The Fiscal cliff Deadlock and its direct impacts on the global Fianacial MARKETS!!
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The Fiscal cliff Nightmare !!
Introduction :
“Fiscal cliff” is the popular term used to describe the challenge that the U.S government will face at the end of 2012, when the terms of the Budget Control Act of 2011 are scheduled to go into effect.
Among the laws set to change at midnight on December 31, 2012, are the end of last year’s temporary payroll tax cuts (resulting in a 2% tax increase for workers), the end of certain tax breaks for businesses, shifts in the alternative minimum tax that would take a larger bite, the end of the tax cuts from 2001-2003, and the beginning of taxes related to President Obama’s health care law. At the same time, the spending cuts agreed upon as part of the debt ceiling deal of 2011 will begin to go into effect. According to Barron’s, over 1,000 government programs – including the defense budget and Medicare are in line for “deep, automatic cuts.”
In dealing with the fiscal cliff, U.S. lawmakers have a choice among three options, and we think that none of which are particularly attractive:
· They can let the current policy scheduled for the beginning of 2013– which features a number of tax increases and spending cuts that are expected to weigh heavily on growth and possibly drive the economy back into a recession – go into effect. The plus side: the deficit, as a percentage of GDP, would be cut in half.
· They can cancel some or all of the scheduled tax increasesand spending cuts, which would add to the deficit and increase the odds that the United States could face a crisis similar to that which is occurring in Europe. The flip side of this, of course, is that the United States’ debt will continue to grow.
· They could take a middle course, opting for an approach that would address the budget issues to a limited extent, but that would have a more modest impact on growth.
But can a Compromise be Reached?
The oncoming fiscal cliff is a concern for investors since the highly partisan nature of the current political environment could make a compromise difficult to reach. This problem isn’t new, after all: lawmakers have had three years to address this issue, but Congress – mired in political gridlock – has largely put off the search for a solution rather than seeking to solve the problem directly. Republicans want to cut spending and avoid raising taxes, while Democrats are looking for a combination of spending cuts and tax increases. Although both parties want to avoid the fiscal cliff, compromise is seen as being difficult to achieve – particularly in an election year. There’s a strong possibility that Congress won’t act until the eleventh hour. Another potential obstacle is that the next Congress won’t be sworn in until January 3, after the deadline.
The most likely outcome is another set of stop-gap measures that would delay a more permanent policy change until 2013 or later. Still, the non-partisan Congressional Budget Office (CBO) estimates that if Congress takes the middle ground – extending the Bush-era tax cuts but canceling the automatic spending cuts – the result, in the short term, would be modest growth but no major economic hit.
Possible Effects of the Fiscal Cliff :
If the current laws slated for 2013 go into effect, the impact on the economy could be dramatic. While the combination of higher taxes and spending cuts would reduce the deficit by an estimated $560 billion, the CBO estimates that the policies set to go into effect would cut gross domestic product (GDP) by 4% in 2013, sending the economy into a recession.
At the same time, it predicts unemployment would rise by almost a full percentage point, with a loss of about two million jobs. Amid an already-fragile recovery and elevated unemployment, the economy is not in a position to avoid this type of shock.
The cost of indecision is likely to have an effect on the economy before 2013 even begins. The CBO anticipates that a lack of resolution will cause households and businesses to begin changing their spending in anticipation of the changes; possible reducing GDP before 2012 is even over.
The world’s biggest investors say the rout that erased $1 trillion from the value of global equities after President Barack Obama was re-elected overlooks the fact that the world economy is improving while U.S. leaders start discussions that may avoid the so-called “fiscal cliff“.
So we will wait the coming of the New Year “2013” to see if US can overcome this Fiscal Cliff nightmare as Obama said one day.” YES WE CAN ”
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