Why We Might Not Want to Fight the Fiscal Cliff

I recently wrote about the fact America has over $16.0 trillion in national debt and about how to deal with the situation. (Read “We Can’t Ignore It: America’s Going Broke.”)

There is increasing talk of a potential upcoming “fiscal cliff” that could drive the U.S. economy back into a recession. This fiscal cliff consists of policy to go into effect at the outset of 2013, which will mean tax increases and spending cuts.

On Wednesday, 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 fiscal crisis and reduce the national debt-to-gross domestic product (GDP) ratio. A rating cut would translate into higher yields required for debt buyers to compensate for the higher risk.

The Congressional Budget Office (CBO) predicts the U.S. economy could contract by 0.5% in 2013 if fiscal spending is curtailed. The U.S. federal budget deficit will reach $1.1 trillion, or around 75% of GDP (the highest level since 1950), in fiscal 2012, ending in September, an amount that is not sustainable and needs to be fully addressed by the next government.

A significant concern will be the upcoming $1.2 trillion in automatic tax increases and spending cuts, effective January 1, 2013.

A dilemma is forming, and it is expected to form a key part of the Presidential debate.

The problem is that a cut in fiscal spending and higher taxes at this stage is a major risk for the country, given the fragile economic recovery, and in my view, could drive America into another recession. On the other hand, if cuts are not made and taxes are not increased, the country’s national debt will continue to spiral out of control and will be passed on to another generation, making it deal with our debt. 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, at home, the situation is just as bad; 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 will not help. If the U.S. had to pay out similar high yields as Spain or Italy, it would be broke.

This national debt will take decades to pay off or even get to more manageable levels, 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!

Moody’s and Standard & Poor’s finally seem to understand the grave national debt situation. The politicians need to make the tough decisions and not worry about getting votes (of course, more easily said than done).

At the end of the day, you cannot go on and print money and hope the national debt problem goes away. Action must be taken. The days of easy flowing money are over.

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