Fiscal Fall Out: Doom, Gloom and Gridlock

by Lear Capital EditorialJanuary 15, 2013

So the Fiscal Cliff crisis has come and gone ... or has it? We are the recipients of a last minute, politically-charged, drama-filled Washington deal that averted an economic free-fall but promptly sent us down a slippery slope.

While the "crisis" promised new taxes, automatic spending cuts, and tax extenders ... the so-called "deal" hits every working American's paycheck due to the expiration of the Social Security Payroll Tax Cut. In addition, taxes have indeed gone up on the "so-called" 1%. Capital Gains and dividends also got hit, business expense tax breaks were allowed to lapse, the effective marginal tax rates were raised, and even the Death Tax went up.

The New Year's Day deal did avert catastrophe for some by extending unemployment benefits, preventing Medicare payment cuts to doctors, continuing tax breaks for low-income workers, college tuition and families with children ... but it failed to deal with more the more critical aspects of the cliff by putting off automatic spending cuts, pushing off the borrowing limit, and leaving the government running on temporary funding through March.

Originally designed to confront our trillion-dollar budget shortfall, the Fiscal Cliff deadline proved to be nothing more than a battle over safeguarding popular spending programs on one side and defending equally popular tax cuts on the other. And, as Washington found the time to give Hollywood a tax break, promote electric scooters, and fund some new NASCAR racetracks ... they left America dangling on a ledge as they try to figure out how to pay the bills in light of our virtually unaddressed soaring deficit accruing at some $46,000 per second. The government once-again hit its borrowing limit prompting the Treasury Department to enact "extraordinary measures" to avoid government default, at least for now.

So while a "cliff" was averted we have perhaps fallen into something a bit more sublime and potentially more damaging to US growth and the economy ... utter political gridlock, the impending gloom of an almost $16.5 trillion deficit, and the imminent doom of the Debt Ceiling limit.

With no credible spending solutions coming out of Washington and an all but inevitable increase in the Debt Ceiling forthcoming, we expect gold to rise as it has done each time the US has increased its debt limit over the past decade. Increasing our debt threshold translates to printing more paper money which weakens the value of the dollar and has lifted the price of gold throughout recent history.

So despite the Doom, Gloom and Gridlock ... investors are finding ways to protect their investments and gold is leading the way. It remains well below its record highs and according to Bloomberg, current macroeconomic conditions are more conducive to gold investing than back in the 1970's bull market when gold rose 24 times in 9 years. In the coming weeks and months of tough talk on the debt and the deficit, we expect gold to rally as it proves to be the last credible hedge and perhaps the only way forward in the fiscal fallout.

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