Fiscal Cliff’s real threat to 401k’s

The Fiscal Cliff’s real threat to 401k’s is not the risk that Congress and the President won’t create temporary patch for the Fiscal Cliff at year end. Rather the real risk is that Congress will kick the can down the road by smoothing over the problem with phony placebo solutions. The risk will be that naïve investors will think the placebo was a true cure and they will overpay for stocks creating a fake boom (a bear market rally). The rally will be a set up to failure where investors are fooled into buying at the top of the market and then suffer losses as the truth comes out. Equities are overpriced in part due to artificially low interest rates and partly due to the Fed’s Quantitative Easing.

The odds of a compromise leading to a successful “deal” to solve the Fiscal Cliff are high. This is because the Republicans were badly hurt by the dangerous actions of the Tea party during the July 24-31, 2011 Federal debt ceiling negotiations. The Republicans no longer have a threat from the Tea party and are motivated to get a deal done before they lose control to tea party radicals, should negotiations with the Democrats drag on.

When the Fiscal Cliff solution is announced by Congress investors should ask themselves how sustainable is the plan? Will the private sector suffer a loss of purchasing power because of tax increases that will result in a recession? Will the planned cuts in spending merely be a promise to make cuts in the future or are these cuts substantial and immediate?

I have written an article “Fiscal Cliff to damage 401k’s”.

Investors should seek independent financial advice.

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