Tuesday, December 4, 2012

A debt deal, the fiscal cliff or the economic abyss?

In the absence of a major deal on debt reduction IE - $4 trillion+ ten year new revenue/sustaining trend savings (or at least a $2 trillion pay down with reliable future negotiations), the fiscal cliff would be the least bad option. Ultimately in the absence of a comprehensive deal, the economic outcome would be far worst. In this scenario the debt markets would continue to lose confidence in the future of the US economy. An ensuing confidence crisis would reverberate throughout the economy with continued restrained hiring by companies, as well as reduced capital purchases. In addition, the political landscape would be characterized by even greater partisanship and imbued negativity. In essence, the economy would become increasingly leeched by a growing condition of doubt - a doubt that would require resolution by a major debt deal or would inevitably result in the 'abyss'. What would the abyss mean? the economy would be characterized by a market induced risk premium on debt (leading to v. high interest rates), significant inflationary pressures, a collapse of the entitlement system and an evaporation of the already challenged trust in government. In addition, because of the Fed's present monetary policy to restrain interest rates, the abyss would occur in the context of higher interest rates and therefore an excess annual interest repayment level for the Federal Government of about $200 billion.

     In short, where the 'cliff' would be an economic tropical storm, the 'abyss' would be a category five economic hurricane.

1 comment:

  1. Since the fiscal cliff is due to increased taxes and reduced spending as required by previously enacted laws, I guess people should know better and be more vigilant when it comes to their spending. Accounting may deem difficult to almost everyone but it's all we ever need to know how we stand on our finances.