US dollars 390.
(photo credit: Thinkstock/Imagebank)
As summer vacation winds down and investors head back to work, we may start
reading headlines that talk about the US economy about to fall off a “fiscal
cliff.” While politicians choose to use the Wile E. Coyote method for dealing
with cliffs (i.e. if you don’t look down you won’t fall), their continued delay
in making hard decisions could cause the US economy to slip into a deep
recession in early 2013.
What is it?
According to the Fiscal Times
‘fiscal cliff’ is what US Federal Reserve Board Chairman Ben S. Bernanke has
called the many major fiscal events that could happen simultaneously at the
close of 2012 and the dawning of 2013.
“The events include the expiration
of the Bush-era tax cuts, the payroll tax cut and other important tax-relief
They also include the first installment of the $1.2 trillion
across-the-board cuts of domestic and defense programs required under last
summer’s bipartisan deficit reduction agreement. At the same time, lawmakers may
have to raise the debt ceiling once again, potentially triggering another
standoff in Congress.”How bad could it get?
CNBC Anchorwomen Maria
Bartiromo writes, “The ‘fiscal cliff’ is fast approaching.
before the January 2 deadline – when without a compromise every working American
will get a tax hike and hundreds of billions of dollars in government spending
programs will expire – the pink slips will be going out at many companies not
sure their government contracts will continue.
“Leaders of defense,
transportation and health-care companies will have to notify employees that
their jobs will be cut because of the uncertainty in the next two months. This
so-called ‘fiscal cliff’ has become the hot button issue from Wall Street to
Main Street with good reason.
Once these programs expire, Americans will
be faced with the biggest tax increase since World War II, with massive layoffs
likely across the nation.
“Many economists say this would catapult the US
economy back into a deep recession, and others forecast an even worse scenario –
depression-like times.”Is it disaster?
While many analysts are saying
that this scenario would cause major harm to the US economy, and by default the
global economy, there are those who think this may be just what the doctor
ordered to start to get the US back on solid financial footing.
Klein writes in the Washington Post
, “Some deficit hawks are also sanguine about
the cliff. A report from the Carlyle Group argues that going over the cliff is
actually preferable to extending these policies and increasing the long-term
This automatic deficit reduction package would largely solve
near-to-medium term fiscal problems, the authors, Jason Thomas and David
As we approach the US presidential election, more and
more focus will be paid to this issue. Mitt Romney’s running mate Paul Ryan
considers getting the US debt under control and controlling runaway spending of
vital economic importance, and he should be able to keep voters – as well as the
candidate’s attention – focused squarely on this issue.Your portfolio
How will this impact your investment portfolio? Certainly a swift compromise
will be a catalyst for stocks, but keep in mind that a year ago the market
dropped over 11 percent in just 10 trading days as the threat of no interim deal
Famed Goldman Sachs market strategist Abby Joseph Cohen, the
eternal optimist, says that investors should be a bit nervous over the next few
Javier David of CNBC writes, “Cohen suggested that a ‘fear
factor’ of a European debt meltdown – as well as the looming ‘fiscal cliff’ and
economic weakness in the US – was beginning to retreat from market psychology as
stocks continue to rally.
Still, investors were right to be worried about
near-term policy risks.
“This is one of those times while where we are
comfortable with the medium-to longer-term outlook, we... are looking at the
shorter-term, and have some concerns primarily about the political situation not
just in United States, but in Europe.”
Make sure to speak with your
financial adviser to evaluate your portfolio in the face of this potential
email@example.com Aaron Katsman is a licensed
financial adviser in Israel and the United States who helps people with US
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