Fiscal Cliff: 1 Step Backward – Then 2 Steps Forward (2K Views)

Lorimer Wilson December 3, 2012 Comments Off on Fiscal Cliff: 1 Step Backward – Then 2 Steps Forward (2K Views) 2,937 Views

…Fiscal policy, both in the U.S. and in Europe, has already been a drag on economic growth, and it’s extremely likely to continue to be one as politicians begin addressing concerns about long-term debt burdens. The debate about the fiscal cliff deal might revolve around the preferred paths to reducing the nation’s long-term debt, but it also will determine just how much fiscal policy will limit growth over the coming months and years. What’s really at stake, in the near term at least, is the answer to two important and interrelated questions: How dysfunctional is our political leadership and how bad is our economy going to be next year? Words: 610

So says Yuval Rosenberg, (www.TheFiscalTimes.com) in edited excerpts from his original article* entitled Fiscal Cliff Mess: How Bad Will Economy Be in 2013?.

Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), may have edited the article below to some degree for length and clarity – see Editor’s Note at the bottom of the page for details. This paragraph must be included in any article re-posting to avoid copyright infringement.

Rosenberg goes on to say, in part:

No matter what, we’re unlikely to see gangbuster growth next year. The forecasts from economists — even those who are optimistic about things moving in the right direction — certainly aren’t all that encouraging.

Nominal growth through the first nine months of 2012 has averaged 2%.
A survey of 39 economists by the Federal Reserve Bank of Philadelphia released earlier this month found that, on average, they predict real GDP will grow 2% in 2013, before picking up to 2.7% in 2014 and 2.9% in 2015.
Those levels are still below the 3% or more needed for the economy to be considered healthy.

Fiscal tightening is a key culprit in the projected sluggishness, particularly in the first half of next year. The fiscal drag should peak next year, increasing from 1% of GDP in 2011 and 2012 to 1.75%, Goldman Sachs economists say. Their projections assume that:

both the payroll tax cut and the Bush income tax rates for high earners expire at the end of the year,
factor in new health care taxes,
the winding down of emergency unemployment benefits,
discretionary spending cuts from the 2011 budget agreement and
the end of the 2009 stimulus package.

Of course, the projected growth rate, low as it already is, and the amount of government drag on the economy both depend on whether a deal is reached to avoid the fiscal cliff, and the ultimate shape of any compromise. Goldman’s chief economists wrote in a note released Wednesday that:

“If resolution of the ‘fiscal cliff’ remains elusive and/or the size of the fiscal tightening ultimately agreed is even larger than we have assumed, a new recession could result. Don’t misunderstand this story as an argument that government budget consolidation is not needed. It is needed over the medium-term, as most of the major advanced economies have long-term budget imbalances that will ultimately require significant consolidation.

Sign up HERE to receive munKNEE.com’s unique newsletter, Your Daily Intelligence Report

It’s FREE

It contains the “best of the best” financial, economic and investment articles to be found on the internet

It’s presented in an “edited excerpts” format to provide brevity & clarity of content to ensure a fast & easy read

Don’t waste time searching for articles worth reading. We do it for you and bring them to you each day!

Sign up HERE and begin receiving your newsletter starting tomorrow

The point we’re making is a little different. The point is that this consolidation is imposing some very real near-term costs on economic growth, which are all the more painful in an environment where the economy is still far below full employment. [Therefore,] it’s very important, in our view, to be careful not to overdo the speed of the adjustment, and especially in early 2103 there are some real risks that policymakers will overdo it.”

Conclusion

The good news is that once we get over that 2013 hump, assuming that the private sector continues to heal and doesn’t freeze up in the face of daily images of contentious Washington deal-making, global growth could improve at least a bit according to Hatzius, and his team:

“Assuming the world can ‘muddle through’ the weakness we expect early in the year as a consequence of even greater fiscal contraction, growth should pick up in the second half of the year.”

*http://www.thefiscaltimes.com/Articles/2012/12/02/How-Bad-Will-the-Economy-Be-in-2013.aspx#4HgkoOHOsQXm2Rs4.99

Editor’s Note: The above post may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.

Related Articles:

1. The Fiscal Cliff: The Choice is Not “Recession or No Recession” but “Recession Now or Recession Later”! Here’s Why

The warnings that the fiscal cliff will cause a recession are delivered as if the government can decide whether or not we have a recession. In fact, the government does not have that power, or we would never have recessions. At the most, the government can influence when, not if, we have a recession. We will most likely undergo a recession when we wean ourselves off the unsustainable deficit spending of the last four years. The choice is not recession or no recession. The choice is recession now or recession later. [Let me explain.] Words: 542

2. The Fiscal Cliff: What Is It? What Are Its Ramifications? What’s the Best Way to Invest for Such an Eventuality?

What is the “Fiscal Cliff”? What would its ramifications be? Will it tip the U.S. into a recession? What are the critical economic building blocks that would be adversely affected? How best should you position your portfolio for such an eventuality.

3. This Is What “Falling Off The Fiscal Cliff” Really Means – and It is DIRE!

We all know that high debt is a growth killer and, at the moment, the U.S. has a budget deficit of about $1 trillion. That’s a very big number…The question is, at what point do countries have to deal with high debt levels? How high do debt levels have to be before one has to deal with the problem by lowering budget deficits? Also, what are the consequences of such debt and budget reductions? Words: 500

4. Goldman Sachs: The Fiscal Cliff Is a Real & Present Danger to Future Level of S&P 500 – Here’s Why

“Portfolio managers have been swayed by hope over experience” when it comes to anticipating the effects the fiscal cliff will have on markets. Investors aren’t giving as much attention to the fiscal cliff as they should be, and that may be helping to set the markets up for a repeat of last year, when the debt ceiling negotiations sent stocks plummeting.

5. Regardless of Who Wins in November the U.S. Is Going Over the Financial Cliff! It’s Just a Matter of Time – Here’s Why

The outcome of the election of 2012 will [only] determine the rate of speed at which we approach the [financial] cliff [because] neither political alternative is willing to change course, to steer away from the cliff. The cliff is so high that whether we go over it at 200 mph (Obama) or whether we merely slip over the edge (Romney), the end result is the same — fatal for the economy and perhaps our entire political system. It is the fall that will kill us. [This article explains why that is going to be the case.] Words: 1135

6. Fiscal Tightening in 2013 and Its Economic Consequences

Under current law, a sharp reduction in the federal budget deficit between 2012 and 2013 will cause the economy to contract but, the Congressional Budget Office projects, will also put federal debt on a path more likely to be sustainable over time. To illustrate the effects of fiscal tightening, CBO compared its projections under current law (the “baseline” projections) with projections under an alternative set of policies — two scenarios in a broad spectrum of choices – in the infographic below.

7. The Fiscal Cliff: Everything You Need To Know About It & Its Implications

The U.S. federal government is scheduled to implement a fiscal tightening of unprecedented severity (approx. 5% of GDP) at the start of 2013. The last time a tightening of such proportions occurred (3% of GDP in 1969) it presaged a recession. Thus, unless mitigated by an act of Congress, we expect the fiscal cliff would lead the U.S. into a recession in 2013. Below, in 26 charts, we examine all aspects of the impending crisis to gauge its potential impact on the credit markets and, by extension, our strategic investment recommendations.

8. Fiscal Cliff Scenario Analysis of the 4 Possible Election Alternatives & Their Financial Implications

This post shows JPMorgan’s estimated probabilities on four different fiscal cliff outcomes, conditional on who wins the presidential election in November.

9. The Fiscal Cliff: What We Think Will Happen and What Investors Should Do

Unless the government acts quickly, it is probable that the term “fiscal cliff” will become a household phrase over the next few months. Unfortunately, this is reminiscent of the budget ceiling crisis about a year ago. In this report we will explain what the cliff is, discuss the worst case scenario, and determine what, if anything, you should do about it. Words: 1436

10. Grappling With the Possible Impact of the Fiscal Cliff

If Congress addresses the issue by maintaining the current tax and spending policies we will get more of the same economy we have experienced for the past three years (all else being equal). [That being said,] what if Congress goes over the fiscal cliff hit? This blog post is designed to asses the impact. Words: 1362

11. Forget About the Fiscal Cliff! Increased Taxes & Austerity Measures Are Coming to the U.S. Regardless! Here’s Why

It’s easy to find analysts and investors who are certain that a deal [to avoid the fiscal cliff] will be reached, or at least that the can will be kicked down the road to buy more time. It’s also easy to find more pessimistic views that are based on the lack of cooperation in the past, and a deeply polarized country and political system. However, I think many are missing the point, which is that austerity is coming to America – taxes are going up and government spending will be reduced – [and. as such,] the United States is likely to face a recession and market correction in 2013, regardless of whether or not a compromise is reached over the Fiscal Cliff. Words: 970

11. The Economic Forecast: Slow & Steady for Stocks & Bonds With a Chance of Higher Inflation on the Horizon – Invest Accordingly

Until policymakers see the light, it’s very slow and steady as she goes, with a chance of higher inflation on the horizon. This is not necessarily bad for the stock market, however, since I continue to believe that both stocks and bonds are priced to the expectation that growth will be very weak or even negative in the years to come. Words: 696

12. US Recession Probabilities Index Says “Yes”, My Indicators Say “No” – Is This Time Different?

The US Recession Probabilities Index is currently at a level that has ALWAYS been followed by a recession. Interestingly, however, I don’t see recession signals in the internal indicators that I follow and which have been right for a long time now so this clearly puts that opinion in the “this time is different” category – or does it? Words: 255

13. We’ve Reached the Tipping Point: Are Consumers Prepared to Save the Day?

Injecting massive amounts of liquidity into the banking system can spur dramatic economic growth if that liquidity is used. On the other hand, if public perception is negative and fearful, that liquidity remains untapped and no growth occurs. We are in a new earnings season and for the most part – based on lowered expectations – the numbers are looking OK so what should we expect based on these modestly improving numbers? Words: 2176

14. U.S. Economy In the ‘Eye Of The Storm’ – Here’s Why

Optimism has seized stock markets in the past month on the back of better economic data in the United States and a late-summer lull in the euro crisis. Market volatility is at its lowest level in years. [That being said, however,] BofA’s top economist Ethan Harris…thinks the U.S. economy is “in the eye of the storm” right now. Below is what Harris sees on the horizon. Words: 363

15. QEunlimited is NOT Going to Save the U.S. Economy – Period!

With the pop from the USFed’s latest attempt at financial shock and awe already seeping from lackluster markets, and the teleprompter news networks losing steam over their promotion of the same, it is time to take a look back at the decisions made on 9/13/2012 and set the record straight on some things.

16. QE 3 Will Actually SUPPRESS the Economy! Here’s Why

The Fed professes that QE 3 or as I call it, QE Infinity (QEI), will create jobs but I am not sure how they can expect anybody to buy their rationale. As we know, QE 1 and QE 2 did very little in the way of creating jobs. Might the Fed realize that QE Infinity could actually be counter-productive to economic growth?

17. U.S. Between a Rock & a Hard Place: A Recession Now or a Financial Collapse Later! Here’s How to Invest in Such Precarious Times

Over the past few years, policy leaders worldwide have grown accustomed to kicking the can down the road with each step in this ongoing financial crisis making incremental moves rather than cultivating viable long term solutions. More recent attempts seem to have evolved into simply just trying to kick the can out of the driveway. Now we fear there may not be enough firepower left to simply kick the can over. [Having done so, we are left between the proverbial rock and a hard place.] If lawmakers do nothing, by all accounts we are likely to see a recession. Should lawmakers extend the Bush-era tax cuts, you make no progress towards long term deficit reduction, potentially raising the risk and magnitude of a future financial crisis. [Let me discuss this predicament further and how best to invest in such precarious times.] Words: 1602

18. Here’s Another Clue to Future Direction of S&P 500

Heard about the “Fiscal Cliff” lately? How many times have you heard it mentioned in the last few hours? Is the media coverage about the “Fiscal Cliff” causing investors to look or focus in the wrong direction for clues to the market’s next significiant move?

19. Dr. Nu Yu: S&P 500 Charts Showing “3 Peaks & a Domed House” Formation Suggest a Swift Advance to the “First Floor” Phase at…

The S&P 500 formed a three-peak pattern inside the trading range from September to October and is now at the beginning of a “Three Peaks and a Domed House” formation. The current swift advance of the SPX could reach the level of 1460 to re-test the previous high. Let’s take a look at some charts. Words: 255

20. BMO: We’re On the Verge of the Next Bull Market! Here’s Why

BMO chief investment strategist Brian Belski went on Bloomberg TV yesterday and made a huge call: he told viewers that “we’re on the verge of the next great bull market” in stocks ( see video here) outlining his bullish thesis based on 16 economic and market indicators he factored into his call which can be seen here

munKNEE.com Your Key to Making Money

Fiscal Cliff: 1 Step Backward – Then 2 Steps Forward (2K Views)

Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), may have edited the article below to some degree for length and clarity – see Editor’s Note at the bottom of the page for details. This paragraph must be included in any article re-posting to avoid copyright infringement.