Look beyond the fiscal cliff

Posted by on December 11, 2012 @ 2:45 pm in Economy & markets

The nation’s near-term focus is on the “fiscal cliff,” the slate of expiring tax cuts and automatic spending reductions that will be triggered at the end of 2012 if leaders in Washington fail to reach a budget agreement. The debate is dominating the news, complete with dire warnings and grim pronouncements.

It’s downright scary. But I think it’s an incredible opportunity.

Why? Because our long-term fiscal imbalance is an issue we should have resolved years ago. Unfortunately, we’ve postponed for too long the difficult choices that we need to make. Now, we’re up against a deadline with real consequences, and we have to do something. It’s time to get serious.

I would remind folks that this debate is not just about the near-term fiscal cliff. It’s about enacting a long-term plan to address the federal deficit.

Our national debt is the number-one threat facing investors today. It has the potential to dwarf the current economic concerns about Europe or China. We need a long-term plan to bring spending and revenues into balance. Investors, whose decisions ultimately make up “the financial markets” do not like uncertainty. In fact, you could argue that the markets absorb bad news better than they deal with uncertainty.

What does this issue mean for the typical investor? It means a great deal. Take for example someone who is nearing retirement. Every time we’ve come close—but failed—to find a solution (recall the debt ceiling debates and supercommittee negotiations of 2011), that person’s retirement account was jolted by spats of market volatility. But the longer term picture is just as important: The investor’s children and grandchildren continued to accrue the burdens of today’s uncontrolled national debt and the huge, unfunded promises embedded in numerous government programs.

What’s in the best interest of investors?

Vanguard manages $2 trillion for people who are investing for their futures. From our perspective, we believe that lawmakers should do the following:

1. Avoid the fiscal cliff with an agreement that makes a down payment on the problem and pair it with a specific and binding timetable and framework for addressing comprehensive deficit reduction in 2013. We’ve kicked the can down the road long enough!

2. Enact comprehensive deficit reduction legislation to bring government revenues and spending into balance over a span of years.

3. Adopt a more simple and transparent tax code. Maintain strong incentives for savings and investment. Devote any additional tax revenues to deficit reduction.

Our elected officials must take advantage of the fiscal cliff deadline. We have an important opportunity to bring clarity to our nation’s fiscal situation. We believe that while short-term steps are important, only a long-term plan will help restore stability to our markets and economy.

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More Vanguard insights on the fiscal cliff:

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