John Mauldin, an economist and writer who has focused much of his attention on the European monetary crisis, published an interesting article August 11. In his earlier articles on the subject, Mauldin identified two most likely outcomes for this crisis, either:
- the countries in the European Union will choose to band together and the northern countries will provide massive bailouts to the southern countries and the euro will be saved, or
- the European Union will choose to break up the euro and return to their former system of currencies.
A third, less likely choice is that the Euro will break up and two different currencies—one for northern Europe and another in Southern Europe—will take its place. Mauldin admits that these choices are hugely expensive, and increase the risk that Europe will fall into a recession or depression in the near future.
In his latest article, Mauldin presents another possibility that I think is most plausible. That is that the politicians in Europe will (using a term that I have come to hate) “kick the can down the road” for as long as possible until they are forced to make a decision about saving the European monetary system. Then, they will choose to keep the euro. He paints this as the most expensive solution offered because all of the votes will come at the last possible minute, when the decisions will be made because they have to be made. He thinks that this solution is the only politically tenable way to deliver bad news to the voters/constituents of each country.
After reading this article I started thinking about the upcoming “fiscal cliff” here in the United States. This cliff is a series of decisions that Congress and the President have to make as a result of yes, “kicking the can down the road” on topics like increasing taxes on income, capital gains, and dividends at the same time as government spending is cut due to automatic budget triggers that have not been addressed. Mix in changing health care law and financial services regulations not yet fully implemented and there are a lot of decisions to be made. In theory, most of the fiscal cliff decisions should be made in the 76 days between Election Day 2012 and Inauguration Day 2013.
Why is it important that we get answers to the fiscal cliff questions? Business owners and managers are unsure how to proceed. They have talked about waiting until they receive some clarity around the fiscal cliff issues before they go out and hire more workers. These employers are scared that changes to their tax structure will force them to cut back on their growth plans, and the long-term plans for their companies.
My sense is that Mauldin’s analysis of the most likely outcome of the European Monetary crisis can also be applied to our Congress’ negotiations around the fiscal cliff topic. Instead of making decisions about the fiscal cliff and providing a clear path for Americans, I think that they will defer or postpone as many of them as possible. The fiscal cliff will never occur. Instead it will be a slope—gradual and convoluted.
This will cost American’s many millions or billions over the long run, but will be the way that most members of congress will keep their jobs. And what is more important—billions of dollars or the job security of your favorite politician?
~ Allyn Hughes, CFP, ChFC, CLU — Brooks, Hughes & Jones, Partners in Wealth Management Tacoma, WA