All The Cliffs You Need To Know About

Investopedia

The United States has been standing on a financial precipice, with a variety of distinct hazards to avoid. In addition to the oft-cited fiscal cliff, there are economic, tax, political, geopolitical and earnings pitfalls to avoid as well. Shifts in positioning on the precipice, in the form of debt limit hikes and deadlocks in Congress, may keep America from the abyss for the time being, but they may nudge the nation even closer to the edge in the long run. For the sake of the collective national and global economy, the U.S. Federal Government must enact significant structural reform in a way that promotes the sustainability of its programs, spurs bipartisan harmony in Congress and revitalizes the American economy.

The Fiscal Cliff
Used loosely here, the fiscal cliff refers to the economic disaster that could occur if the U.S. government budget deficit was allowed to continue. According to the Heritage Foundation, Social Security, Medicare, Medicaid and Welfare programs comprised 62% of U.S. government spending in 2012. Republicans and Democrats alike can agree that if no changes are made, financial doom is impending; possible scenarios include rampant inflation, currency crisis and a sizable recession. No one program is to blame, and significant improvements are necessary across the board.

According to the U.S. Social Security Administration, Social Security's annual costs will exceed annual income beginning in 2021. It is also projected that the program's trust fund assets will be drawn down by 2033, resulting in insolvency. Social Security's failings can be attributed to a number of exogenous variables such as population growth, lifetime longevity and interclass income disparity. The Board of Trustees has recommended that either the payroll tax must be raised or benefits must be reduced in order to maintain the program.

Medicare and Medicaid pose an even more pressing threat; once again, exogenous variables such as rapid population growth via the baby boomers and rising healthcare costs have rendered the healthcare system unviable. While President Obama's Affordable Care Act did succeed in cutting $716 billion from Medicare spending, the solvency of the Medicare trust fund was only extended to 2024. The easy way out - cutting Medicare or Medicaid benefits - would be an unpopular decision on all accounts. Other options, such as the Independent Payment Advisory Board (IPAB), have been for the most part unsuccessful. IPAB was created to help limit Medicare spending, but it does so at the expense of the taxpayer; many doctors now refuse to treat Medicare patients as a result of low government reimbursement rates. In order to seriously address the U.S. Federal budget deficit, the American healthcare system must first be reformed.

The Economic Cliff
The overarching narrative on Wall Street and mainstream media is that we have emerged from the worst of the recession. To further this point, analysts frequently cite the increased regulation of the banking system by way of the Dodd-Frank Wall Street Reform and Consumer Protection Act. While this legislation is benefitting the economy, overhaul of the financial services industry is not yet complete.

The Dodd Frank law was enacted in 2010 and it effectively fastened a tourniquet upon the banking sector, a sector whose excesses were a major cause of the financial crisis of 2007-2008; however, some of the regulation may still be lacking in severity. For example, the "hedging exemption" stipulated by the Volcker Rule allows banks a loophole with which to engage in risky proprietary trading. Insider trading and financial fraud continue to plague the industry as a whole; at worst, banks negotiate settlement fees for their transgressions, few executives are ever legally charged for their crimes, and bank bailouts only serve to incentivize greed on Wall Street. For the American people to trust in their banking system once more, the SEC must ensure that this kind of nefariousness does not continue.

The Tax Cliff
Around the world, an increasing number of foreign nations have made steps toward progressive tax codes. France, the most notable example, recently attempted establishing a marginal tax rate of 75% for individuals earning over $1.3 million. While that rate was shot down by the Constitutional Council of France, leaders plan to propose another revised plan this year. While it is generally accepted that wealthier individuals should be subject to higher tax rates, extreme tax hikes are sure to discourage entrepreneurism and wealth creation. Indeed, the most affluent are allegedly prepared to leave France.

In America, many forget that the driver of the debate is U.S. National Debt, as the Federal Government struggles to reverse its spending ways without … well, without having to spend less. Despite reports that clearly establish the inefficacy of tax increases in turning the deficit around, progressive taxes are still seen by many as a primary solution to the debt crisis. Weighing into the debate, a broad spectrum of "trickle-down" economists, prominent businessmen, think tanks and more radical 99%-ers. In short, a more progressive tax code is all well and good at the margin, but confiscatory taxes, will wreak destruction upon the economy.

Political and Geopolitical Cliffs
The greatest political danger that the United States faces today is divisiveness. This kind of widespread dissention has become ubiquitous in American society. In fact, Republicans have called President Obama "the most divisive president in history." In the history of Congress, the filibuster was used almost 400 times between 2007 and 2012, but was only used once each year, on average, between 1917 and 1969. Political impasse has been reached. Before being able to achieve real change, politicians must strive to live up to the standards of past bipartisan cooperation.

The geopolitical cliff is merely an extension of the political one. Many areas in the United States have become increasingly politically polarized. Some have gone as far to suggest that the United States has not been as divided since the Civil War era. A cursory examination of your typical blue/red colored map denoting the most recent presidential election results will serve to prove this point. Politicians end their speeches with a reference to the enduring American spirit of rallying together when times are at their worst. Rather than becoming an over-quoted nicety, the American public must live it.

Earnings Cliff
In this tumultuous economic climate, many companies are experiencing earnings weakness as a result of both macroeconomic and industry-specific headwinds. Variables such as more taxes, continued high unemployment and disproportionate income growth has stunted aggregate demand. In response, an increasing number of companies have taken to issuing negative EPS guidance previous to each quarter.

Despite these negative factors, analysts are hopeful for the U.S. economy. Variables such as shrinking household debt, rising consumer confidence and higher consumer spending rates may stimulate the economy better than any government stimulus package could. The most striking of these variables is household debt. In the third quarter of 2012, household debt fell to a 29-year low. Thus, while earnings may be declining, corporate America may be on the mend.

The Bottom Line
In sum, the United States sits on a handful of cliffs: fiscal, economic, tax, political, geopolitical and earnings. Many of the measures passed will only serve to temporarily halt the nation's march towards the edge. America must re-evaluate the functionality of its government and economy as a whole and it must do so quickly.

More From Investopedia

Rates

View Comments (2)

Recommended for You

  • Tycoon buys 30 Rolls-Royces for Macau hotel

    A Hong Kong tycoon has placed the biggest ever order for Rolls-Royce cars, agreeing to buy 30 Phantoms to chauffeur guests at a luxury resort he's building in the global gambling capital of Macau. Stephen Hung's $20 million purchase surpasses the 14 Phantoms bought by Hong Kong's Peninsula Hotel in…

    Associated Press
  • 1 Tip To Lose Belly Fat

    It's Hollywood's Hottest Diet And Gets Rid Of Stubborn Fat Areas Like Nothing Else.

    AdChoicesagoodcooksSponsored
  • Tycoon's arrest sends shock wave through Russia

    Tycoon's arrest sends shock wave through Russia MOSCOW (AP) — The arrest of a Russian telecoms and oil tycoon has sent shock waves through the country's business community, with some fearing a return to the dark days of a decade ago, when the Kremlin asserted its power by imprisoning the country's…

    Associated Press
  • Before You Buy Alibaba, Check Out 4 Top China Stocks

    Before You Buy Alibaba, Check Out 4 Top China Stocks While investors gear up for Alibaba Group 's (BABA) hotly anticipated initial public offering, don't forget about other Chinese stocks that are worth keeping an eye on. Today's Young Guns Screen of

    Investor's Business Daily
  • As Fed takes baby steps, Cramer's trick for profit

    In turn, Cramer says making money in the market, involves looking at the environment through the lens of the Fed. "The trick is to remember that they speak for the common person," Cramer said. "The Fed wants the common person to make money." With that backdrop always in mind, Cramer says it becomes…

    CNBC
  • "The Retiree Next Door": How successful retirees stretch their savings

    "The Retiree Next Door": How successful retirees stretch their savingsBy the time she hit her late 40s, Toni Eugenia wasn’t sure she would ever be able to retire. Eugenia, 56, a pharmacy technician who lived in Houston, was nearly $200,000 in debt and

    Yahoo Finance
  • Costco Stores in Canada to Stop Taking American Express

    “The credit card relationship between American Express and Costco Wholesale Canada will not be renewed when it expires” on Dec. 31, the company said today in an e-mail to Canadian customers. The message was attributed to Lorelle Gilpin, vice president of marketing and membership for Costco…

    Bloomberg
  • CNBC Anchor Calls Out Fed-Hater Bill Fleckenstein In Startling Shouting Match

    CNBC Bill Fleckenstein of Fleckenstein Capital appeared on CNBC's Futures Now program on Tuesday. Futures Now host Jackie DeAngelis came out swinging, asking Fleckenstein right at the top if he was willing to admit that he had misunderstood monetary policy. Sounding taken aback, Fleckenstein…

    Business Insider
  • Norwich Information Security MS

    Online, accredited, top ranked. NSA Center of Academic Excellence. Recognized by the Department of Homeland Security. Download your free brochure!

    AdChoicesNorwich UniversitySponsored
  • Beanie Babies creator's sentence debated in court

    Beanie Babies creator's sentence debated in court CHICAGO (AP) — Federal prosecutors seeking to put the billionaire creator of Beanie Babies in prison for hiding millions in Swiss bank accounts told appellate court judges Wednesday that the toymaker's sentence of probation threatens to erode the…

    Associated Press
  • Play

    Citi, Bank of America Offer Discounted Mortgages

    Citigroup and Bank of America will offer mortgages at discounted interest rates to help borrowers with low incomes or subprime credit. AnnaMaria Andriotis joins MoneyBeat. Photo: Getty.

    WSJ Live
  • Apple to unveil new iPads, operating system on Oct. 21 : report

    The company plans to unveil the sixth generation of its iPad and the third edition of the iPad mini, as well as its operating system OS X Yosemite, which has undergone a complete visual overhaul, the Internet news website said. Trudy Muller, a spokeswoman for Apple, declined to comment. The iPad is…

    Reuters
  • Gilead Stock Is Falling On These Drug Setbacks

    Gilead Stock Is Falling On These Drug Setbacks Gilead Sciences (GILD) shares are backsliding Wednesday on news that the patient drop-out rate for hepatitis C drug Sovaldi is quadruple that of clinical trials. In addition, the biotech's Phase 2 study results

    Investor's Business Daily
  • Don't care about Alibaba? Here's why it may matter

    When the Alibaba Group Holding prices its initial public offering Thursday, small businesses in particular will be watching. Founder Jack Ma -the former English-teacher-turned-dot-com billionaire-has touted his e-commerce platform as a way for smaller merchants to expand their international…

    CNBC
  • Here's What Mark Cuban Wishes He Knew About Money In His 20s

    Cuban is the owner of the Dallas Mavericks basketball team. Billionaire investor and entrepreneur Mark Cuban is generous with his advice. When we asked him what he wishes he'd known about money in his 20s, he said:

    Business Insider
  • Wondering How You Could Save on Home Insurance?

    Get a quote from Farmers Insurance and discover how you could save. Speak with an agent to get the knowledge you need to make an informed decision.

    AdChoicesFarmers InsuranceSponsored
  • Margaritaville casino owners seek bankruptcy

    The owner of Biloxi's Margaritaville casino has filed for Chapter 11 bankruptcy protection Tuesday, only hours before a hearing where the landlord aimed to seize the property. The filing by MVB Holding LLC in U.S. Don Dornan, a lawyer for landlord Clay Point LLC, said the company had planned to ask…

    Associated Press
  • Embraer to sell 50 E-175 jets to Republic in $2.1 billion deal

    Brazil's Embraer SA, the world's third largest commercial planemaker, said on Wednesday it booked a firm order from U.S. The deal, which will be included in Embraer's order book for the third quarter, is valued at $2.1 billion, the planemaker said in a securities filing. The planes will be operated…

    Reuters
  • SHOE COMPANY: Our CEO Just Disappeared And Most Of The Money Is Gone

    "and like that: he's gone." This is an actual headline from a company press release: "CEO and COO disappeared, most of the company's cash missing." (Via FastFT) In a statement, German-based shoe company Ultrasonic said its CFO,  Chi Kwong Clifford Chan, has been unable to reach the company's CEO,…

    Business Insider
  • Top Analyst Upgrades and Downgrades: AEP, BHP, GE, Incyte, 3M, Tyco, Under Armour and More

    Top Analyst Upgrades and Downgrades: AEP, BHP, GE, Incyte, 3M, Tyco, Under Armour and More Stocks were firm on Wednesday morning ahead of the FOMC meeting outcome. Tuesday’s rally may have sparked higher interest again, and investors are looking for bargains

    24/7 Wall St.
  • Play

    Tues., Sept. 16: Watch Humana Stock

    Humana, Global X Social Media Index ETF and Majesco Entertainment are among stocks to watch. WSJ's Chris Dieterich discusses the details with Michael Casey. Photo: Humana

    WSJ Live
  • Billionaire Investor Says Chinese People Work Harder And Western Companies Could Face Deep Trouble After Alibaba IPO

    Michael Moritz, the chairman of VC firm Sequoia Capital, is a huge fan of Chinese internet companies and reiterated his enthusiasm for the Chinese market in an interview with The Wall Street Journal Wednesday. The billionaire investor described the Alibaba IPO as a “major landmark event” that is as…

    Business Insider
  • Tired of Living Paycheck to Paycheck?

    New website reveals how to save $1,000's when you're living paycheck to paycheck. See exactly how.

    AdChoices Media ForceSponsored
  • Play

    Analyzing the Fed's Exit Strategy

    The Federal Reserve’s ultralow interest rates will stay in place but it is still on track to wind down its bond-buying program. David Lebovitz of J.P. Morgan Funds joins the News Hub. Photo: Getty.

    WSJ Live