Wednesday, December 26, 2012

You, me and the U.S. economy!

Economically speaking, is this what the year 2013 has in store for us?

Christmas and Hanukkah 2012 are now past which means it's time to look ahead to what the year 2013 will mean for you, me and the nation's economy!

Taking a quick swipe off of the top of my head, the United States faces any number of pressing economic issues that need to be addressed in 2013.

Of course it is how these issues will be addressed by Washington lawmakers and Federal Reserve policy makers that is the trillion dollar question which may help to carve the economic (and therefore social) path for the country going forward.

Two major areas of economic concern!

One area of concern is of course is the impending Fiscal Cliff*. I had prognosticated long ago that the simple plan of Barack Obama and the Democrats in Congress was to fly over the edge purely for partisan political purposes ("Presenting the Democrat plan for going over the fiscal cliff!").

While this is of course no way to govern that is where the nation now finds itself. In the grips of self-serving politicians more concerned with their reelection down the road than with the good of the nation now and far into the future.

Potentially worse than going over the cliff might be some politically palatable compromise that at the end of the day will only serve to exacerbate the fiscal condition that the country will find itself in!

The second, and what to my mind may be even a more dire fiscal flashpoint, is the level of the federal debt (now $16 trillion plus) plus $1 trillion a year budget deficits and what will occur when Ben Bernanke ultimately can no longer hold interest rates near zero.

Oh he may want to hold them down but sometimes market forces may be even greater than the power of the man behind the curtain at the Federal Reserve!

Rising U.S. interest rates may happen for any number of reasons including the potential that the domestic economy and the employment situation improves and/or inflation becomes an issue.

Failing that, it could be something even more problematic such as the confidence of investors in the ability for the U.S. to pay waning.

Either way when you take this amount of debt (and the number is only going to increase) that has a short-term average maturity in the vicinity of 5 years or so and you bump up the interest rate just 1% the impact on the federal budget and by extension the federal deficit would be astronomical.

Imagine if instead of a 1% interest rate increase on new issues of government debt it was 2% or 3%.

At some point, as we have seen in nations like Greece, investor perception ultimately becomes investor reality and they will demand more of a return to compensate them for what is perceived to be, or that actually may be, greater risk.

Back on December 12 after listening to Fed Chairman Bernanke speak to the press I was moved to write an article I titled "Ben Bernanke: Snake oil salesman!"

The reason I chose this title was because the good Chairman who was raised in the well-respected Ivory Tower environs of academia seemed to be floundering.

He seemed to be at a loss for what to do beyond doing more of what he has already done. These are moves that, while providing liquidity for the stock market to rise while at the same time not improving the overall economy, are fraught with a plethora of potential unintended consequences the scope of which are not known.

And they are not known because the United States economy post-2008 has been the subject of a grand laboratory experiment whose theoretical outcomes seem to work out fine in the economic back-rooms of academia that are manned by Ph.D's, but that in the real world no one can really know for sure!

Add to all of this the potential impact of Obamacare, the EU financial crisis and the economic malaise of Japan and China and 2013 sets up to be a very interesting year.

Let's just hope that someone shows up who actually knows what they're doing!

*Infographic of the impact from going over the Fiscal Cliff here.

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