The Fiscal Cliffhanger: A Tax & Spending Showdown (continued)
by AL MARTIN (AL MARTIN RAW)
This is not a scalpel approach. It's not being done with a scalpel. It's being done with an ax.
Even though it might sound like a great idea, the reason everyone is so fearful of it -- and markets are fearful of it -- is because of the economic drag it would represent on the economy.
It would also focus the reality of the fiscal situation in people's minds and that's what politicians are frightened of.
The Unwashed should also be frightened of it because of an estimated 1.5% decline in GDP in 2013. Then if you say there will be around 2% growth and then you say that's not there anymore and we have a GDP growth somewhere around zero or fractionally higher.
So what are the consequences for the Unwashed? One of them is that we would enter the year 2013 with about an 8% unemployment rate and end the year with a 10% unemployment rate. This would take place because of the ensuing contraction in the economy.
A direct correlation can be made from a contraction of GDP vs. increase in unemployment. There's an algorithm that can be used which is rather precise. In the United States we know that a 1.5% contraction in GDP would mean an increase of 2.5% in the unemployment rate.
So what is the battle between the Republicans and the Democrats who have both dug in their heels regarding this fiscal cliff issue and its resolution? Now it has gone beyond a numbers debate. What makes compromise so difficult is that it isn't simply a debate about spending and taxation. It is a much deeper philosophical debate, wherein each party is trying to protect what they perceive as their own mandate or their turf as it were.
The Democrats are attempting to act like liberal populists -- which is their base -- in a vain effort to protect the Working Class. But what they don't realize is that those days are over.
Meanwhile the Republicans are attempting to protect their constituency which is the wealthy. They are trying to defend what is the philosophical core of the Republican Party, namely that increased taxation is a bad thing because it reduces economic growth.
In a sense it's two pseudo-philosophies duking it out and that's what it's all about. If it was strictly a game of numbers, a compromise would have already been reached. This goes to the philosophical core of each party. That's what's making compromise so difficult. It's almost like a religious belief system.
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* AL MARTIN, author of "The Conspirators: Secrets of an Iran Contra Insider," is an Independent Political-Economic Analyst with 25 years of experience as a trader on NYMEX, CME, CBOT and CFTC. He is also currently trading the commodity futures market day and night and has a teleconferencing service to facilitate transactions in the markets. This is a service for independent market-experienced traders.
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