Austerity 2013
The US fiscal cliff is the biggest near-term term threat to the global economy, according to Fitch Ratings. The shock of failing to reach an agreement would hit the rest of the world via a weaker dollar and asset prices, lower US price and wage inflation and a heightened risk of deflation.
Domestic demand would fall and US imports would drop faster than exports. The first countries hit would be export-oriented. China and Japan would experience steepest falls in GDP in 2013. Commodity exporters like Russia and Brazil would be less affected in 2013, but in 2014 would begin to slow.
What would transpire is the oft-mentioned race to the bottom in which countries would attempt to limit the appreciation of their currencies versus the US dollar, and print, print, print in monumental QE fashion. But, as Jeff Berwick of the Dollar Vigilante points out, perhaps this has already begun:
In the last month alone, and in eerie synchronization, the Fed, BOE, and Japan have all announced massive new QE programs.
The ECB’s unlimited QE program has been announced and is about ready to go.
Even the Chinese central banksters have jumped aboard and just injected a record 290 billion yuan into the banking system via open market operations with much more likely to come.
And in this mercantilist, nation-state, democratic and fasco-socialist Western world of today, no one can ever resist devaluing their currencies along with the big players, which will likely mean almost every major country in the world will have to step things up or they risk the chance that their currencies won’t get to zero as quickly as the others, which will anger their exporters.
In other words, this could be the final stages of the crackup boom, as Ludwig von Mises predicted. Now that Ben Bernanke and others have committed to QE to infinity, it certainly looks that way. But, exactly how long it will take is the main question.
The 2013 fiscal cliff is barreling in on us, with the New Year just over three months away. A historical package of tax increases and spending cuts are set to take effect at the end of 2012 and early 2013, setting the stage for the same sort of indecision which marred the US in August of 2011 over the fiscal cliff.
The measures are due to slash the federal budget by $607 billion or 4 percent of GDP between FY 2012 and FY 2013, according to the Congressional Budget Office (CBO). Few expect there to be much compromise before the November election.
The Bush tax cuts will expire on December 31, 2012, raising all income tax rates (top tax rate will go from 35 percent to 39.6 percent), as well as rates on estate and capital gains taxes. The alternative minimum tax, essentially a second income tax, will also apply to millions more citizens.
From Obamacare, Affordable Care Act Taxes are set to take effect in January 2013, including increased tax rates on high-income earners.
On January 2, the Budget Control Act of 2011 will take effect. Half of the scheduled annual cuts ($109 billion from 2013-2021) will come directly from the national defense budget, half from non-defense. However, some 70 percent of mandatory spending will be exempt.
Extended unemployment benefits are set to expire at the year’s end, and were last extended in February.
$55 billion per year in spending cuts are scheduled to hit the Pentagon in January unless Congress does something before the New Year. Details of how the cuts will be enacted are yet to be fully worked out by the White House Office of Management and Budget, but some preliminary decisions have been set. Perhaps, some of the costs will be made up by increasing the amount of drones deployed and lessening the amount of humans.
The fiscal cliff represents a repeat episode of the US coming to terms slowly with its own plight of austerity. It is not two parties arguing over small government or big government, but rather a range of corporate-sponsored totalitarian legislation designed to paralyze the nation. Just last year the 2011 debt ceiling fight in August almost made the US unable to meets its financial obligations, and resulted in an unprecedented downgrade in the US credit rating by Standard and Poor’s.
The $607 billion budget contraction would send the US into the next phase of depression within the first half of the year. Real economic output in 2013 would grow just .5%, resulting in lower taxable incomes and higher unemployment (one to two million).
$55 billion per year in spending cuts are scheduled to hit the Pentagon in January unless Congress does something before the New Year. Details of how the cuts will be enacted are yet to be fully worked out by the White House Office of Management and Budget, but some preliminary decisions have been set.
A July 2012 IMF report cites fiscal tightening in the US in early 2013 as a major risk to global economic stability. “Any delays in raising the federal debt ceiling could increase risks of financial market disruptions and a loss in consumer and business confidence.”
The IMF advises US policymakers to pursue tax and spending cuts aimed bringing the 2013 deficit down by a modest 1 percent. Some of the major concerns regarding the US debt are: an aging population, longer life expectancies, and rising health care costs.
