Forex Go!

The lame duck Congress is moving swiftly toward passage of Start, the new nuclear arms treaty with Russia, and the health benefits package for the brave souls who participated in the 911 rescue efforts.  The passage of these two bills will quickly reverse the inaction during the first two years of the Obama administration.

The most ballyhooed of recent legislation will soon be referred to as the Obama tax cut plan.  Because it extended advantages to those “high income” individuals that many Democrats feel do not need any further tax cuts and because the legislation’s predecessor, the Bush Tax Cut plan was ineffective in boosting the economy, Washington was deeply divided over the legislation.

The President’s hand picked committee worked diligently to draft the tax cuts but Obama omitted representatives from the House from participation.  Denied their voice and fifteen minutes more of national notoriety, House Democrats threatened to turn on the President, who admittedly disliked aspects of the bill.  After much consideration and typical antics, the legislation easily cleared both chambers of Congress and was signed into law in time to extend unemployment insurance to 2 million Americans for the next 13 months.

Polls show that the majority of Americans favor the bill that will cost taxpayers another $858 billion.  Republicans who originally vowed to pass no legislation that did not lay out a payment plan caved in and apparently decided to tackle tax cuts with the new Congress in January. 

The salient points of the Obama Tax Plan are: 

• A two-year extension of the Bush Tax Cuts to all taxpayers.
• A one-year
• An extension of the 15 percent tax rate on capital gains and dividends.
• A one-year reduction in the 6.2 percent social security payroll tax deduction.
• A 13-month extension of unemployment benefits to the long-term unemployed.

Obama justifies the gamble saying that these actions will help to generate another 1.0 percent in the Gross Domestic Product.  Despite the volatile activity surrounding the euro, analysts project an 11 percent gain in the S&P 500 and as much as another 15 percent gain for the Dow Industrials.

Obama and Spending Cuts

The President and Republicans apparently agree on another testy issue; the need for comprehensive tax reform and the commencement of cuts to reduce the national deficit.  The U.S. has been put on notice by Moody’s that inaction would result in a downgrade in credit markets; a fate to which Ireland has been relegated.

Both sides of the aisle and the President have heralded various aspects of the Simpson – Bowles deficit reduction plan.  The recommended austerity cuts will touch all areas of American society.  Unlike elected officials, the bi-partisan Simpson – Bowles report goes after the three areas where politicians hesitate to tread; Social Security, Medicare and Defense.

Clearly no deficit reduction program can be taken seriously that des not include a sharpening of the pencil in these three areas.  Social Security and Medicare legislation is outdated.  When the programs were initiated, life expectancy was in the low 60’s.  Many Americans are productively working into their 70’s.

In the Sunday New York Times Business section, the Obama Tax Plan has given Americans reasons to smile in the short term. The long term, however, presents an entirely different outlook.  Acknowledging the necessary trimming that is forthcoming, the newspaper challenges the President to hold the line on those programs that truly serve the people. 

Coincidentally, a 60 Minutes interview with Meredith Whitney indicates that outside the trappings of the devastated real estate market, the financial distress of local governments is the most serious crisis on the table.  Whitney expects this crisis to explode in 2011 and the reality is that the federal government does not have the funding to bailout these entities.

The result could well be the default of trillions of dollars of municipal bonds and massive unemployment increases.  Whitney stated that Washington and Wall Street have chosen to look the other way rather than address the decay of municipalities. 

In one of Senate Minority leader Mitch McConell’s more memorable declarations, “The government does not have an income problem, we have a spending problem.”  Unless Social Security, Medicare and Defense are addressed, spending will remain the culprit.  When trying to reduce the deficit, there can be no untouched turf, whether it is politically correct or not.

The Obama Tax Plan has saved the short-term day, but Congressional battles loom.  Unfortunately, the warring parties are more interested in protecting their constituencies than doing what the country needs.  The time has come to pay the fiddler.

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