This is the way the world ends This is the way the world ends This is the way the world ends Not with a bang but a whimper. -T.S. Eliot Since the reelection of President Obama some have come to believe that there is a sort of financial “Judgment Day” ahead. Chairman of the Federal Reserve, Ben Bernanke, called it a “Fiscal Cliff”. Economists and politicians have been pointing to this event since concern arose that a republican house and democrat executive branch and senate would be unable to reach an agreement on how to extend the Bush era tax cuts and spending measures. In August of 2011 a supercommittee was put together and charged with stopping an American default of sovereign debt. They were faced with raising the debt ceiling by $1.35 trillion while at the same time cutting spending by $1.5 trillion over the next 10 years. In the end a committee of bipartisan politicians was unable to come to terms. Other than raising the debt ceiling in order to avoid a default on sovereign debt nothing was accomplished. This is what led to the downgrade on the outlook of our national debt. Fast-forward to the evening of November the 6th 2012. Almost as soon as it became apparent that leadership in this country would not change hands across the board news media was plastering Fiscal Cliff headlines everywhere. The morning came and markets, which are historically forward looking, opened down and continued that way to close out the week. President Obama issued a statement that he will remain committed to lowering the deficit through raising taxes on people who make $250 thousand a year or more while continuing to raise the debt ceiling and spending our country through recession into stability. QE3 is now active and perpetual with no end to its $40 billion a month spending on the horizon. John Boehner, speaker of the house and republican congressman, issued his own statement that he wants to continue with all of the Bush era tax cuts and the reduction of government spending. Both sides are unwilling to budge… However, if or partisan government cannot come to terms, a trigger mechanism kicks in which promises automatic spending cuts of $1.2 trillion equally across national security and domestic policy. Save for entitlement programs like social security, veteran’s benefits, and federal pensions. Tax cuts will expire as well leading to higher taxes on the upper and middle classes. All of this will happen in January of 2013. But what does this all mean? What can we draw from the happenings of the past few days, years? That is exactly what one of my coworkers asked me this week. She works with me in the ethics and compliance office of one of the world’s largest banks. We monitor the activities of our executive board, portfolio managers, analysts, you name it. My co-worker is a well educated middle aged woman with an MBA and a lifetime of experience. Curious to hear more of what she was thinking I turned to her and asked; “Well, what do you think?” She responded without hesitation. “I think Obama just needs to sign an executive order and raise taxes on the rich. I was listening to him speak, he takes my breath away every time I hear him, and he is right that the rich need to pay their fair share.” I said, “That is an interesting thought.” knowing that she was a liberal democrat, brainwashed, and unable to be reasoned with on the issue. “The only problem is the President is not able to make an executive order effecting taxation. That is reserved for our congress as per the US Constitution.” She sighed and turned away shaking her head, not wanting to believe what I had just told her. She was unable to accept that her savior was unable to waive his hand and make our problems go away. This seems to be a common mindset among those who voted for President Obama’s reelection. This does not mean that I enthusiastic ally believed that Mitt Romney, or his 20% tax cuts across the board, would have saved us from our problems and a republican house and senate would have placed us on the right path. In fact, I was almost equally unsatisfied by what both candidates had to offer. But overall I believe that smaller government and less regulation are better for business and our economy. When it comes down to it, thinking about the plans set forth by the democrats and republicans, we should all be left wanting. The democrats wanted to increase spending while telling us they would be able to pay for it by taxing only the rich at a higher rate. The republicans offered us a plan of tax code simplification, lower taxes, and reduced spending. I do not feel either of these methods will work. This feeling stems from the fact that we are going bankrupt and can no longer afford our spending levels or exceedingly low tax rates. I know I am a radical and my beliefs do not fall along any party line. I am not giving you the Chris Matthews or Sean Hannity versions of what we should do. I am simply looking at the finances of the United States of America. Love it or hate it we need to raise taxes and cut spending at the same time. Don’t believe me? Look at the numbers from the congressional budget office if we do not cut spending: Yep, you are reading that correctly. We would need to see growth rates that only the emerging markets countries are seeing over the next 10 years to get out of this mess. Oh yeah, I forgot to mention, this is without cutting taxes and letting the Bush era cuts expire. What could cause this kind of growth? Innovation of course, a kind we have not seen since the internet and tech boom. The closest we have to that right now is Apple (AAPL) and we can see that is not getting the job done. With no innovation on the horizon to save us we are left with another picture painted by the CBO: Fiscal or Economic Measure (A)CBOBaseline (B)AlternativeScenario Federal deficit in FY2013 $641 billion $1037 billion Economic growth in FY2013 −0.5% of GDP 1.7% of GDP Unemployment rate 2013 9.1% 8.0% Public debt in 2022 58% of GDP 90% of GDP If we extend the Bush era tax cuts, raise the debt ceiling, and increase government spending we are looking at the world of column B. In other words if we continue the status quo world B is projected. This is a world with a massive federal deficit and rising public debt. Unemployment and economic growth would remain the same. But there is light at the end of the tunnel. There is something the government can do to help this nation. And that SOMETHING is NOTHING! Well, would you look at that? This chart depicts our federal deficit if we let the “trigger mechanism” kick in. We let the tax cuts expire and decrease spending without raising the debt ceiling and our federal deficit all but disappears. We would have the world of column A. The price is jumping off the cliff. Yes we would fall back into recession. Yes unemployment would be higher. Yes times would be tough. But we need to bite the bullet now to save the countries future. Once we jump off the cliff we can then begin to reform entitlement programs and other government spending. Once the deficit is gone we can lower tax rates. But that’s not up to me. It’s up to our elected officials. In a time where we need them to do nothing chances are good that they will work something out and continue to push us in a path of financial Armageddon. We would be left to die slowly, “Not with a bang but a whimper.” All to save their jobs. But the apocalypse doesn’t have to come. We just need to stand together at the edge of the cliff. I am there with my arms stretched out and my hands open ready to jump with anyone who wants to come with me. It will be a bumpy ride down and the climb out won’t be any easier but we have to jump and I pray that we as a country are ready to do it.