Beware: Fiscal Cliff Looms For U.S. Market
As a country, we've done nothing to manage our debt the last couple of years. In fact - we've added to it at a record rate. Wall Street-"dooms-dayers" foretell of a fiscal cliff that the market is headed for.
The U.S. economic outlook for next year is being shadowed by what economists are calling the "fiscal cliff" of 2013 -- the expiration of enormous tax cuts and transfer payments.
These fiscal stimulus measures -- including the Bush-era tax cuts, the 2010-2011 payroll tax cut and extended unemployment insurance benefits -- will expire at the beginning of 2013 unless Washington renews them. They amount to about 5 percent of the U.S. gross domestic product, according to calculations from Morgan Stanley. Taxes imposed by the "Obamacare" reforms will add to the fiscal punch.
Financial experts say that if this "fiscal cliff" is approached without serious strategies to correct our troubles, the country could be headed into another recession.
The last time the U.S. faced a fiscal cliff close to 5 percent of GDP was in 1969. Before the fiscal contractions set in that year, the real economy was expanding at an annual pace of 5 percent and the unemployment rate was below 4 percent.
By the end of 1969, however, the economy had entered a recession.
With 2012 a presidential election year - and a heated one at that - expect to hear a lot more about this growing crisis in the weeks and months to come.
But whatever ultimately happens, the uncertainty leading up to the resolution will likely keep investors and businesses on edge for the remainder of 2012, as they were during the debt ceiling debacle in mid-2011.