“Fiscal Cliff” or “Speed Hump”?

fee-only financial planningAre you sick of this “fiscal cliff’ metaphor? I am. Sure, Washington needs to deal with taxes and spending. But, to constantly hammer into peoples’ minds the metaphor of us going over the cliff is absurd.

Of course, the media loves to catch our attention with fear. Our brains, particularly our amygdala, are hard-wired to be aware of potential dangers. The amygdala is one of our first filters for incoming information; always looking for problems. The media knows this and continues to saturate us with a disproportionate amount of bad news.

Certainly, Washington needs to deal with the scheduled tax increases and spending cuts. Without an agreement, there could be a $640 billion impact on the economy; $500 billion of increased taxes and $140 billion in spending cuts. That could reduce our GDP by 4%-that’s not good. Without an agreement, our annual deficit of $1 trillion or more would be cut in ½. That’s good.

The politicians actually agree on more than half of the $640 billion in question. Republicans and Democrats alike want to continue the low tax rates for the middle class, minimize the impact of the AMT, and not cut defense spending. So, $375 billon of agreement already. In addition, spending cuts and tax hikes, if they happened, would be phased in over time. Lastly, agreements and legislation can occur in December or early 2013 and be applied retroactively. These ticking clocks that show the number of days, hours, minutes and seconds to December 31 when we go over the fiscal cliff drive me crazy.

The bigger picture is how we are going to handle our long-term budgets. The last four years have been tough. $5 trillion has been added to our national debt. Our debt is currently 70% of GDP. Without change, it will likely exceed 100% in the next decade and could be twice that in the next 20-25 years. Those are real problems. With all the talk of non-discretionary spending cuts and taxes on the wealthy, the real focus needs to be on the entitlements; particularly social security, Medicare, Medicaid and the like. Without change, we are on a slippery fiscal slope.

At the same time, there’s lot of good news. Consumer sentiment and net worth are up, debt is down and housing has seemingly hit bottom and is more affordable than ever. Business sentiment is up; businesses are making money, have cash and can borrow at the lowest rates since the 60s.

In my opinion, we are not approaching a fiscal cliff; but, rather, another fiscal speed hump. Hopefully it causes Congress and the White House to slow down and deal with important issues rather than kicking the can down the road. If Washington could just help lift us all out of the uncertainty of both short-term and long-term financial issues, things could really be looking up.