The Fiscal Cliff Looms

Christopher Ruddy's Perspective: Fasten your seatbelts — here’s what will likely happen on Jan. 1, 2013:

At the strike of the new year, all of the Bush-era tax cuts will automatically and fully expire, and taxpayers across the income spectrum will be hit with the largest tax hike in history.

They won't be fully renewed if President Obama wins re-election because he is holding those cuts hostage to his demand that rates on wealthier taxpayers be returned to Clinton-era rates of as much as 39.6 percent.

Vice President Joe Biden has been on the campaign stump bragging they won't be renewed out of "fairness" — Obama wants to punish the rich.

It's true that the rich will get hit with higher taxes, but the Bush tax cuts affect almost all tax-paying income earners.

Also set to expire is a 2-percentage point temporary payroll tax cut. And, at the same time, a new set of taxes arising from the implementation of Obamacare is set to kick in.

All those tax increases — plus $109 billion in automatic cuts in government spending that are mandated to begin at the beginning of the year thanks to legislation signed by Obama — form a combination known as a “fiscal cliff” that could send the country sliding back into recession or depression.

These looming automatic tax increases should have been a major issue in this year’s presidential election, to the detriment of Obama’s re-election effort. But I didn’t see it.

And, the facts about Obama's economic record are not in the forefront: some 12.5 million Americans officially unemployed, millions more underemployed, gasoline prices twice as high as they were when Obama entered the White House, the slowest economic growth for any recovery, an unfixed housing crisis, and more disturbing data.

Despite these facts, Obama has held the front-runner status during most of the campaign.

If Obama does win, he will have just one person to thank: Federal Reserve Chairman Ben Bernanke. Bernanke’s quantitative easing policies created the additional “stimulus” that Obama wanted and made him palatable to swing voters.

The Fed recently announced QE3, the third round of quantitative easing that will buy $40 billion worth of mortgage-backed securities from banks each month to pump the economy full of liquidity to keep interest rates low and spur recovery.

But this policy is widely known as printing money out of thin air.

The low interest rates allow banks and corporations to borrow money at zero or close to zero rates. They, in turn, use this free money to buy up securities and government debt at higher rates, making fortunes for themselves.

Those who have access to the free money are big winners. The losers are savers who are receiving effectively negative rates on their money in banks and all Americans who value the soundness of the dollar.

At first blush, Bernanke's policies seem to be working. They have created a phony stock rally as the Dow hovers around its peak before the 2008 crash. With rates low and starved for yield at banks, investors are forced to put money into the stock market. Market prices rise and people feel wealthier.

Billionaire mogul Sam Zell recently said the Dow Jones industrial average, currently around 13,500, could likely fall more than 4,000 points if corporate and economic fundamentals truly reflected share prices. “Based on the fiscal cliff and all of the headwinds, the stock market should be at 9,000 and not 14,000,” he told CNBC. “We’re seeing too much capital chasing too few opportunities. We’re creating artificial numbers.”

Zell says that even if Congress does manage to steer the country away from the fiscal cliff, uncertainty over how much businesses of all sizes will be paying in taxes will keep expansion and hiring at bay. What we need is sound spending, not automatic spending cuts, and sound monetary policy, not fiscal gimmicks like Bernanke’s “stimulus” efforts.

Last year, for example, the Fed created money and bought 61 percent of the government debt.

This model is not only unsustainable, it creates pure inflation, which Milton Friedman in his seminal work on inflation, “Money Mischief,” argued.

For the moment, the Fed policy is helping Obama's re-election.

Low interest rates for mortgages and Obama’s Home Affordable Refinance Program (HARP) that gives homeowners with mortgages, even those 5 percent larger than the value of their homes, the ability to cheaply re-finance, is the main way Obama has staved off political disaster for himself.

But there is no free lunch. Someone will pay. Sadly, it's taxpayers like you and me who denominate our wealth in dollars.

Christopher Ruddy is CEO and editor of Newsmax Media Inc. Read more Christopher Ruddy Insider articles — Click Here Now.