Barack Obama's nightmare on Wall Street

Wall Street's reaction to the US election result foreshadowed the belting retirees and higher-middle income earners will cop after heavy tax hikes and spending cuts kick in.

Fasten your safety belts because the US stock market, retirees, and higher-middle income Americans are about to be attacked and attacked severely. The horror of what looks like being ahead for Americans in the short to medium-term hit Wall Street last night.

But the fall was more serious because markets sensed that there was danger of a triple whammy – much tougher times in the US, a worsening of European problems and China caught in a leadership change, which will delay further stimulus.

Not surprisingly among the biggest casualties were oil prices, which fell over 5 per cent, and underlined that Australia, as a significant energy exporter was not far from the front line of the market attack.

You could feel the danger to markets as you watched the post election rallies.

Obama’s speech was one of the most inspiring pieces of rhetoric I have heard for a long time and he is in the fortunate position, thanks to the US energy revolution, to have the opportunity to change the face of the US and longer term restore American economic health (On the cusp of a new US prosperity, October 31).

But that’s down the track.

The most significant post election picture was the angry face of the Republicans who knew that they had lost an "unloseable election”. They did not listen to Obama’s speech but walked out as soon as Romney had finished. When morning broke, Wall Street sensed that the Republican frustration would make a compromise on the "fiscal cliff” measures hard to achieve.

When you look at the tax measures that could come into effect on December 31 or soon thereafter you realise that they will decimate America in the short term. Add that to the spending reductions and you have a some $600 billion in immediate tax and spending cuts. There will be some compromises but we are set for some very severe blows to the US economy.

Just imagine what would happen in Australia if measures like the following were suddenly introduced at the same time as major spending cuts:

– For tax payers earning over $US250,000, tax rates will be raised from 33 and 35 per cent to 36 and 39.6 per cent.

– Taxes on dividends may be raised from 15 to 43 per cent. Even if the ultimate increase was to, say, 25 per cent it would still require a major adjustment to share values.

– Families may see an increase in the inheritance tax from 35 per cent to 55 per cent.

And, worse still, the asset exclusion from inheritance tax will be slashed from $10 million dollars to $1 million dollars.

The Republicans want spending cuts that are more severe than those proposed before they will agree to moderation in tax cuts.

I am not in the business of predicting how this will turn out, but last night’s share market showed the ultimate outcome could be nasty.