It isn't too early to think about next year.
We are now in plain view of the "fiscal cliff". After the election,Congress may or may not end up keeping income and estate tax rates at their recent levels. Next year may bring some notable financial developments, and it isn't too soon for households to think about them.
You may want to prioritize tax reduction. If the Bush-era tax cuts sunset, everyone will see higher taxes. The federal income tax brackets (10%, 15%, 25%, 28%, 33%, 35%) that we have known for the last nine years would be replaced by five higher ones (15%, 28%, 31%, 36%, 39.6%) come 2013.1
High earners may want to watch their incomes. If your earned income for 2013 tops $200,000 - or exceeds $250,000, in the case of a couple - you may face two Medicare surtaxes. While the Medicare payroll tax on earned incomes above these levels is set to rise to 2.35% from the current 1.45%, the second surtax may prove to be the real annoyance: there is scheduled to be a 3.8% charge on net investment income for individuals and couples whose modified adjusted gross incomes surpass these levels.1,2
Some fine points about this second surtax must be mentioned. It would actually be levied on the lesser of two amounts - either your net investment income or excess MAGI above the $200,000/$250,000 levels. Most investment income derived from material participation in a business activity would be exempt from the 3.8% surtax, along with tax-exempt interest income, tax-exempt gains realized from selling your home, retirement plan distributions and income that would already be subject to self-employed Social Security tax.2
The bottom line is that a bonus, an IRA distribution, or a sizable capital gain may push your earned income above these thresholds - and it will be wise to consider the impact that would have.
You may have less take-home pay next year. Social Security taxes for paycheck employees are slated to return to the 6.2% level in 2013. They've been at 4.2% since the start of 2011. If you earn $75,000 during 2013, you will take home about $1,500 less of it than you would have in 2012. If you earn $50,000, we're talking $1,000 less.3
Any 2013 Social Security COLA may be minor. In 2012, the cost of living adjustment to Social Security benefits was 3.6%. Before that, Social Security recipients went three years without a COLA. As inflation is mild, whatever COLA is announced this fall in tandem with Medicare premium changes may not amount to much.1
Next year, medical expense deductions may shrink. If you are thinking about delaying a procedure or surgery until 2013, remember that the itemized deduction threshold for unreimbursed medical expenses is set to increase from 7.5% to 10% of adjusted gross income in 2013. Even if that happens, however, the threshold will remain at 7.5% through 2016 for taxpayers age 65 and older.1
You may be able to find a better Medicare Advantage plan for 2013. The Affordable Care Act has altered the landscape for these plans (and their prescription drug coverage). Using Medicare's Plan Finder (click on the "Find health & drug plans" link at Medicare.gov), you may discover similar or better coverage at lower premiums. The enrollment period for 2013 coverage runs from October 15 to December 7.1
Those without work may find a safety net gone. Extended jobless benefits may disappear for the long-term unemployed at the start of 2013. Will Congress extend them once again? Possibly - but that isn't a given.
The estate & gift tax exemptions may shrink significantly. The (unified) lifetime federal gift and estate tax exemption is currently set at $5.12 million - and it will drop to $1 million in 2013 if Congress stands pat. Federal gift tax and estate tax rates are also slated to max out at 55% in 2013, as opposed to 35% in 2012. Right now, an unused portion of a $5.12 million lifetime exemption is portable to a surviving spouse; in 2013, that portability is supposed to disappear.4
Many analysts and economists think that Congress will eventually abide by President Obama's wishes and take things back to 2009 instead of 2001 - that is, a $3.5 million estate tax exemption, a $1 million lifetime gift tax exemption, and a 45% maximum estate and gift tax rate.4
Prepare for year-end drama ... and for 2013. The last two months of 2012 will surely bring political theatre to Capitol Hill. As it unfolds, you may want to look ahead to next year and consider the impact that these potential changes could have on your financial life.
Citations.
1 - money.usnews.com/money/blogs/the-best-life/2012/08/29/get-ready-for-5-key-money-changes-in-2013 [8/29/12]
2 - www.cliftonlarsonallen.com/inside.aspx?id=364 [2/23/12]
3 - money.cnn.com/2012/05/29/news/economy/payroll-tax-cut/index.htmx [5/29/12]
4 - www.smartmoney.com/taxes/income/preparing-for-taxmageddon-1337724496427/ [5/23/12]
Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.
Monday, September 24, 2012
Monday, September 17, 2012
THE FED ANNOUNCES QE3
THE FED ANNOUNCES QE3
A look at the central bank's latest strategy.
One more round of easing brightens the mood of Wall Street. With the fiscal cliff roughly 100 days away and the first Tuesday in November still too far off, institutional and retail investors were counting on the Federal Reserve to combat market anxiety with a new stimulus. In its latest policy announcement, the Fed came through - on September 14, the central bank launched its third round of easing in the past four years.1
How does QE3 compare to QE2? Well for one thing, QE3 is open-ended. The Fed will purchase $40 billion of agency mortgage-backed securities per month, until it decides otherwise. It is also continuing its Operation Twist bond-swap program through the end of 2012, meaning that the Fed will be adding $85 billion worth of long-term securities in each of the last four months of this year.1
Additionally, the central bank reinforced its pledge to keep interest rates at record lows "at least through mid-2015."1
During QE2 (November 2010-June 2011), the Fed incrementally bought $600 billion in longer-term Treasuries and reinvested payments on $1.25 trillion of mortgage-linked securities it purchased from banks during QE1 (November 2008-March 2010).2,3
What could QE3 potentially accomplish? Ideally, QE3 will aid the stock market, the housing market and by extension the job market. By buying mortgages, the Fed is seeking to accelerate the promising rebound in the real estate sector and keep long-term interest rates low.
Did the announcement live up to expectations? The Dow soared 100 points just minutes after announcement of the policy statement, so any thoughts that the market had priced QE3 in initially appeared inaccurate. The CBOE VIX (the so-called "fear index") slid below 16 on the news. In short, the market got what it wanted - and the summer rally found a little more momentum.4
As Bank of Tokyo-Mitsubishi chief financial economist Chris Rupkey commented to CNBC.com this week, this rally has been fueled largely "on hopes for QE3 even as investors believe QE3 will have virtually no effect. The market does not seem to know what it wants, but the Fed is going to give it to them anyway." BlackBay Group managing principal Todd Schoenberger seconded that notion: "This rally's been based on a 'Bernanke bubble' ... if he doesn't come through with another round of QE, it's going to be a big disappointment."5,6
With the Fed more or less saying that easy money will be available for some time, you might say the markets are pleased.
Is QE3 really necessary? Stocks have performed better than many analysts expected this summer, thanks in part to renewed hope that the European Union will solve its debt crises. With the markets at multi-year highs, some analysts felt that the Fed should have refrained from further stimulus measures.
In a September 12 CNBC survey of 58 noted money managers, strategists and economists, 59% of respondents felt QE3 would do nothing to reduce the jobless rate. That said, the Fed obviously saw merit in easing before the economy approaches the edge of the fiscal cliff.6
Central bank easing doesn't always realize its aims. Looking back, we can see that QE2 had some unexpected effects. Many economists and housing industry analysts assumed that it would drive mortgage rates lower. It didn't. In fact, interest rates on 30-year fixed-rate mortgages climbed about 30 basis points during the program. Six weeks after QE2 started, rates on the 30-year FRM had jumped nearly half a percent.2
What might happen in the near term? Hopefully the Fed's action will give stocks a shot in the arm for fall and winter, strengthen the residential real estate market and show support for both Wall Street and Main Street. Let's hope that this major announcement leads to a major improvement for the broader economy.
Citations.
1 - www.marketwatch.com/story/fed-to-launch-qe3-of-40-billion-mbs-each-month-2012-09-13 [9/13/12]
2 - www.bankrate.com/finance/federal-reserve/qe2-financial-crisis-timeline.aspx [9/21/11]
3 - www.bankrate.com/finance/federal-reserve/qe1-financial-crisis-timeline.aspx [9/21/11]
4 - www.bankrate.com/finance/federal-reserve/qe1-financial-crisis-timeline.aspx [9/21/11]
5 - www.cnbc.com/id/49002386 [9/12/12]
6 - www.cnbc.com/id/48990032/ [9/12/12]
Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.
Monday, September 10, 2012
BUYING vs. RENTING REVISITED
For people of a certain age, who remember taking out a home mortgage at 15%, 16% or even near the top at 18%, the astonishingly low rates that banks are charging today are a little hard to believe. This chart, taken from statistics collected by the Federal Home Loan Mortgage Corporation for 15-year and 30-year fixed-rate mortgages, tells the story: rates have been historically low for years, and they have been trending lower ever since the bottom fell out of the real estate market.
This has created a strange but not unusual market situation: people who remember the housing market collapse are nervous about buying right at the time when they can buy more house for less money than ever before in their lifetime, and finance at rates we may never see again. Our instincts tell us to buy when the markets are booming and prices are high, and to stay on the sidelines when the markets are offering us bargains.
The economic case for purchasing a home vs. renting has always been a bit sketchy. The real estate site Trulia has calculated that the breakeven between the two comes when you can buy for 15 times your yearly rental costs. By that formula, if you're paying $20,000 a year in rent, you might think twice about purchasing a comparable home that costs more than $300,000. But that formula has some embedded assumptions about mortgage rates. If you were to buy that $300,000 house and finance it at 18.45%--the average national mortgage rate back in October, 1981--then your $4,631 monthly payments would amount to $55,572 a year--more than two and a half times the rental rate you're paying now. This might not be the ideal tradeoff. But at 3.55%--the average national rate in July--the payments are $1,355 a month, or $16,260. At those rates, even if you factor in maintenance and property taxes, buying might actually cost less per month than renting.
Trulia identifies some markets where prices are historically high and historically low. The average two-bedroom condominium or townhouse in the New York City area currently costs about 32 times as much to buy as to rent. In Seattle, you can expect to buy at about 24 times the rental cost; San Francisco and Portland, OR now cost 22 times as much. Meanwhile, Miami homes are going for about about eight times annual rents, while Phoenix (10 times) and Las Vegas (11) seem to be relative bargains.
In general, you should avoid committing too much of your cash flow to the place you live; annual housing costs should be less than a third of your gross annual income. And you probably shouldn't count on your home appreciating in value immediately. A recent report by Fitch Investors Services says that in many markets, housing prices won't have completely bottomed out until late next year. This is not a market for flipping homes. But with the combination of low rates and distressed prices, it may be the best time to buy that many of us have seen in a long, long time.
Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.
This has created a strange but not unusual market situation: people who remember the housing market collapse are nervous about buying right at the time when they can buy more house for less money than ever before in their lifetime, and finance at rates we may never see again. Our instincts tell us to buy when the markets are booming and prices are high, and to stay on the sidelines when the markets are offering us bargains.
The economic case for purchasing a home vs. renting has always been a bit sketchy. The real estate site Trulia has calculated that the breakeven between the two comes when you can buy for 15 times your yearly rental costs. By that formula, if you're paying $20,000 a year in rent, you might think twice about purchasing a comparable home that costs more than $300,000. But that formula has some embedded assumptions about mortgage rates. If you were to buy that $300,000 house and finance it at 18.45%--the average national mortgage rate back in October, 1981--then your $4,631 monthly payments would amount to $55,572 a year--more than two and a half times the rental rate you're paying now. This might not be the ideal tradeoff. But at 3.55%--the average national rate in July--the payments are $1,355 a month, or $16,260. At those rates, even if you factor in maintenance and property taxes, buying might actually cost less per month than renting.
Trulia identifies some markets where prices are historically high and historically low. The average two-bedroom condominium or townhouse in the New York City area currently costs about 32 times as much to buy as to rent. In Seattle, you can expect to buy at about 24 times the rental cost; San Francisco and Portland, OR now cost 22 times as much. Meanwhile, Miami homes are going for about about eight times annual rents, while Phoenix (10 times) and Las Vegas (11) seem to be relative bargains.
In general, you should avoid committing too much of your cash flow to the place you live; annual housing costs should be less than a third of your gross annual income. And you probably shouldn't count on your home appreciating in value immediately. A recent report by Fitch Investors Services says that in many markets, housing prices won't have completely bottomed out until late next year. This is not a market for flipping homes. But with the combination of low rates and distressed prices, it may be the best time to buy that many of us have seen in a long, long time.
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.
Tuesday, September 4, 2012
OVER THE CLIFF
It may not feel like we're in a bull market, but stocks are in the midst of an extended rally that has taken the S&P 500 index from below 1280 in early June to the low 1400s currently. Yet whenever you read about America's economic recovery, there is inevitably a mention of the looming fiscal cliff, a scary future event that could decimate the economy and drive share prices back down.
What is this fiscal cliff? Why are economists so frightened of it? The term refers to a sudden change in a lot of different tax policies that is scheduled to take place automatically at midnight on December 31. As soon as the clock strikes twelve, the Bush-era tax cuts will expire, eliminating the 10% tax bracket altogether, and moving the current 25%, 28%, 33% and 35% brackets up to 28%, 31%, 36% and 39.6% respectively. At the same time, the 0% capital gains tax rate would bump up to 10%, and the tax rate on dividends would rise to 15% or 28%, depending on the recipient's income tax bracket.
Also expiring: a provision that eases the so-called "marriage penalty," some deductions for college tuition, child tax credits, dependent care credits and a particularly harsh phase-out would eliminate up to 80% of some taxpayers' itemized deductions for mortgage interest, state and local taxes, and charitable donations.
Making the cliff a bit steeper, the Budget Control Act of 2011--what most of us remember as the tense compromise that ended last year's budget standoff--calls for automatic government spending cuts of $1.2 trillion from the federal budget over the next 10 years.
The cliff becomes a bit steeper still as the Obama-era payroll tax cuts (reducing taxes by about 2% for workers) expire at the same moment in time.
All of this would boost government revenues and lower government spending--the opposite of a government stimulus--and suck some of the spending power out of consumer balance sheets. How much? The Congressional Budget Office estimates that if we go over the cliff--that is, if Congress doesn't act between now and the end of the year--a total of $560 billion would exit the economy to pay down the government deficit. That's the good news. The bad news is that the CBO estimates that this would reduce America's total economic activity in 2013 by four percentage points. To put that in perspective, last year our economy grew at a 1.7% rate.
So is a recession inevitable? What are the odds that Congress will take bold, decisive action during a Presidential election year? Some pundits believe that the magnitude of the economic consequences has gotten the attention of Congress, and that no matter who gets elected, something will be done. The most likely possibility, alas, is yet another stop-gap measure which might extend some of the tax cuts but repeal some of the automatic spending cuts, pushing the cliff out so that future lawmakers will have to deal with it--which is basically how we got in this mess in the first place.
Meanwhile, as the U.S. economy continues to march straight toward the edge, a growing nervousness may be part of the reason why the economy has been so slow to recover. Businesses are reluctant to hire or invest in the future when there are serious questions about what that future will look like. The slow, steady rise in the stock market this summer suggests that many investors have not yet looked up and noticed that the economy is on a collision course with a recession-causing event. The big question that none of us knows the answer to is: what will they do when they look up and see the cliff?
Sources:
http://www.smartmoney.com/taxes/income/how-the-expiring-bush-tax-cuts-affect-you/
http://bonds.about.com/od/Issues-in-the-News/a/What-Is-The-Fiscal-Cliff.htm
http://bonds.about.com/od/Issues-in-the-News/a/What-Is-The-Fiscal-Cliff.htm
Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.
What is this fiscal cliff? Why are economists so frightened of it? The term refers to a sudden change in a lot of different tax policies that is scheduled to take place automatically at midnight on December 31. As soon as the clock strikes twelve, the Bush-era tax cuts will expire, eliminating the 10% tax bracket altogether, and moving the current 25%, 28%, 33% and 35% brackets up to 28%, 31%, 36% and 39.6% respectively. At the same time, the 0% capital gains tax rate would bump up to 10%, and the tax rate on dividends would rise to 15% or 28%, depending on the recipient's income tax bracket.
Also expiring: a provision that eases the so-called "marriage penalty," some deductions for college tuition, child tax credits, dependent care credits and a particularly harsh phase-out would eliminate up to 80% of some taxpayers' itemized deductions for mortgage interest, state and local taxes, and charitable donations.
Making the cliff a bit steeper, the Budget Control Act of 2011--what most of us remember as the tense compromise that ended last year's budget standoff--calls for automatic government spending cuts of $1.2 trillion from the federal budget over the next 10 years.
The cliff becomes a bit steeper still as the Obama-era payroll tax cuts (reducing taxes by about 2% for workers) expire at the same moment in time.
All of this would boost government revenues and lower government spending--the opposite of a government stimulus--and suck some of the spending power out of consumer balance sheets. How much? The Congressional Budget Office estimates that if we go over the cliff--that is, if Congress doesn't act between now and the end of the year--a total of $560 billion would exit the economy to pay down the government deficit. That's the good news. The bad news is that the CBO estimates that this would reduce America's total economic activity in 2013 by four percentage points. To put that in perspective, last year our economy grew at a 1.7% rate.
So is a recession inevitable? What are the odds that Congress will take bold, decisive action during a Presidential election year? Some pundits believe that the magnitude of the economic consequences has gotten the attention of Congress, and that no matter who gets elected, something will be done. The most likely possibility, alas, is yet another stop-gap measure which might extend some of the tax cuts but repeal some of the automatic spending cuts, pushing the cliff out so that future lawmakers will have to deal with it--which is basically how we got in this mess in the first place.
Meanwhile, as the U.S. economy continues to march straight toward the edge, a growing nervousness may be part of the reason why the economy has been so slow to recover. Businesses are reluctant to hire or invest in the future when there are serious questions about what that future will look like. The slow, steady rise in the stock market this summer suggests that many investors have not yet looked up and noticed that the economy is on a collision course with a recession-causing event. The big question that none of us knows the answer to is: what will they do when they look up and see the cliff?
Sources:
http://www.smartmoney.com/taxes/income/how-the-expiring-bush-tax-cuts-affect-you/
http://bonds.about.com/od/Issues-in-the-News/a/What-Is-The-Fiscal-Cliff.htm
http://bonds.about.com/od/Issues-in-the-News/a/What-Is-The-Fiscal-Cliff.htm
Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.
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