiday. Aside from that, six days assumes lawmakers are willing to work around the clock to work out a deal in which House Republicans and the White House remain ideologically miles apart.

The numbers were reportedly close, and Republicans are likely getting used to the idea that the world did not end after House Speaker John Boehner, R-Ohio, said his party would accept a tax deal that included some revenue gains.

Over the weekend, several lawmakers said there was a chance at a deal that could be slapped in place merely to avoid disaster, although details would come later.

Perhaps unfortunately, Boehner called his solo shot "Plan B." He then pedaled "Plan B" to House members. And everyone knows there is rarely a "Plan C" so when Boehner failed to find enough support among his own party members last week and the plan failed Thursday, House members were sent home for the holidays. They were left to contemplate how their leaders could invent a budget so abyssal that it is predicted to send the economy into a second recession and then prop that up as leverage to force a compromise between two parties whose inability to compromise set up the quandary in the first place.

Investors contemplating the worst also have a holiday-shortened window of opportunity in which they can react to the increasing possibility that more than $500 billion in spending cuts and tax hikes could be impossible to avoid at this point.

The Wall Street Journal reported Monday that low income families would be the most hurt by the tax hikes that would be mandated Jan. 1 if no other budget deal was reached.

Wealthier citizens would have the most to lose in numbers of dollars, but less in terms of a percentage of their incomes. Those earning $10,000 to $20,000 per year would give up as much as $605 per year in additional federal taxes.

But the hardest hit would be low income couples with children. The fiscal cliff "clobbers," that group, said Roberton Williams, a senior fellow at the Tax Policy Center.

"It is striking how large some of the increases are," he said.

A couple with a child earning $10,000 to $20,000 would stand to lose $1,324 out of a $2,761 tax credit. The same sized family earning $20,000 to $30,000 that receives a $15 rebate out of their federal taxes would, instead, have to pay about $1,400 in taxes.

Investors have zero to cheer about. The poor get "clobbered" and the wealthy get pinched. All in all, the country retreats back into a recession. Unemployment jumps from 7.7 percent to 9.1 percent.

Either way, Monday turns out to be a test of resolve. Investors either believe that the "fiscal cliff" is not as bad as it sounds and that a deficit-reducing $500 billion budget adjustment will restore confidence in the U.S. dollar and government bonds or it will not.

Confidence, it turns out, is taking the long way around the barn. Investors have to believe the tax code will not hurt consumers and their ability to spend money that keeps corporations profitable and, conversely, they have to believe the tax code will not directly gut corporate accounts.

If that's the question at hand, one has to believe that there is a bit of confidence to spare in the U.S. economy. After all, when credit rating agency Standard & Poor's dropped the U.S. rating from its pristine AAA perch in the summer of 2011, yields on benchmark U.S. treasuries went down, not up.

That's because confidence is relative, not absolute. The U.S. government was still the safest bet around when compared with other options.

In international markets Monday, the Nikkei 225 index in Japan shed 0.99 percent, while the Shanghai composite index in China added 0.27 percent. The Hang Seng index in Hong Kong rose 0.16 percent, while the Sensex in India was flat, up 0.07 percent.

The S&P/ASX 200 in Australia gained 0.25 percent.

In midday trading in Europe, the FTSE 100 index in Britain rose 0.24 percent, while the DAX 30 in Germany lost 0.47 percent. The CAC 40 in France backed up 0.24 percent, while the Stoxx Europe 600 fell 0.l2 percent.

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