Friday, November 16, 2012

Investors Eyeing on the Fiscal Cliff, the making of the next economy crisis?

The stock market is quite moody these few days due to the fiscal cliff issue. Maybe some of you are not sure what is fiscal cliff. I will try to explain about it in this article and also will include my own opinions about the fiscal cliff.
Whats is Fiscal Cliff?
Well, there are a lot of news about fiscal cliff and those news make it very complicated to understand. I am one of those who find it hard to understand what is fiscal cliff just by reading the news. So, I go and find some information about fiscal cliff.

Here is the summary for Fiscal Cliff:


  • 1st January 2013 marks the end of Bush Tax Cut. Fiscal Cliff is the effect of the expiration of the tax cut.
  • When Bush Tax Cut expires, taxes for businesses and every taxpayers will increase!
  • Financing for most federal program such as military and domestic funding will be reduced.
  • When businesses and taxpayers are taxed at much higher rate, then the government will have a LARGE amount of money flowing in. And, this raise concern! Why?
  • Sudden inflow of tax money will largely reduce deficit at fast rate! Based on the picture above (taken from Wikipedia), the tax money can slash off US deficit by 60-80%. (What is Budget Deficit? It means the amount of money the government is owing. In other words, Debt.) From graph , you can see that US is having LARGE debt. So, the expiration of Bush Tax Cut is actually a good thing for US as it reduces expenditures and increases income. Isn't that good? 
  • Why reduction the deficit is not good? Well, it is a good thing for a country but people are concerned that weak economy would not be able to withstand this sudden spending cut and outflow of money from market back to government. (If you are not sure about this then imagine: $100 million of money is in the market flowing and changes hands and suddenly tax increase and now the total money in the market become $50 million.) People are afraid that the sudden reduction of money in the market would cause a major problem such as cash flow of businesses, expenses cut of household, unemployment etc.
  • In addition, US's emergency unemployment-compensation program will also expired which will save $26 billions in government spending but millions of jobless people will not get any financial support from government. 

All these can cause a major problem for US economy and might ultimately brings US economy into recession. Of course, it will cause a BIG hiccup in the stock market.

Is this going to be the beginning of the next economy crisis?
No one knows for sure but since the symptoms and problems are so clear and everyone are taking actions and thinking for ideas to tackle it. I am optimistic. This might not be the beginning of the next economy crisis. So, it is time to grab some cheap stocks when other people are starting to panic sell.

My Opinions and View on Fiscal Cliff
In my opinions, this is not a big issue to be concerned of. Why? From what I know, the tax in US before the Bush Tax Cut is as it is. So, it would not be a problem when the Bush Tax Cut expires because everything will be back to the original state (before Bush Tax Cut). In fact, the economy is strong before Bush Tax Cut according to Warren Buffett. I am a fans and an investing follower of Warren Buffett, so I believe that he has a point there.

Excerpt from Chicago Sun-Times:
OMAHA, Neb. — Investor Warren Buffett says there won’t be a recession if Congress can’t resolve the so-called fiscal cliff before the automatic tax increases and spending cuts take effect in January.
Buffett told CNN on Wednesday that the U.S. economy is very resilient, and it won’t collapse if lawmakers and President Barack Obama can’t immediately agree on a plan.
The billionaire’s view differs with economists who have predicted a recession is likely if the fiscal cliff isn’t addressed.
Buffett told CNN, “We are not going to permanently cripple ourselves just because 535 people can’t get along.”
Buffett also says he believes the economy would be fine even if income and capital gains taxes were significantly higher than they are now.
AP

So, I am sure the economy will be alright. Time to pick some cheap stocks. Get ready to make some profit when the market mood go back to positive.

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