Remember back a few months when everyone was talking about the “fiscal cliff”
and what a big crisis it was supposed to be, bringing Armageddon to financial
Well that “crisis” ended with a whimper, just like most overly hyped
crises. Did your computer explode on January 1, 2000? Well we have another
supposed crisis that’s going to wreak havoc with the global economy, drag the US
into another recession, add millions to the unemployment rolls, etc. Unless an
agreement is reached, in another week we will have the “sequestration”
What is sequestration? One definition is the action of taking
forcible possession of something; i.e., confiscation. Sort of what the
government does to us routinely, but that’s for another column. When dealing
with the federal budget it is a term that means mandatory spending cuts will
take place if the government spends too much without authorization.
does it work?
The sequester is a rash of spending cuts scheduled to hit on March
1. Unless Congress acts, $85 billion in across-the-board cuts will occur this
year, with another $1.1 trillion coming over the next decade. Sounds like a lot,
until you realize that: 1) you are talking about a budget of $4t.; and 2) as I
have written in a previous column, these aren’t even cuts; it just a smaller
increase in the budget that was originally planned (hardly what normal people
consider a cut).
Now all the hysteria has started. I don’t mean political
posturing from the likes of President Obama, who created this in 2011, telling
anyone who will listen that these cuts are going to leave hundreds of thousands
of mentally ill people without treatment, end day care, border agents will see
reduced hours, criminals will be set free – you get the point.
journalists are also more than nervous about the impact of the cuts. Writing in
MarketWatch, John Nyaradi says: “Federal spending will be slashed by $85 billion
between now and September 30 when our government’s fiscal year ends. From
October 1 of this year until September 30, 2021, there will be annual cuts of
$109b. The $85b. in cuts to this year’s budget will kick in during the
second and third quarters of the calendar year, bringing great havoc over the
remaining months of 2013. Examples of some of the cuts include 5 percent less
funding for Hurricane Sandy relief efforts, displacing many of those whose homes
were destroyed by the storm, the loss of over one million jobs during 2013 and
2014, and significant impacts to military and defense spending.”
investors, the outlook is equally troublesome,” he adds. “Already, the
elimination of the payroll tax holiday is forecast to reduce GDP by 1.5% in
2013. The sequester is expected to take away another percentage point of GDP
growth. With a 2.5% loss in GDP growth, we may very well find ourselves in
Let’s try and leave our political
emotions at the door and look at things rationally. The $85b. is a little more
than 2% of the budget. You mean to tell me that there is no waste at all in the
US federal budget? Give me a break. Do some basic math and you’ll see that it’s
like trying to find $85 to save from a $4,000 budget.
I do a lot of
volunteering for an organization that works with families in debt, and we help
give them the tools to get out of debt and live within their means. In almost
every case you can manage to save such a small amount. Families can do it by
slightly limiting their heat or air-conditioning use, plus some smarter shopping
decisions, and it doesn’t even impact their lives.
Hard to fathom that
the government can’t do without 2% of their budget.
pundits are saying this will be a disaster for stocks. They are encouraging
investors to move to cash because if the automatic cuts go into effect, markets
will tumble, being that they haven’t been factoring in this possibility. My
response would be that in general this will be a meaningless event for the
economy as a whole. As for individual investors, each one is different and
should take a different approach into preparing their portfolios for next
If you are a retiree who needs to be very careful with limited
retirement funds, it may pay to move some money into cash because it’s of utmost
importance not to lose money, as opposed to making another percent or
Speak with your financial adviser to see if you are prepared for the
Aaron Katsman is a
licensed financial adviser in Israel and the United States who helps people with
US investment accounts.