Reuters – ‘Fiscal cliff’ makes U.S. Fed queasy
Federal Reserve policymakers are sounding the alarm over a “fiscal cliff” at the end of this year, when scheduled U.S. tax hikes and spending cuts could pose a big threat to the fragile economic recovery. Along with its official mandate of watching unemployment and inflation, the U.S. central bank is keeping a close eye on a potentially debilitating political fight over how to fix the budget deficit. If lawmakers in Washington do not get rid of the tax hikes and spending cuts due to take effect in early 2013, the country could easily careen into another recession. Any moves by Congress, however, aren’t expected until after the November 6 presidential election. The Fed is worried that individuals and companies could hunker down and curb spending, making markets antsy as the country awaits the outcome of an election that could pave the way for new tax and spending policies. Though few expect Washington to do nothing while fiscal policies push the economy into another downturn, partisan politics could undermine the Fed’s unprecedented actions to revive the economy. “I have been disappointed that the president and Congress are not taking action until after the election,” St. Louis Fed President James Bullard told reporters in Utah last week.

Comment

As the chart below shows, the debt ceiling should be hit around Labor Day. Why not 2013 as projected? Bluntly, the deal negotiated by the super committee (remember them??) did not raise the debt ceiling enough to push this issue off until after the election. How is this possible?  The federal government is spending money faster than originally projected.  On Meet The Press on April 15, Geithner said the U.S., “won’t hit its debt limit again until late in the year.” 2013 is off the table.

Once this ceiling is hit, Geithner can steal borrow from some government trust funds to help fund the government.  In 2011 Geithner borrowed enough from trust funds to keep the government going about eight weeks before the debt ceiling had to be raised (see “May 16″ below).

How long do we go after we reach the debt ceiling later this year? If Obama thinks it is in his best interest to push the issue, Geithner will say the Treasury has “run out of options” by mid-October and let it explode in the Republicans’ faces. If Obama decides it is not in his best interest to push the issue, the administration will find ways to fund the government through the election.  This gives the Republicans an opening to hammer Obama on fiscal responsibility.  Remember that this issue helped form the Tea Party, who in turn helped the Republicans win 61 House seats in 2010 (the most in 70 years). Either way, this will be an issue for the November election.

All the talk about a “fiscal cliff” is both right and wrong. It is right in that there is one coming and it has to be dealt with. However, many incorrectly believe this will only be an issue after the election. As the chart below shows, current rates of spending could make this a critical issue just prior to the November elections.

Click to enlarge:

Source: Bianco Research

Category: Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

6 Responses to “Is The Fiscal Cliff Coming Before The Election?”

  1. [...] Is The Fiscal Cliff Coming Before The Election? | The Big Picture. [...]

  2. theexpertisin says:

    Well, well.

    “The federal government is spending money faster than originally projected”.

    I’m shocked.

  3. Rich in NJ says:

    Romer proposes some sensible solutions here:

    What about the United States, which faces a terrible long-run budget problem, but no immediate threats from the bond market? The best policy here is to combine the backloaded consolidation I’m recommending for troubled countries with the short-run stimulus I’m advocating for countries like Germany. We could enact something like the Bowles-Simpson plan to reduce the deficit sharply over 10 years, and include in it more near-term investment in infrastructure, education and scientific research.

    This would lower unemployment faster, and put us on a path to fiscal health. And, by strengthening our growth, it would help the world economy, too.

    These policies are nuanced, so they are easily caricatured as doing something with one hand and undoing it with the other. Their key element is dynamics — using credible plans to lower borrowing costs and address long-run fiscal problems, while not taking immediate austerity measures that would raise unemployment when what countries need most is growth.

  4. ilsm says:

    Long run fiscal crises:

    End perpetual war, and raise taxes!!

    “No prince prospers from long war”. Sun Tzu about 2500 years ago.

    Unless the prince wishes to starve grandma, that is.

  5. Futuredome says:

    They are “really” spending money than faster though(in ex’s terms)? Eh, not really. About on projection.

    The tax hikes will help spur investment.

  6. blackjaquekerouac says:

    not if interest rates plunge to 1.5% on the 10 year…or lower. “now you’re heading headlong and at full speed into a wall.”