Financial Planning: What Does the “Sequester” Mean for Your Investments?
The “fiscal cliff” may be behind us, and the “debt limit” debate is in the rear-view mirror—but don’t worry! Our fearless leaders in Washington DC have created yet another crisis for the media to obsess over. The most recent edition of partisan gridlock in Washington is over the “sequester” cuts.
As you may know, these are cuts designed to reduce the federal government deficit. They will have a broad impact—from defense funding to domestic programs. Unfortunately, economists on both sides of the political spectrum are concerned about the impact that the cuts may have on an economy that is still recovering.
Not surprisingly, there is little hope that the politicians in Washington will arrive at a deal. The Washington Post reports:
The sequester is set to kick in on Friday, leaving Congress little time to prevent across-the-board spending cuts that would start this week and last until they’ve saved up to $1.2 trillion over 10 years.
Democratic and Republican leaders are expected to introduce competing proposals this week that would replace the indiscriminate reductions, but neither side sees much chance of winning passage for their plans.
That means the sequester is almost certain to kick in on Friday.
Republicans have been working on a proposal that would preserve the cuts but give the administration more discretion over how to implement them. They may also produce a plan that would structure the defense reductions to have minimal impact on national security.
The Democratic plan would delay the sequester until January and replace the sequester with $110 billion in new tax revenue and a more narrow menu of spending cuts.
Administration officials have spent the past several weeks sounding alarms over how the reductions would impact everything from government services and national security to federal workers and the economy.
The fundamental concern for most economists is that, while government spending has grown at an unsustainable rate in recent years, cutting this spending dramatically may have a devastating effect. For instance, one of the areas that will be cut is defense spending. These spending cuts translate into less money for contractors and others associated with the defense industry. The ripple effect means that less money is being spent, and that economic growth is likely to slow.
As an investor, it’s hard to say exactly what will happen. If the cuts do go into effect and the economy is weakened, don’t be surprised to see the stock market tumble. If the politicians in Washington are able to avert this crisis, it will be smooth sailing… until the next crisis comes along.
The real question that investors should be asking is “how can we shield our investment so that political dysfunction doesn’t compromise our future?” The good news is that we can help. If you’d like to learn more about creating an investment portfolio that protects your assets from market volatility, get in touch with us today!
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Depaul University—O’Hare Campus in Chicago IL
July 31, 2012 7:00 PM