Monday, October 8, 2012

Going Over the "Fiscal Cliff" Would Be Real Bad ... And It Would Be Totally Unnecessary, Too

Let's discuss the U.S. "fiscal cliff" currently scheduled to hit the U.S. economy (and indirectly the rest of the world's economies, too) in 2013 unless Congress acts to prevent it.

If we go over the cliff, taxes will increase for everybody, big defense cuts will take place and other government spending will be arbitrarily and automatically curtailed as well. And all this would happen simply because our elected officials can't get their act together, behave responsibly and reach an agreement to avoid what everybody agrees is unacceptable, dangerous to our economy and unnecessary.

While perhaps foolish to think positively that responsible action will result from the deliberations and discussions of our "public servants," I believe that Congress will in fact take necessary steps to prevent going over the cliff at year end. That said, it's no sure thing, and the possibility that they won't take appropriate action in time and the resulting ramifications are definitely worth our attention.

So here's the way I see it.

Reaching an agreement is essential and will happen. The timing will be after November's election and hopefully very soon thereafter.

That's due to the fact that there will be a huge difference between the good and bad effects of arriving at an acceptable compromise and not doing so: (1) both the U.S. and world economies will dodge an unnecessary economic debilitating bullet by reaching a "grand bargain" and (2) major economic disruptions will occur if we all go over the "cliff."

People's confidence is a big deal and should never be taken for granted. A grand bargain will instill some confidence that Congress can act appropriately while failing to reach such a deal would do great harm to consumer confidence throughout the world. And more fear, uncertaintly and doubt about the world's economic situation is exactly what we and the rest of the world's citizens don't need at this fragile time.

So while we can be highly confident that a "grand bargain" will be reached at some point, we can't pretend to be able to predict either the timing or the political theatrics that will occur prior to such an accord.

Citi see stocks falling by 20% in worst-case fiscal cliff summarizes Citigroup's professional investment team's three scenarios of possible outcomes in a well researched explanatory "note" referenced below. You may wish to click on the "said in a note" phrase in the following sentence:

"How bad could going over the “fiscal cliff” be for investors? Try a 20% decline in equity prices, Citi Research analysts said in a note . . . .

That’s under a worst-case scenario mapped out by analysts about what happens if big tax hikes and spending cuts are allowed to take effect at the beginning of next year. It’s one of three scenarios contemplated. The other two envision sidestepping some of the fiscal cliff measures like tax hikes, and hatching a “grand bargain” of fiscal consolidation.

With Congress (having left) town until after the elections — and no visible progress on the fiscal cliff — the worst-case scenario becomes all the more interesting. If there’s no deal, the Citi analysts say that in addition to the decline in stock prices, oil prices would drop by $20 a barrel; a 5% depreciation of the dollar is possible; and unemployment would rise to at least 9.5% through 2014 . . . .

The analysts note that there is “little if any probability” that lawmakers would allow the worst-case fiscal cliff scenario — coupled with a failure to raise the debt ceiling — to play out. . . .

“The prospect of a lame duck Congress adjourning with only promises of action would likely make for a stressful year end and could be a serious jolt to financial stability at the start of the year,” the analysts write. “Investors would have no assurance that lawmakers could avert the tax hikes and spending cuts and also extend the debt limit in a timely way.”"

Summing Up 

The problems and ramifications associated with not reaching a "grand bargain" deal are simply too great to contemplate. Accordingly, I'll wager that even our politicians aren't going to take us over the fiscal cliff at year end or anytime thereafter.

Instead, they'll reach an agreement which will demonstrate we're still capable of self governance. This may in turn position our nation's real economic growth to reach a much needed level of ~3% by 2014 and beyond. 

As a result, our unemployment rate will move down to below 6% within the next few years.

In turn, this will help the rest of the world's growth prospects as well, as U.S. consumers still represent the economic engine which drives worldwide growth and prosperity. 

While not trying to be polyannaish,  I do foresee better days ahead for the world, led by America, of course. And regardless of who's elected in November.

2013 and beyond will bring We the People better days. It's about time.

Now let's hope that's how it all works out.

Thanks. Bob.

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