The United States Fiscal Cliff
The term “fiscal cliff” entered the American lexicon as a reference to the impending economic predicament the United States government is facing at the end of 2012. Certain tax assistance laws enacted during the Bush administration and extended during the Obama administration, are set to expire on December 31, 2012, costing each U.S. taxpayer approximately $3,500 in higher taxes. The Budget Control Act of 2011, which was the compromise for the increase in the U.S. debt-ceiling, required certain spending cuts of approximately $1.2 trillion. The combination of the increase in taxes, reducing the amount of personal disposable income, coupled with the required reduction in federal spending, create an immediate reduction in economic activity in the United States which has been labeled as the fiscal cliff.
Projections by the Congressional Budget Office (CBO) estimate that the combination of tax increases and spending cuts would cause the 2013 deficit to be cut in half but would also reduce the United States GDP by approximately 4%. In other words, such a significant shock during a still delicate economic climate has led many economists to predict another recession in the United States if action is not taken. Some predict domestic unemployment to increase a full percentage point, which could equate to a loss of as many as 1 to 2 million jobs.
Regardless of who wins the Presidential Election in November 2012, the United States Congress will continue to mid-December in what is often called the “lame duck” session, when many members have been voted out and new members have been voted in, yet the official date for the new Congress is in January 2013. Unfortunately, this lame duck Congress will be in the position of responsibility to make any adjustments to the laws that would trigger the fiscal cliff. Professional investors are generally concerned that the lame duck Congress will not be able to pass any legislation to postpone or modify the impending fiscal cliff.
This uncertainty about how and if the United States will address the economic issues has created increased interest in precious metals as a hedge against the possible impacts of the fiscal cliff.
For more information and recent articles, please consult the following:
Beware the Fiscal Cliff
Small Businesses Fear Fiscal Cliff Awaits at Year-End
IRS Could Buy Time on Fiscal Cliff
U.S. States Teetering on Brink of Fiscal Cliff, Ganeriwala Says
‘Fiscal cliff’ would spike taxes on most Americans, report says
U.S. Fiscal Cliff to Be Resolved at ‘11th Hour’