The US Is Entering A New Era Of Fiscal Austerity
Dec 6 2012
In discussing the fiscal cliff issue, the one big takeaway not to forget is that it is all about austerity—-extreme austerity if we go over the cliff and a lesser amount of austerity if we settle it before year-end. More than likely, this is the start of new era of fiscal austerity in the U.S. In no way do we see this as a solution to the myriad of problems besetting the U.S. economy and stock market. These include the still excessive level of household debt that is the main culprit holding back economic growth, a loss of economic momentum in the last few months, declining earnings estimates and guidance, the European recession and the growth slowdowns in the BRIC nations and emerging markets. As we explained in last week’s comment, it is the huge buildup in household debt resulting in a major credit crisis and great recession that caused most of the budget deficit, rather than the other way around.
Going over the cliff would result in roughly $500 billion of increased taxes and $100 billion in spending cuts in 2013, a total that amounts to about 4% of GDP, and would surely threw the economy into recession within a fairly short period of time. This is a totally undesirable outcome that both sides want to avoid, although even then, a settlement is not a sure bet. Our main point, however, is that even a resolution of the problem would have to involve some combination of tax increases and spending cuts that would add fiscal restraint to an already fragile economy, thereby causing the very recession that everyone is seeking to avoid. The result would be an actual increase in the deficit.