I attended a webinar about the impending doom of the fiscal cliff last month. There was a lot of dry and boring conversation about dividends, capital gains, and gift taxes. It probably would have been more interesting if Montgomery Burns from the Simpsons© explained what the fiscal cliff consisted of.
As I listened, I noticed that this cliff seemed to only affect those that are well to do, or rich. My client base is consists of working, middle class families and entrepreneurs. My clients are more concerned about how they are going to pay college tuition for their kids, not harvesting capital gains.
As I prepared to write this blog post, I reviewed my notes and realized none of the information was extremely vital to my client base. I literally had to ask myself “What the f$%& was the fiscal cliff anyway?” Here is what the media should have told you about the fiscal cliff instead of scaring you.
The Fiscal Cliff in Plain EnglishThe fiscal cliff primarily affects those who have a huge stake in the investment community. The “cliff” consisted of a combination of tax increases and spending cuts that were created to offset tax cuts and spending increases approved by George W. Bush during his presidency. See the components above. President Obama wanted to let the Bush tax cuts expire for the rich folks, raising $1.4 trillion over 10 years. If a compromise was not reached, the economy would have gone into another recession in my opinion. The opinions of economists, policy makers, and other yahoos said If the problem had not been solved, the economy could have gone into another recession by .5% or expand by 2%. Sounds real convincing, right?
How the “crisis” was “solved”
So the last 3 weeks, the President and the House have been arguing about who needs to pay more taxes. In the end, the President won. Higher taxes will be imposed on households making more than $450,000 each year, which represents about 2% of all taxpayers. But the Social Security tax will go back to its original rate of 6.2% (12.4 for the self-employed). The compromise bill signed by Obama will keep middle class families from paying alternative minimum taxes (an additional income tax for those who deemed to be rich by the IRS) permanently and saving these families about $3,000. It was supposed to be a win-win for all. It is estimated that households earning between $500,000 and $1 million will see a tax increase of $15,000, and those over $1 million it would be about $170,000. In comparison, the social security tax increase will result in a tax increase between $1,000 and $5,000 dollars for middle class families.
But this bill has apparently left some loose ends. The ever rising deficit was not addressed. There are spending cuts that were delayed that will come into effect to the tune of $110 billion and the credit limit of America’s credit card has to be increased again. Haven’t I heard this BS before? I do not remember the deficit ever being solved or addressed since I was able to vote (2002). Honestly I did a better job of balancing the budget using Wall Street Journal’s Make Your Own Deficit Reduction Plan tool.
The Moral of the Story
The middle class is paying a little more taxes, instead of a lot more taxes. The rich are paying significantly more in taxes, instead paying at middle class tax rates. The US government spent more than it brought in…AGAIN. I am certain policy makers will find a new crisis that will scare the public within a few months. So I anticipate asking my question again: “What the f$%& does that have to do with me and my clients?”
Jéneen R. Perkins is a freelance accountant and consultant serving entrepreneurs, families and small businesses. She prides herself in being fluent in English instead of “Accountant-ese”.
CNN, Fiscal cliff’s new definition of rich
Wall Street Journal, Congress Passes Cliff Deal
CTVNews, U.S House approves deal to advert fiscal cliff
On March 14, 2012 I was reading the news headlines, while eating my lunch, when notice that one of them stated that 4 big banks failed the stress test administered by the Federal Reserve Bank. So what does that mean to me as a consumer and an entrepreneur?
First let’s define what a stress test really is. Stress testing is simply analyzing a financial institution under various “what-if” scenarios. The scenarios could involve anything from sharp increases in unemployment rates, interest rates, and oil prices to market crashes and reduced domestic production. It supposed to be better than forecasting and is widely used in Europe and by the International Monetary Fund (the world’s bank). According to Wikipedia, “Stress testing reveals how well a portfolio is positioned in the event forecasts prove true. Stress testing also lends insight into a portfolio's vulnerabilities. Though extreme events are never certain, studying their performance implications strengthens understanding.” In layman’s terms, a stress test shows how a financial institution will manage if the economy crashed (again) or if the world came to an end.
With the information above, now I can fully understand Jonathan Stempel’s article Fed gives high marks in bank stress tests results , right?
To quickly summarize, larger banks passed (15 out of 19 to be exact), while others failed. This means that 15 banks would survive extreme economic changes through 2013 if the changes occurred this year. JP Morgan Chase, Wells Fargo, and PNC were among the banks to receive a gold star. But the named financial institutions that failed are what are so intriguing. Citigroup, MetLife, Ally Financial, and SunTrust Bank all failed, miserably.
It really surprises me that MetLife and Ally Financial failed. According to the article, MetLife is the largest life insurer in the US. Ally Financial was the leading online bank, then switch gears to the consumer loan market when it purchased GMAC Finance. To think, Snoopy (MetLife’s mascot) would have a foreclosure sign on his dog house. And the auto industry was bailed out only to be financed by irresponsible CEOs and investors. However, I am not all surprised that Citigroup failed. If you asked me, it was in their destiny.
I have done business with Citigroup, and I will never do business with them again. Since 2009, Citigroup, better known as Citibank, made various business decisions that I was skeptical of. One of those decisions impacted me on a personal level and I am still dealing with the consequences of Citigroup’s actions until this day. I even owed stock in the company, but not anymore. In October 2011, 24 consumers were arrested for attempting to close their bank accounts at Citibank in New York during Occupy Wall Street protest. Click this link for additional information about this incident. I truly believe that if the customers were wearing business suits that NYPD would not have been involved.
So what does the stress test results mean to the rest of the U.S.? It means that 79% of the financial institutions tested are doing what we, as consumers, expect them to: protect our funds, offer competitive interest rates, and not issue risky assets (loans). It also means if you have any connections to the four failures listed above you may want to end those relationships. Obviously, they need to be monitored. Those 15 banks are considered to beacons of light in the muddy waters of this economy. And the stock prices of these banks have increased and probably will continue to do so. The world’s stock markets ended on a high note. So I guess majority of our banks passing a test means, that we can take a collective sigh of relief. Citibank, technically, did not fail the stress test. The Federal Reserve Bank merely did not approve the capital plan, or their explanation of where the money actually goes. My point: Citibank is a failure.
Since October 2008, I have pondered reasons as to why the recession began. Over the past 3 years, I have read numerous articles and watched various news programs, each claiming to thoroughly explain the real reason for the recession. The housing market was often fingered as the blame; with its sub-prime mortgages and “no-doc”loans. However, I do not think it was the back-alley practices or suspicious activities of the real estate market that tanked our economy. I truly it believe it is our good old attitude in the USA of “My credit limit or score says I can afford it”. I only feel this way after reading an article provided by Investopedia’s Financial Edge on Twitter called “Why Today's 'Recession' Tops The Great Depression”. Based on the information in the article, our nation should have struggled more than our predecessors did during the 1930s. The article is laced with a lot of financial jargon. Here are the major comparison points of the article:
“1). The nation’s debt: During the onset of the Great Depression (June 1929), the national debt was $17 billion, which of only 16% of our gross national product (GNP can be viewed as the net worth of the US). Also, there were no significant interest payments. As a nation, we only incurred debt during wartime, and promptly paid our bills during peacetime. The current debt level is near $15 trillion, of which $434 billion represents interest payments. In 2010, our gross national product was almost $15 trillion. 4.5 billion of our debt is serviced by foreign nations, over half of this amount is owned by China and Japan.
2). The nation’s spending: Programs like Social Security and Medicare are tremendously underfunded. Another $62 trillion dollars, in addition to the outstanding $15 trillion in debt, is needed to properly fund these programs. This is calculated to be approximately $528,000 per household. These figures are expected to increase as baby boomers retire. During the Great Depression, these programs didn’t even exist.
3). The workforce: Unemployment was calculated differently during the Depression when compared to the current formula used today. But the overall gist is that unemployment levels higher if today’s numbers were recalculated. As of August 2011, unemployment was at 9.1%.
4). The real estate market: Average home prices dropped 31% during the Depression, compared to a 33% decrease in the beginning of 2011.
5). The economy: Due to the deficit of $15 trillion, caused by the government overspending funds, our gross domestic product was overstated (GDP is similar a person’s gross wages from their job). If the deficit was included in this calculation, the US has not experienced GDP growth since World War II.”
The author goes on to say that there were some historical and other economic events impacted our current financial state. I agree with him to a certain extent. It is true that the government’s effort to spend its way out of a deficit was not the best decision. By doing so, a false sense of hope and security was created. Please read the full article at: http://financialedge.investopedia.com/financial-edge/0911/Why-Todays-
My question is: Why did we buy into it, literally? Our own government is basically maxed out, the deficit equal the total output of all US based firms. And still, “overall consumer credit levels increased by 6% in July 2011”, according to the Federal Reserve.“In 2010, consumer debt amount to $2.4 trillion, or $7,800 for every US resident…These figures do not take into account mortgages. Typical, credit card debt accounts for one-third of all consumer debt, while installment loans (student, automobile, boat, etc.). comprise the other 67%. As of December 2010, the average homeowner spent 15.27% of their disposable income to pay creditors, while renters spent23.99%.”(http://www.money-zine.com/Financial-Planning/Debt-Consolidation/Consumer-Debt-Statistics/). In an economic letter posted by the Federal Reserve Bank of San Francisco, it states that “One of the striking features of the U.S. economic downturn that started in 2007 is that it was preceded by the largest increase in household debt in recent history (http://www.frbsf.org/publications/economics/letter/2011/el2011-02.html).”
I can find so much more information that proves that we, as nation, continued to buy everything we could get our hands on…with credit. It is true that the real estate market crash prompted the recession. However, we as consumers added fuel to the fire.
Now I am more motivated to become debt free because now I understand I am the only one responsible for my financial future.
"Putting My Money Where My Mouth Is" is a journal about real life experiences and concerns of Jéneen R. Perkins. The purpose of the blog is to exhibit the real life challenges and answer the tough questions posed by the concepts of business, entrepreneurship and money.