Investment Contrarians

Fiscal Cliff Averted, but the Massive Debt Will Limit Government Flexibility

By for Investment Contrarians |

Fiscal Cliff Averted, but the Massive DebtWell, the doom and gloom of the fiscal cliff was averted in the nick of time, which in turn, pleased Wall Street and gave stocks a boost to begin the new year.

While the deal was a nice compromise between the two parties on the tax issues, there is a lot of work ahead for President Obama, as the statutory national debt limit of $16.4 trillion nears. As of this morning, the national debt balance used for the limit stood at a superlative $16.39 trillion. The headline national debt of $16.43 trillion is actually already above the limit, but don’t worry, the Treasury Department said it will be able to pay its debt payments and bills. Of course, we know this will also hold until the extended deadline on March 1.

The bottom line is: President Obama needs money to operate his plan to save America. Obama has asked for increased power to increase the national debt limit without Congress, but we all know this will never happen under the Republican-controlled House.

So while I view fiscal and monetary strategies as critical to keeping economic growth going, I also understand that the government needs to be tough and do something to the staggering national debt or risk deepening the financial crisis down the road for generations.

The problem is that if too much spending is cut, the impact on the economic recovery could be enough to send America back into another recession and financial crisis this year.

The question is concerning where some of the budget cuts will originate from.

Defense will likely lose a big chunk of its budget, especially given the pullout from Iraq. The problem is that the world is full of risk and conflict, whether it’s in Syria, Iran, or North Korea. If tensions in these hot areas escalate, defense spending will likely need to be increased.

Another area that I can see additional cuts is in “Obamacare” and the roughly $716 billion in cost reduction to Medicare. I expect there will be more cuts to come.

If you are looking at collecting Social Security in your golden years, think again. I believe this area could see heavy cuts, as only those in need of help may have future access to Social Security, which in my view, is not that big of a deal for those that don’t need the help.

We could also see a change in the way that federal pensions are allocated and paid for. Perhaps the government will pay less into it as a way to cut spending.

The reality is that the national debt must be managed. A viable plan must be made between the two parties in order to deal with the national debt now and not off-load it onto our kids and future generations. And the country, like those in the eurozone, must adhere to a tough budget.

There will be unpopular decisions that will need to be made to save the country and stop the frivolous printing of money and mounting national debt.

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