Monday, December 31, 2012

All Eyes on US Fiscal Cliff, A Chance for Stock Trading or Continue Watching?

The market is quiet today. US has yet to come out with a good solution to handle the Fiscal Cliff. The so called fiscal cliff is expected to happen starting on 1st January 2013 but until now, the US Senate and House still has not agreed on a solution or plan. Since in Malaysia our time is faster as compared to US, the fiscal cliff will officially happen on 2nd January 2013 in Malaysia which will be 1st January 2013 of America.

About Fiscal Cliff

Fiscal Cliff is expected to happen due to the ending of Bush Tax Cut and 2011 Budget Control Act. This will cause a sudden reduction in Government spending and sudden Tax increase in US which is expected drag US economy into another recession.


If this is very confusing for you, I have a simpler version to help you better understand the situation.

For Example: Fiscal Cliff and The Economy
If you are earning RM3000 per month and you have to pay 50% in Tax to government. But under Bush Tax Cut and 2011 Budget Control Act, the tax amount of reduced to example 20%. So, you pay less in tax. Let's do some mathematics here:

Scenario #1:
Income: RM3000
Tax Rate under Bush Tax Cut: 20%
Taxed Money: RM600
You Left: RM2400

Scenario #2:
Income: RM3000
Normal Tax Rate: 50%
Taxed Money: RM1500
You Left: RM1500

Now, in US, Bush Tax Cut is in effect, so you have more money to spend (Scenario #1). But starting 1st January 2013, both the tax cut and budget control will end which means tax rate will rise to normal condition (Scenario #2). What will happen?

A lot of people might suddenly faced problem paying their debts. This could possibly create a major problem in the US economy. In Budget Control Act 2011, it mentioned that spending cut will be triggered. Government will start spending cut after the end of Budget Control Act 2011 which will cause a sudden deficit reduction in US which will cause recession in year 2013.

Information about US Budget Deficit from Wikipedia

The deficit—the difference between what the government takes in and what it spends—is projected to be reduced by roughly half in 2013. The Congressional Budget Office estimates that this sharp decrease in the deficit (the fiscal cliff) will likely lead to a mild recession in early 2013.
This leads to a question to all of us, is this our chance to start buying in some good stocks at lower price? Then start making profit when US finally announce good news for fiscal cliff? Or should we just wait and see what will happen when "Fiscal Cliff" day arrive?

What do you thing?
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