Fiscal cliff and investment risk
Posted November 21, 2012on:
Since the re-election of President Obama, the S&P 500 index has dropped more than 5%; pundits have attributed that to the imminent “fiscal cliff.”
What is the “fiscal cliff”? It is the simultaneous expiration of tax cuts and mandated across-the-board spending cuts that will take effect on January 1st if no agreement is reached between the President and Congress. The combined amount is $669 billion, or about 4% of GDP.
All the talk has been about what happens if this much money is taken out of the economy, which is undergoing a fragile recovery. Will the economy plunge back into recession? If we fall off the fiscal cliff, will the survival of our nation be at stake?
I highly doubt it. If you have to spend 4% less next year, would you call it “jumping off a cliff?”
Looking at it from another angle, our estimated budget deficit this year is $1.08 trillion. If we fall off the “fiscal cliff,” the combined tax hike and spending cuts would shrink the deficit by 60%. That’s almost like budgetary nirvana. This can only be good for the nation in the long run.
So the way I see it, even if the President and Congress cannot come to a “grand bargain,” the worst case scenario is short-term pain and long-term gain. If they can mitigate some of the short-term pain, so much the better.
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