Fiscal Cliff Deal Inadequate

The simple fact is that the deal that was reached to avoid the so-called “fiscal cliff” is nothing more than a postponement of the real negotiation, which will have to bear results if the country is to avoid across-the-board spending cuts in the form of sequestration. The March deadline looms larger than that of the cliff and Republicans and Democrats have already drawn lines in the sand. The GOP will refuse to vote for an increase in the debt ceiling unless Democrats agree to cuts to entitlement programs, and the entire drama will be played out again, although this time experts feel there is less chance of positive resolution. For more on this continue reading the following article from Iacono Research. 

My takeaways from the recent fiscal cliff deal.


First, thank God people will now stop talking about “going over the fiscal cliff”.  Fed Chief Ben Bernanke has done many terrible things at the central bank, but coining the phrase “fiscal cliff” was clearly one of the worst.

Second, anyone thinking that this is somehow the end of the story when it comes to the U.S. budget difficulties should be immediately absolved of that notion since, before you know it, there will be another catchy phrase to describe what is about to happen over the next two months.

Based on what I’ve been reading, it will be termed an “abyss” of some sort – the debt ceiling abyss, the sequestration abyss, the government funding abyss, or, my personal favorite appearing in the title above, sans the “abyss” moniker. This Bloomberg report summarizes what lies ahead:

If anything, the U.S. faces an even more ominous deadline in a few months. The debt ceiling was hit as of New Year’s Eve. The U.S. Treasury will dip into its tool bag to keep the country’s borrowing ability going, but that will last only about two months. Also in early March, the sequestration — $110 billion in across-the-board spending cuts, half in defense and half in domestic programs – springs back, unless Congress finds a way to offset it with other spending cuts. Weeks later, the law that keeps the government funded expires. It all means that, in late February and early March, Congress will face a sequestration, a government default and a government shutdown. Republicans say they’ll use the leverage created by the debt ceiling to force Obama to accept spending cuts, particularly in entitlement programs. Obama resisted that notion on Dec. 31, saying he wants more tax increases and won’t accept Republican plans to “shove” spending cuts past him. “If they think that’s going to be the formula for how we solve this thing, then they’ve got another thing coming,” he said.

Per this story at The Hill, the duo of Simpson and Bowles probably best characterized the result as follows:

“We have all known for over a year that this fiscal cliff was coming. In fact Washington politicians set it up to force themselves to seriously deal with our Nation’s long term fiscal problems,” Simpson and Bowles added. “Yet even after taking the Country to the brink of economic disaster, Washington still could not forge a common sense bipartisan consensus on a plan that stabilizes the debt.”

What does this mean for financial markets in general and precious metals in particular? These thoughts from the Bank of Nova Scotia appearing in this Globe & Mail report today provide a good summary:

The U.S. budget agreement is likely to prove [U.S. dollar] negative in the medium term as it averts the fiscal cliff today but fails to provide a credible medium-term fiscal plan and instead forces major issues, like the debt ceiling and $110-billion in spending cuts, out to March 1, and highlights how challenged the U.S. political system has become. In addition, it potentially lays the foundation for a rating agency downgrade.

Anyone who grew tired and angry about the fiscal cliff debate over the last couple months should enjoy the current reprieve while they can because it will be just days (maybe only hours) before we start hearing about the much more difficult (and dangerous) debate that lies ahead.

This post was republished with permission from Tim Iacono.

Policymakers’ Risk Fiscal Cliff

The debt ceiling, which refers to how much the U.S. federal government may go into debt, has become a bargaining chip in the final round of debate over how to avoid the fiscal cliff. Republicans have promised not to agree to raise it until President Obama offers deeper spending cuts. In a recent message to Congress, the president told Republicans that there would be no negotiating for raising it later if they allow negotiations about the fiscal cliff to fail now, and many economists feel taking the debt ceiling off the table is a smart move for the White House, if only to ensure that if a recession is to result that it comes now instead of at the end of Obama’s second term. For more on this continue reading the following article from Economist’s View. 

One more from Tim Duy:

The Debt-Ceiling Gamble, by Tim Duy: Ezra Klein reports that the White House is drawing a line in the sand on the debt-ceiling, and they really, really mean it:

The Obama administration is utterly steadfast on this point: They will not suffer a repeat of 2011, when they conducted negotiations over whether the United States should default. If Republicans go over the cliff and try to open up talks for raising the debt ceiling, the White House will not hold a meeting, they will not return a phone call, they will not look at the e-mails.

The Administration is looking to take the debt ceiling off the table forever. This is good policy; that Congress should be able to pass laws authorizing spending but not authorizing the required debt is beyond ridiculous. Also ridiculous - and irresponsible - is the willingness of the Republicans to use the debt ceiling to hold the economy hostage. Ending this travesty should be a priority for the White House.
Klein adds that the White House is ready for the fight now while their strength is up:

Boehner and the Republicans don’t want to give up the leverage of the debt ceiling forever, or for 10 years, or even, as John Engler, head of the Business Roundtable and a former Republican governor suggested, for five years. But the White House isn’t very interested in compromising on this issue, as they figure that if there needs to be a final showdown over the debt ceiling, it’s better to do it now, when they’re at peak strength, then delay it till 2014 or 2015, when their own vantage might have ebbed.

I would add another advantage. Better - from a political point of view - to have a recession at the beginning of President Obama's second term that can be blamed entirely on the Republicans. A recession in the first half of 2013 means that, most likely, the Democratic presidential nominee can run on the back of an improving economy by 2016. Alternatively, they run the risk that this recovery, anemic as it is, gets long in the tooth by 2016. Even worse would be that they agree to let the Republicans once again hold the economy hostage two years from now. Politically, if I had to pick between a recession now or closer to the next election, I would pick now.

 This blog post was republished with permission from Economist's View.