What Is The Sequester?

The Sequester – What is it?
Here we go again. First we had the Fiscal Cliff drama to contend with, then Congress entertained us throughout the holiday season with their Debt Ceiling antics. As if that were not enough, now we get to watch as Congress and the White House do their silly little political dance over the latest national fiscal crisis, the Sequestration.

The Sequester – What is It??
If you recall from my article a few months ago on the resolution of the Debt Ceiling crisis, part of the resolution that was agreed upon back during the 2011 Debt Ceiling argument was a provision in the Budget Control Act of 2011. This provision essentially mandated over $1 trillion in federal spending cuts over 10 years, with half coming from the military defense budget, and the other half coming from domestic discretionary spending.

For 2013, this will mean roughly $85 billion in across-the-board spending cuts. These automatic cuts are scheduled to go in effect on March 1, 2013. Along with military defense, the remaining cuts will impact programs all across the nation, from energy, housing, and law enforcement, to education and public safety. Currently, entitlement programs such as Medicare, Medicaid, and Social Security are not affected.

Don’t We Want Federal Spending Cuts?
Well, yes and no. Conventional economic wisdom says that it is always best to implement spending cuts when the economy is robust and growing. That way, there is a much milder impact on overall economic growth. But as we have experienced the past five years, the economy is in an extremely fragile state, and many believe that $85 billion in current-year spending cuts will be the proverbial straw that breaks the camel’s back. The 4th quarter of 2012 saw the slowest growth (virtually flat growth) since the recession ended in 2009. The most serious concern is that the Sequestration will throw the economy back into recession.

While we have emerged from recession since 2008, the recovery has been the weakest recovery from recession in history. With still historically high unemployment, a fragile housing market, all-time low interest rates, a European union on the verge of economic collapse, and tax increases on virtually all Americans, now does not seem like the appropriate time to slash yet more economic activity. Keep in mind, while federal spending can be looked at suspiciously, a dollar spent on wages for a federal worker are no different than wages spent in the private sector. Both produce equal value in terms of economic activity.

So What Does This Mean?
Fortunately (and I use that term quite loosely), we have the hindsight having already been through Debt Ceiling I, Debt Ceiling II, and the Fiscal Cliff all in the past few years. So we know a little bit about how this story might play out. Already we are seeing increased volatility in the stock market as nervous investors begin to re-think their investment decisions. I don’t anticipate that ending soon.

My hope is that Congress and the White House come to an 11th hour resolution before the President is required to mandate the cuts as prescribed in the Sequestration bill. As we are quickly approaching the deadline, there is a good chance that a deal will not be struck before the deadline, and we will begin hearing about the spending cuts such as work furloughs and program cuts immediately. Any agreement that is made could suspend those spending cuts going forward.

Robert Henderson is the President of Lansdowne Wealth Management, an independent, fee-only advisory firm in Mystic, CT. His firm specializes in financial planning and investment management for retirement, with a special focus on the particular needs of women that are divorced or widowed. He is an Accredited Asset Management Specialist and a Certified Divorce Financial Analyst. Mr. Henderson can be reached at 860-245-5078 or bhenderson@lwmwealth.com. You can also view his personal finance blog, The Retirement Workshop at http://lwmwealth.com/blog and the firm’s website at http://www.lwmwealth.com.