All of this noise out of Greece has taken attention away from the fastly approaching U.S. fiscal cliff: the end-of-year deadline that threatens to lop off an estimated 3 to 5 percentage points off of GDP growth in 2013.
Reinhart’s note discusses the timetable regarding the fiscal cliff:
Unfortunately, there is no clear timetable for action. Congress will deal with the situation when it is good and ready to do so. And, the lessons from similar experiences in recent years suggests that such action will occur at the last minute.
But as an economist who’s getting paid to make forecasts and opinions, he shares with us the key dates that he’ll be watching. Here’s his assesment:
[T]here is a strong likelihood that there will be a lame duck session of Congress following the November election. Ideally, legislators will reach agreement on a plan which avoids the 2013 fiscal cliff and, at the same time, addresses the unsustainable longer-term course of US fiscal policy. However, given the elevated degree of gridlock in DC and the likelihood that some degree of gridlock will remain no matter what the election outcome (it is mathematically impossible for either party to achieve a filibuster proof majority in the Senate), this is an awful lot to expect during a post-election session of Congress that may last six weeks or so at most. A more likely scenario might involve a short-term extension of the major budget provisions or delayed action until debt ceiling constraints help to force a compromise agreement in early 2013. Of course, the longer the delay, the greater the likelihood that policy uncertainty will negatively impact the real economy.
- Morgan Stanley Just Slashed Its US GDP Forecast And Warned Things Could Get A Lot Worse (businessinsider.com)
- CBO Warning: Recession Will Follow 2013 ‘Fiscal Cliff’ (theatlanticwire.com)
- Fiscal cliffs, multipliers, and the myth of central bank independence (economist.com)
Mamta Badkar | May 17, 2012, 10:54 AM
Unless Congress acts, more than $600 billion in tax and spending provisions will change at the end of the year. And this will impose fiscal restraint at a time when the U.S. economy is growing very gradually.
But what is the fiscal cliff? What impact could it have on the economy? What are the most likely scenarios? And which companies most exposed to government spending stand to take a hit?
- Ben Bernanke says Euro crisis, ‘fiscal cliff’ threaten U.S. economy (calgaryherald.com)
- What the Fed fears (economist.com)
- Here’s A Calendar For Fiscal Cliff-Mageddon (businessinsider.com)
Now at first blush, this statement might sound highly critical and moralistic, like saying that Bernanke is feeding the worst habits of the economy, when in reality the economy needs to be cut off from cheap leverage and go cold turkey.
And since elsewhere in his interview, McCulley slammed moralistic interpretations of macro-economics, this seems odd.
But here’s the full line from McCulley: “Suddenly the Federal Reserve is the bartender at an AA Meeting: You Keep cutting the price, but nobody’s drinking!”
So he actually wasn’t making a judgment, but rather just describing the reality of an economy that’s in deleveraging (or as put it, in a liquidity trap). When people want to have less debt, no amount of rate cutting will want them to take on more. When people are quitting alcohol, lowering the price doesn’t matter (or at least, it’s not the price that will make them change their mind.).
Unlike in past recessions, where households were sensitive to changes in the price of credit, in this economy they’re not, and Bernanke’s actions do very little.
So according to McCulley (who sounds very Richard Koo-like, when talking about all this) the answer is: Fiscal, fiscal, and more fiscal stimulus. Let the government lever up, so that the private sector can finishing levering down without an economic collapse.
- Two Investing Geniuses Share Their Take On The Economy, Markets, And What Government Needs To Do Now (businessinsider.com)
- Guest Post: There Will Never Be A Failed US Treasury Auction… Until There Is (zerohedge.com)
- McCulley: We Are In a ‘Liquidity Trap!’ (ritholtz.com)
- Paul McCulley on Fed policy and “liquidity trap” (investmentpostcards.com)
- This Is Paul McCulley’s #1 Fear For The US Economy (businessinsider.com)