US going over the fiscal cliff is probably best for world economy

No doubt I have a simplistic view but the best thing in the long-term for the world economy would be for the US to start reducing its budget deficit and its burgeoning  public debt. Public debt has to be set to whatever level is sustainable. An economy in transition from one level to another can permit a changing level of public debt, but the current level of deficits (7 -9% of GDP) and ever-increasing debt is not sustainable. The problem is that even if the US did not avoid the fiscal cliff the US public debt would continue to grow – if a little more slowly than as at present. The cliff may in reality be more like a hill but it is still along the way to the wrong place.

US Public Debt

US Public Debt

Budget discipline and a stable level of public debt must – I think – come first. It is public profligacy – whether in Greece or Spain or the US – which is unsustainable and rampant profligacy will not end without some short-term pain. It is probably time for the US to bite the bullet.

I see that the US press is now beginning to expect that some kind of fall – whether over a cliff or a hill – is inevitable but that perhaps the fall can be cushioned by attaching a bungee rope or by aiming for a ledge part-way down!

NY Times: Until late last week, most observers had expected the president and Congressional Republicans to come up with at least a short-term compromise before the year-end deadline. But thefailure of Speaker John A. Boehner to win support for tax increases on the wealthiest Americans from fellow House Republicans has forced many economic observers to reconsider what might happen if political leaders remain deadlocked into 2013.

MSNBC: On the Sunday news shows, no one signaled a change of position that could form the basis for a short-term fix, despite a suggestion from Obama on Friday that he would favor one. The focus was shifting instead to the days following January 1 when the lowered tax rates dating back to the George W. Bush administration will have expired, presenting Congress with a redefined and more welcome task that involves only cutting taxes, not raising them.

“I believe we are,” going over the cliff, said Republican Senator John Barrasso of Wyoming. “I think the president is eager to go over the cliff for political purposes. I think he sees a political victory at the bottom of the cliff,” Barrasso said on Fox News Sunday.

Some Republicans have said Obama would welcome the fiscal cliff’s tax increases and defense cuts, as well as the chance to blame Republicans for rejecting deal. Obama has rejected that assertion.

WSJ: Lawmakers returning to town this week will see whether they can agree on a plan to avoid the full brunt of the fiscal cliff, the combined $500 billion in tax increases and spending cuts set to begin next week. Little if any progress was made in the talks before Congress and President Barack Obama left town last Friday for Christmas. The president plans to leave his vacation in Hawaii late Wednesday night, returning to Washington on Thursday, the White House said.

CNBC: Despite the $600 billion of tax hikes and spending cuts due to come into force at the end of this month unless U.S. lawmakers reach a deal, the S&P 500 index is not displaying signs of stress, says independent chartist Daryl Guppy.

The stock index is in fact trading upwards as investors increasingly take in the possibility that the U.S. economy might fall over the “fiscal cliff,” he told CNBC Asia’s “Squawk Box” on Thursday. “The fiscal cliff is a bungee jump. It used to be exciting. Now it’s just a tourist attraction. The market is absorbing that,” he said. 

While the S&P 500 index has dipped back towards the 1,380 to 1,400 range seen in August and mostly recently in November, stocks appear to be on their way up again, he added. The index closed at about 1,419 on Wednesday.


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