Jan. 1 could be start of something much worse
Over the last year, we have heard all kinds of political gibberish relating to the economic situation our country is in. Things like fiscal cliff, sequestration and quantitative easing are some examples. To follow and understand the language that comes out of Washington, D.C. these days requires some sort of "economic voodoo." Even an economist has trouble trying to explain it.
Fiscal cliff and sequestration are tied together because both relate to the end of this year. Quantitative easing is a subject that would require a 500-page textbook to explain.
The fiscal cliff (sequestration) is the $1.2 trillion in budget cuts and tax increases that are looming effective Jan. 1. The tax increases will come from the Bush tax cuts expiring and the payroll tax "holiday" expiring - all this because Congress and the president could not agree in 2011 on how to handle the debt limit for the federal government. So they agreed that if something was not done by Dec. 31, 2012, everyone would share in the pain.
Quantitative easing is basically the U.S. government printing more money without any collateral to back it up. That puts more greenbacks in circulation, but it devalues the dollar so that less can be bought with each dollar.
Now, regarding the fiscal cliff and how that will affect you. Short answer: You will have 7-10 percent less money to spend. It will have an effect on your personal life, your economic life and the economic health of the country. When the public has less money to spend, businesses slow down, people lose their jobs and new business creation grinds to a halt. Those are the characteristics of a recession leading to a depression.
The 7-10 percent is made up of two tax increases to your paycheck deductions. Two percent will come from the ending of the payroll tax holiday initiated in 2012. "What is that?" you may ask. Congress and the president decided in 2011 that the folks needed more pocket money, so less would be deducted from their paychecks regarding the FICA tax (Social Security). That ends on Dec. 31. The other 5-8 percent comes from the Bush tax cuts that were put in place in 2003 and are now set to expire on Dec. 31. So more will be taken out of each paycheck, in terms of FICA and income tax. This will apply to everyone, not just "the rich." And there will be aspects to this other than tax increases.
Federal budget cutbacks will have large effects on defense spending, unemployment benefits, welfare programs and discretionary spending in order to reach the mandated spending cuts. The effects of these cuts will ripple through the economy.
Currently, Congress and the president are trying to negotiate a deal to avoid this fiscal cliff. But in my thinking, everything they are talking about only pushes the problem out farther, and it will have to be dealt with eventually. The only two solutions are a growing economy (more tax revenue) and less government spending.
So, what can you and I do? We need to be aware of what is coming, its effects, and start preparing for it. We also need to keep the pressure on our elected officials to live within their means, stop escalated spending and look for other solutions rather than just always running to higher taxes.