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Thursday, January 3, 2013

Cliffhanger: Still hanging



If the global economy could vote, would it have voted for the messy budget compromise that US politicians cobbled together in the first hours of 2013?

The answer is it probably would. But like the authors of the deal, it may well live to regret it.

The world's financial markets are in favour, if early moves in Asian and European share prices are anything to go by.

But some will say that only goes to show how short-sighted those markets really are.

Think about it. There were three things about America that were troubling investors a week ago: the dysfunctional relationship between its two most important branches of government; the uncertainty over its short and long-term budget policies; and finally, the fear that the combination of these two things might accidentally tip the economy into a recession.

Scary

This week's deal lifts the risk of an accidental recession - at least for a while. But it does little to address the first two issues: in fact, it makes another scary stand-off, over spending cuts and raising the amount of debt that the Federal government can legally issue, almost inevitable.

There are two big numbers that are helpful in thinking about what Congress and President Obama did, or did not, achieve this week.

The first is $2.3 trillion (£1.41 trillion). That is a lot of money, but it is what the Congressional Budget Office (CBO) reckons the US federal government would have needed to borrow over the next 10 years if Congress and the President had done nothing.

In other words, $2.3 trillion is the borrowing that would happen under the "tight", fiscal cliff scenario: with roughly 4% of gross domestic product in spending cuts and tax rises in 2013, and more after that.

The second number is $7.9 trillion.

That is roughly what the Federal government would need to borrow between 2013 and 2022, if Congress and President Obama had agreed to keep tax rates and spending policies more or less the same as they were at the end of 2012, minus temporary stimulus measures such as President Obama's payroll tax cut, which have now been allowed to expire.

BBC

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