Fiscal Cliff Talks Underway Between Obama, House Speaker Boehner; Market Rallies on Talk of "Fluff" Compromise

The SP&P staged a mild (and meaningless) 19-point flagpole rally on news of a possible compromise between House Speaker John Boehner and president Obama as shown by the following chart of S&P Futures.



Market participants hope that Obama and Boehner agree to kick the can down the road. Most likely they will, the question is by how much.

Please consider Obama Opens Fiscal Cliff Talks as Boehner Open to Revenue

House Speaker John Boehner said he offered a “framework” including new revenue to reduce the U.S. budget deficit in his first face-to-face talks today with President Barack Obama and top Congress leaders since the Nov. 6 election.

As both sides expressed optimism that a deal is possible, U.S. equity markets rose.

Boehner also said he is serious about including revenue in an agreement if accompanied by significant spending cuts. The framework is “consistent with the president’s call for a fair and balanced approach,” he said after what he called a “constructive” meeting with the president and other congressional leaders in the Roosevelt Room at the White House.

“We’re prepared to put revenue on the table, provided we fix the real problems,” including entitlement costs, said Senate Republican leader Mitch McConnell of Kentucky.

Despite the optimism, the starting points for both sides -- Obama’s insistence on higher taxes for top earners and Republicans’ refusal to raise rates -- leaves negotiators with arithmetically complex and politically fraught choices.

While insisting on taxes, Obama has shown some openness in recent days. He and Geithner said rates must increase without specifying that the top rate must return to the 39.6 percent level in effect when President Bill Clinton left office.

Democrats and some Republicans are also beginning to talk publicly about another alternative: a more modest increase in upper-income tax rates.

One idea would be to raise Obama’s $250,000 income threshold for a tax increase to $500,000 or $1 million and increase the current 35 percent top rate to 37 percent, Peter Orszag, Obama’s former director of the Office of Management and Budget, said today on Bloomberg Television.

“Will John Boehner really blow up a deal for a 1 percent point increase above $1 million?” Orszag said. “The administration has made it clear there has to be at least some increase in marginal tax rates.”

Several congressional aides have suggested that in the event talks fail, both parties in Congress are discussing fallback plans for $60 billion to $100 billion in deficit reduction to replace automatic spending cuts set to take effect in January.

Why the Country is Broke

Read that last paragraph above carefully. No one in either party has the guts to stand up and say "we cannot afford this".

I talked about this earlier today in Ron Paul, American Hero; His Farewell Speech to Congress; Mish Reflections On Why the Country is Broke

Question of the Day

If Republicans are not in favor of deficit spending and Democrats are not either, then how the Hell do we have trillion dollar deficits?

The answer is vast majority of politicians are liars, with no backbone to stand up and tell the truth to US citizens: "the country is broke".

We cannot afford wars. We cannot afford to keep troops in 140 countries. We cannot afford to be the world's policeman.

We also cannot afford Davis-Bacon and prevailing wage laws. We cannot afford the pension promises we have made. We cannot afford collective bargaining of public unions. We cannot afford all kinds of entitlements that have been promised.

How Does It Happen?

We have all of these things because corrupt politicians buy votes of constituents who want to hear the lie that we can afford those things. In the end, that's what it's really all about.

The unions, the warmongers,  the banks, and all the other special interest groups buy votes of  corrupt politicians every step of the way. The "compromise" in Congress is Republican get their wars and Democrats get fiscally unsound social programs.

Expect Fluff Compromise

Look for a compromise to do as little as possible to fix the structural problems in the US. Instead look for Republicans to scale back cuts in military spending and Democrats to scale back revenue increases.

The non-leaders in both parties will stand up and proclaim "we saved the US from the fiscal cliff" or some other self-congratulatory nonsense.

Once again, I am not in favor of tax hikes (unless they come at a steep price such as scrapping Davis-Bacon, ending collective bargaining of public unions, etc., things that will actually fix some structural problems).

However, I don't expect anything but fluff compromises because neither Obama nor Boehner has the courage to tell the truth.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com