Fiscal Cliff A Reality – US Debt to hit Legal Limit by Year End

Category: US Federal Reserve November 5, 2012 | Comments Off Share
Fiscal Cliff

Fiscal Cliff A Reality - US Debt to hit Legal Limit by Year End

The potential, Fiscal Cliff fear factor will increase as the US gets closer to the year end. Will lawmakers rise to the challenge, or will they put things off again? As of last week, the US Treasury was $235 billion below the $16.4 trillion statutory ceiling on the amount it can borrow. That gives the Us Government enough funds to pay its bills, including interest on its debt and retirement health benefits, until the end of the year, the Treasury said, reiterating a forecast it made in August. If Congress fails to raise the debt limit, analysts expect the Treasury will run out of options to avoid a default sometime in the latter half of February. However, the forecast could change dramatically depending on how the administration and Congress deal with the massive tax increases and spending cuts due to go into effect at year-end. After Tuesday’s Presidential and Congressional elections, the US will have less than two months to find a solution to the so-called Fiscal Cliff  – the $600 billion in tax increases and budget cuts that could fuel a fresh recession. Treasury officials, briefing reporters on debt sale plans, said it was urgent that Congress act to increase the nation’s borrowing authority, reported Reuters. “As we saw last summer, it is important that the debt limit is raised in a timely manner,” said Treasury Assistant Secretary Matthew Rutherford. A political fight last summer over raising the debt ceiling pushed the United States to the brink of default and prompted Standard and Poor’s to downgrade the country’s top-tier credit rating. A congressional watchdog agency said the battle also drove up Treasury’s borrowing costs.

U.S. debt-ceiling increase could be headed for a Wall Street-rattling showdown in 2013 if Congress, as expected, shuns a quick and easy fix at the end of this year in favor of another round of last-minute brinkmanship. Regardless of who wins the November 6 elections, many congressional aides and Capitol Hill observers are predicting that lawmakers will go right up to the deadline – probably around mid-February or early March – before increasing the $16.4 trillion limit on borrowing that is nearly exhausted. While no one is certain of another 11th-hour fight in February or March, no one is ruling it out. The U.S. Treasury Department no longer would be able to finance government operations, forcing widespread shutdowns and default on debt payments to creditors from China to England.

The road map to America’s Fiscal Cliff:

Some of the steps along the way had good intentions; some had no intention at all, other than to avoid hard decisions. Now, crucial deadlines loom at year-end on major budget deficit and tax issues, a convergence of problems Federal Reserve Chairman Ben Bernanke dubbed a “fiscal cliff. Here is a timeline of how the nation got where it is today.

1. 1998-2001. Long economic expansion of 1990′s peaks. U.S. government budget in surplus under President Bill Clinton.

2. 2001. Stock market tech bubble bursts. President George W. Bush, Congress enact deep, “temporary” tax cuts. Some Republicans predict cuts will spur economy, pay for themselves. September 11 attacks occur.United States and its allies invade Afghanistan.

3. 2002. After four years of surpluses, U.S. budget slips into deficit of $158 billion. Bear market in stocks.

4. 2003. United States and allies invade Iraq. Bush and Congress cut taxes further. Deficit grows to $378 billion.

5. 2004-2006. Stock market recovers. Deficit shrinks.

6. 2007-2008. Housing market bubble bursts. World financial crisis. Stock market crashes. WorstU.S.recession since Great Depression. Unemployment, home foreclosures soar. Bush, Congress bail out big banks. Deficit jumps to $459 billion in 2008.

7. 2009. President Barack Obama, Congress enact $787 billion stimulus, including expanded “temporary” tax breaks for children, education. Auto industry bailed out. Recession ends mid-year. Stock market bounces back. Deficit hits $1.4 trillion.

8. 2010. Obama signs healthcare overhaul into law. Obama creates Simpson-Bowles deficit reduction panel. Its plan for drastic fiscal reform is largely ignored. Led by Tea Party conservatives, Republicans win control of House of Representatives in mid-term elections. Obama agrees to extend Bush tax cuts for two years. Deficit shrinks to $1.3 trillion.

9. 2011. Treasury Department request for increase in U.S. debt ceiling becomes focus of fight in Congress. Republicans, Democrats settle dispute by forming “super committee” to examine fiscal reform. Debt ceiling raised.U.S.credit rating downgraded. Super committee collapses in discord. Deep, mandatory budget cuts triggered for 2013. Stock market makes choppy advance. Deficit estimated at $1.6 trillion.

10.Spring 2012. US Federal Reserve Chairman Ben Bernanke warns lawmakers of “massive Fiscal Cliff” at year-end. Main elements of approaching crisis include tax increases due to expiration of Bush tax cuts and other tax measures that Congress has allowed to slip, along with budget cuts due to super committee flop.

11.Summer 2012. Presidential, congressional election campaigns in high gear. Stock market advances.

12.Autumn 2012. Congressional Budget Office warns that the fiscal cliff, left un-addressed, could trigger recession. Mitt Romney named Republican presidential nominee. Obama reiterates support for keeping Bush tax cuts for all except high income earners. Republicans support extension of Bush tax cuts for everyone. Deficit for 2012 estimated to shrink to $1.1 trillion.

13.November 6, 2012. Election Day.

14.November 13, 2012. Congress scheduled to return for “lame-duck” session to deal on Fiscal Cliff issues. Focus that day would most probably be on tax cuts and spending cuts” – and not raising the debt limit. That session will be focused mainly on trying to clean up another big mess Congress has created over a series of imminent tax increases and spending cuts – known as the Fiscal Cliff – that could throw the US Economy back into recession if allowed to happen. But even the main two Fiscal Cliff problems – how to parcel out a new round of deep spending cuts and how to structure tax rates – are probably too daunting for Congress to fully deal with during the short, five-week post-election session.

15.December 31, 2012. If Congress takes no action, Bush tax cuts expire, other Fiscal Cliff elements kick in.

16.Early 2013. If no action from Congress automatic budget cuts set to kick in. Debt ceiling expected to be hit again.

Fiscal Cliff
Fiscal Cliff – Steep Tax Hikes & Benefit Cuts

Fiscal Cliff Concerns Weigh on Economy:

Deep divisions between Democrats and Republicans over taxes and government spending once again carry the potential for a costly policy clash over budget policy. A group of Wall Street firms that advises the Treasury on borrowing needs warned that the prospect the nation could run into the Fiscal Cliff was already weighing on the U.S. recovery. Business investment slumped in the third quarter, taking a bite of economic growth. “A timely and orderly resolution of this uncertainty would contribute meaningfully to an improvement in the economic outlook,” the firms said in a report to Treasury Secretary Timothy Geithner. The Treasury announced plans to auction a total of $72 billion in debt securities to refund maturing debt and raise $8.9 billion in new cash. The department expects to keep its debt sales stable in coming months. It said it still planned on issuing floating-rate notes late next year and Rutherford dismissed suggestions that investigations into key British benchmark interest rate Libor was complicating that plan.The status of Libor, or the London Interbank Offered Rate, is in flux as British authorities grapple with how to improve the rate-setting process after Barclays Plc admitted it rigged the rate for its own benefit.

Some Time Breather before Fiscal Cliff:

Technically, market analysts expect the debt limit to actually be reached December 31. But they predict that Treasury Department maneuvers will allow the government to continue operating safely until mid-February. Even with last year’s scares, analysts do not think it is important for Congress to increase the limit before the end of the year. “It would be nice not to go down to the drop-dead date, but with the way the process has evolved over the last 20 years, operating on auxiliary engines is standard practice now,” said Lou Crandall, chief economist with Wrightson ICAP, referring to emergency steps the Treasury Department can take to briefly delay exhausting its borrowing limit. Representative Chris Van Hollen, a member of the House Democratic leadership, told Reuters: “It would serve the country well if we could resolve the Fiscal Cliff issue sooner rather than later.” But political considerations are standing in the way. If Republican presidential candidate Mitt Romney wins on November 6, Democrats likely would want to see the next debt-limit increase – always unpopular with voters – on the new president’s watch rather than on Obama’s, said a Senate Democratic aide. If Obama is elected to a second term, he likely will have to deal with a House of Representatives still under Republican control. And Boehner repeatedly has warned he is not willing to let the debt limit rise without strings attached: For every dollar of higher borrowing authority, there would have to be at least one dollar of savings. So for example, if Obama were to seek a $1 trillion debt limit increase Congress would have to find $1 trillion in spending cuts or tax increases under Boehner’s rule. That is probably too ambitious for a lame-duck session that will last only five weeks or so. One House aide, however, suggested that if Congress during the lame duck approved a “framework” for larger deficit reduction steps next year – with details to be worked out later – that might be enough to satisfy Boehner’s demand.

The US Dollar may Decline:

The US Dollar seems in a over bought condition & may now decline against a basket of major traded currencies, triggering a sharp rise in Gold Prices. The Euro may rise from the lows of 1.2754 to 1.2970 & then to 1.3195. INR Nov Futures have declined to around 54.94 as expected to dip to 55.09. The US Dollar may now decline to a support of 53.65 & then to 52.57 / INR.



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