Investment Contrarians

Time’s Running Out; Fiscal Cliff Needs a Resolution

By for Investment Contrarians |

Fiscal Cliff Needs a ResolutionAmerica is fast approaching the $16.4-trillion limit in national debt that is legally allowed under the current debt ceiling. With the current debt at $16.24 trillion, time is running out, which is why we need to either resolve the fiscal cliff or, as the President wants, hike up the national debt ceiling in order to allow the government more flexibility in its spending. Failure to raise the national debt limit would mean that the government would need to access emergency funds to avoid a default and initiate the fiscal cliff cuts and tax increases in some form.

So far, the talks between House Speaker John Boehner and President Obama have resolved little. Just last week, Boehner offered up a new 10-year, $2.2-trillion strategy that entailed adjustments to Medicare and Social Security benefits but also avoided a return to higher taxes for the nation’s top income earners. In response, the President is willing to look at reviewing the highest tax rate for the rich, but at the same time, he wants to cut loopholes.

With just over three weeks left in the year, something will need to be done. In the event that a resolution is not achieved, the government will have to access emergency funds until a deal is agreed upon. This is the dilemma that we are at now; but something has to be done, or America could be leaving a much worse financial mess for the generations ahead, including a possible recession and massive national debt.

Moody’s Investors Service warned it may cut the U.S. triple-A debt rating for a second time in 2013, should the government not deal with the financial crisis and reduce the national debt-to-gross domestic product (GDP) ratio. A rating cut would translate into the need for higher yields so the U.S. Treasury can compensate for the higher risk.

The Congressional Budget Office (CBO) predicts that the U.S. economy could contract by 0.5% in 2013 if fiscal spending is curtailed. (Source: Congressional Budget Office web site, last accessed December 5, 2012.)

The problem is that a cut in fiscal spending and higher taxes at this stage, given the fragile economic recovery, is a major risk for the country, and it could drive America into another recession. On the other hand, if cuts aren’t made and taxes are not increased, the country’s national debt will continue to spiral out of control and will be given to another generation to deal with. In my view, it may be time for some short-term pain to achieve long-term gains!

Many eurozone countries are facing tough austerity measures, so why aren’t we?

You cannot simply go over to Europe and tell them they need to fix their credit crisis when the situation is just as bad at home; it would be hypocritical.

The reality is that the national debt is accelerating fast, and it’s not going away anytime soon. The only plus here is the country’s low bond yields; albeit, a rating cut won’t help. If the U.S. had to pay out similar high yields as Spain or Italy, the U.S. would be broke.

It will take decades to pay off this national debt or to even get it to a more manageable level. But viable plans must be put in place now, or our kids and their kids will suffer more.

Something drastic needs to be done regarding the national debt or the country’s financial strength will go down the toilet!

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