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USA : The fiscal cliff

10/09/2012 | 08:40am US/Eastern

Major European events this summer have demonstrated the willingness of the Old Continent to end the debt crisis. Investors appreciated the measures taken, but now they are worried about the American situation.


The lack of a majority in Congress requires compromise between Republicans and Democrats prevented a true fiscal policy. This is very problematic because many tax measures expire on 31 December 2012. These tax cuts have a cost between 1100 and 1400 billion dollars each year and the debt to GDP ratio has doubled since 2007. The first deadline would have a value of $ 550 billion, which represents 3.5% of U.S. GDP.


In addition, the U.S. debt ceiling (USD 16 934 billion) will be reached in three months and an agreement should be signed before this date otherwise a new lock as the summer 2011 will occur.


It seems unthinkable that the U.S. government allows such a deficit and let get support measures expire what would lead ultimately the U.S. economy into recession (estimated at -0.3% according to the Congressional Budget Office against a projected growth of 2.3% in 2012). This situation would be totally contradictory while the Fed policy which has launched its third quantitative easing aimed at supporting growth and lower unemployment. Meanwhile investors remain on alert.


 

US GDP vs  US federal budget deficit (Bloomberg)


 
 



Alexandre Nutte
© 4-traders.com 2012
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