Resource World Magazine

s p e c u l at i o n s L eon ard M e lma n Fiscal Cliff legislation and its impact W hen it comes to building toward a public relations crescendo, it is difficult to imagine a more impressive effort than the one created by the US Congress and the President throughout December, 2012. This particular drama was named the "Fiscal Cliff" and it had all the elements of a true drama; an immovable deadline, constant depictions of what would happen if a settlement was not accomplished and a public presumably frightened half to death. The "Cliff" had two essential components which presumably, in combination, had the ability to completely downturn the American economy and plunge it into renewed recession. In the first case, many of the Bush-era tax cuts were scheduled to expire December 31, 2012 meaning that general tax withholding rates would surge higher on January 1 for millions of wage-earning Americans. In the second case, severe spending cut agreements known as "sequestrations," were already enacted and were scheduled to go into place on January 1, 2013. These agreements would have drastically cut funding to many governmental programs, presumably inflicting personal hardships and reducing economic activity. The Fiscal Cliff, then was the name given to reflect the effect of both taking place simultaneously – namely a sharp reduction in consumer purchasing power due to higher levels of taxation combined with yet another reduction in consumer activity brought about by the removal of increments of government spending and the termination of many government workers. The sense of drama was immeasurably heightened by conflicting philosophies of government between the President and the Democratic-dominated Senate on the Left and the Republican-controlled House of Representatives on the Right. President 24 www.resourceworld.com Obama insisted on legislatively eliminating the tax increases for the majority while adding heavily to the tax burdens of the wealthy, while also insisting on forestalling any significant government spending cuts. The Republicans were loath to add to the tax burdens of the well-to-do, stating that would eliminate a source of investment funds for the expansion of commerce, and they also insisted on maintaining a significant portion of the scheduled government spending cuts. Clearly, the two positions were at loggerheads and as the clock ticked toward December 31, genuine fears grew that no resolution would be found and the country indeed would go tumbling over the threatened Cliff to the detriment of all. Stock markets sagged worldwide, business plans were put on hold and uncertainty began to even reduce retail commercial activity during the Christmas holiday season. However, as many skeptics might have anticipated, a last-minute solution was indeed passed in the form of the "2012 American Taxpayer Relief Act" on the evening of December 31. The Act, which, given that there were only two questions to be resolved, ran for an astonishing 157 pages and appeared to give the President and the Democrats much of what they wanted. The President was able to proclaim that all Bush era tax cuts were to be extended 'permanently' and taxes would be increased among the very wealthy with the threshold for the new 39.6% rate being income above $450,000 for a couple filing jointly. In addition, the scheduled spending reductions would not go into effect on January 1 as had been previously scheduled. Among the politically sensitive programs which would have been cut back were unemployment insurance; food stamps; the Supplemental Nutrition Assistance Program and several others. However, there is a serious catch regard- ing eliminating those spending cuts. The elimination is only valid through March, 2013 as spending in general will be taken up in debates regarding yet another onrushing crisis, this one relating to the expiring Statutory Debt Limit – a debate which threatens to contain every bit as much drama as the one just concluded. In terms of base and precious metals mining, these debates are hardly insignificant and, in fact, could have a major impact regarding metals prices. As a general supposition, legislative action which results in accelerating economic growth may be interpreted as being positive for the base metals. In fact, the elimination of those general tax increases (which would have reduced consumer spending) and the elimination of program reductions indeed benefitted the base metals which performed relatively well during December and early January. However, since precious metals prices historically react positively to enhanced increments of crisis, the fact that the Fiscal Cliff was resolved, thereby leading to a reduction in uncertainty, turned out to be negative for the precious metals with gold and silver showing losses between early December and mid-January. American Congressional action is truly an important factor in metals pricing. The all-important Statutory Debt Limit and Budgetary debates that are ahead, deserve close attention. n This material is taken from sources believed to be reliable and is provided for information only. Any investment decision should be made only after prior consultation with investment professionals. Leonard Melman is a financial and political writer who focuses on issues relating to the resource sector. Mr. Melman lives in Nanoose Bay, British Columbia, Canada and can be reached at lmelman@shaw.ca february 2013

• Cover