Finding A Balanced Solution To The Fiscal Cliff
Blog of HORAN Capital Advisors | Nov 25, 2012 02:39AM ET
Since November 15th the S&P 500 Index has managed to gain over 4% in spite of the rhetoric surrounding the consequences of going over the fiscal cliff. Finding a "balanced" solution to the budget issues in Washington is more than a near term issue.
As the below chart shows, total credit market debt to GDP has been on an increasingly higher growth trajectory. A contributor to this debt increase is the growth in debt at the U.S. government level due to the significant budget deficit from year to year. Additionally, the economy continues to grow at a recent market comment by Liz Ann Sonders, Chief Investment Strategist for Charles Schwab & Co. She notes the mixed market results that occurred when capital gain tax rates were increased. However, she goes on to note, "but looking more closely, you can see that the capital gains tax hike in 1986 was met with very strong market performance. Why? Because it was part of President Ronald Reagan's bipartisan tax reform, which slashed marginal and corporate tax rates while also eliminating many deductions. I hope our policy-makers heed the message of this particular history."
The important takeaway from the above table is the necessity to craft a budget solution that includes components that are conducive to economic growth.
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