Contemplating The Fiscal Cliff

While most New Zealanders summer worries are mainly focused on the weather and what to eat or drink next, deep in the winter of Washington politicians and officials are contemplating the ``Fiscal Cliff’’.

In simplistic terms the Fiscal Cliff is the phrase coined to describe what will happen in the United States in January when the expiry date comes up a for a vast range of legislation covering tax cuts and spending programmes.

The legislation involved covers more than a decade where the various branches of the US Government could not agree on a Budget so they agreed on time limited legislation to give themselves a chance to compromise.

Of course after years of half-hearted attempts, no compromise has been reached.

The Founding Fathers carefully designed the US government structure and constitution to make it very difficult for one branch to dominate the other, what they probably did not foresee was the partisan brinkmanship politics that now dominates the US political scene.

The US House of Representatives is due to meet on Sunday to avert the cliff, while President Obama has cut short his holiday in Hawaii to meet with Senators to see if some deal can be reached.

The term ``cliff’’ is a bit dramatic for what will happen if they fail to agree, it is more a slope - with taxes being ratcheted up and spending programmes cut over a number of years.

In some ways for many economists going over the Fiscal Cliff would not be such a bad thing as it will sort out the US’s incredible deficit problem. Though most predict the medicine will be so harsh (with an almost estimated 88 percent of Americans facing tax hikes and many hit by the end of Government assistance packages) it will knock the US into a very deep recession – And where the US tends to go, so then so does much of the world.

The Wall Street Journal constructed an interactive decision making tree which shows the problems US lawmakers are grappling with:

Wall Street Journal - Interactive ``How Would You Avoid The Fiscal Cliff''

Elsewhere on Scoop there is a wide range of material on the Fiscal Cliff and in particular the effects so far on the New Zealand dollar and markets:

An op/ed piece by Walter Brasch - Fiscal Chicken

NZ dollar falls on view US to sail over fiscal cliff
Dec. 28 (BusinessDesk) – The New Zealand dollar fell as US stocks tumbled on concern America is running out of time to avert US$600 billion of tax hikes and spending cuts starting Jan. 1 that threaten to stall the world’s biggest economy

While you were sleeping: Hope fades for budget deal
MARKET CLOSE: NZ shares rise in light holiday trading

NZ dollar falls; fiscal cliff talks become Christmas Grinch
Dec. 24 (BusinessDesk) - The New Zealand dollar edged lower in abbreviated local trading as stalled negotiations to stave off US$600 billion in tax hikes and Federal spending cuts erode investor optimism the day before the Christmas holidays.

World Week Ahead: Can Santa bring budget deal?
Dec 24 (BusinessDesk) – The focus on this holiday-shortened week on both sides of the Atlantic will remain keenly on the attempts to reach a US budget deal after talks ground to a halt.

Republican non-vote throws spanner in the works
Trading had been going along swimmingly during Asian markets hours until news of the Republican –non vote threw a spanner in the works, which saw risk assets quickly reverse course. But even if Republicans agreed to this plan, the Democrats had already ...

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