Pessimistic analysts from around the globe expect the USA to fall off the “fiscal cliff”, which will be a devastating blow to the global economy. Optimists are sure that the “fiscal cliff” (if any) will stimulate an economic revival.
Is the fiscal cliff really dangerous? Let’s have a closer look at the issue.
Fiscal Cliff
According to Eugene Olkhovsky, ’s leading expert in financial markets from Canada, the US authorities are planning to cut the budget deficit in 2013.
If there are no changes in the US legislation, the budget deficit chart will draw a figure will was called the “fiscal cliff” by Ben Bernanke. This deficit reduction is aimed at reducing the growth of the US public debt, which has already exceeded $16 400 bn or 104% of GDP. The US Congress expects the “fiscal cliff” lead to a major recession in the US economy. Taking into account the fact that the US economy is the world’s biggest one, the entire global economy will feel the consequences.
In particular, the “fiscal cliff” implies the introduction of progressive taxation, extra taxes and unavoidable budget sequester.
The “fiscal cliff” is expected to take place on January 1st 2013 if the Budget Control Act of 2011 signed by Barack Obama eventually takes effect. The act implies tax hikes and spending cuts in order to reduce the public debt by $1000bn within the next 10 years.
The roots of today’s tension and expectations of the “fiscal cliff” lie in the fact that the US authorities have been raising the debt ceiling continuously since 1940. As you may remember, in 2011 the US Congress was unwilling to raise the ceiling once again, which might have resulted in a default of the US economy. The compromise was reached just in time. This compromise implied the very act, which may lead to the “fiscal cliff” in 2013.
It seems like the solution that seemed to have saved the USA in 2011 now turns out to be a delayed-action bomb. In 2011, the USA got its rating cut by S&P, which resulted in a stock market crash along with higher gold prices (above $1700/oz).
The” fiscal cliff” may cost the USA some $600bn and a major economic recession. This may turn into a global recession amid an economic slowdown in China and the continued eurozone crisis.
What Is Behind “Fiscal Cliff”?
There is no “fiscal cliff” yet. However, the global economy already starts feeling its negative impact:
Investors flee risky assets in favor of safe-haven assets, thus making financial markets unstable, volatile and less predictable. Dollar-dependent currencies are weakening (like the Aussie, for example). Gold cannot decide on the direction of the future turned as well.
How do various analysts see the threats of the “fiscal cliff”?
More optimistic forecasts (like the one made by the Committee on the Budget of the US House of Representatives) imply just a 0.5% decline in the US GDP as well as a 1.5% increase in the rate of unemployment.
More pessimistic forecasts (like those made by the IMF and other institutions) say that the US GDP may drop 13% in 3 years while the rate of unemployment may grow up to 11%.
Both the sides are sure that if the US does manage to avoid the “fiscal cliff”, its GDP will gain 1.7%. Otherwise, the USA won’t be the only victim. The list will include global financial markets, the crisis-ridden eurozone , Japan, China, Russia and other countries all around the world.
Is there any chance to avoid the ‘fiscal cliff”? Are the US authorities still trying hard to prevent the doomsday scenario from manifesting itself?
Expert Opinion
Experts assume that fleeing the “fiscal cliff” is not the only way out. There is a way to extend the implementation of the “fiscal cliff”, i.e. to implement all the planned spending cuts and tax hikes within 1-2 years. During this period, the politicians will still have time to find a compromise. Obviously, there are negative consequences of such an extended plan. However, they won’t turn into an economic disaster.
The “fiscal cliff” issue is aggravated by the fact that its resolution depends on the Republicans and Democrats’ ability to compromise rather than American economists’ skills. Moreover, there is some misunderstanding even within the parties.
Experts see various outcomes of the possible “fiscal cliff”. However, they say it is too difficult to image the situation in which the “fiscal cliff’ scenario does manifest itself. American politicians are known for being serious and responsible about the consequences of their political actions. The US political system is mature enough to prevent the “fiscal cliff”.
The next round of talks will take place on December 27th. Probably, we will finally see the resolution of the problem. Barack Obama is confident about the positive outcome of the forthcoming talks.
US Dollar
Some analysts say that the US Dollar will decline against the common European currency and other majors.
Those who trade the US Dollar should shift their focus from the “fiscal cliff” to the Fed’s promise to continue QE3.
According to Lionstone Investment Services Ltd (a TOP member of ’s rating of Forex brokers ), the US Dollar may lose its status of a safe-haven asset and deprive US bonds of their advantages in terms of the yield.
The chart below, courtesy of , reflects the current state of affairs in the market of EURUSD:
