Does the Fiscal Cliff Even Matter?

Wednesday, 12 Dec 2012 07:39 AM

By Ashish Advani

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Not a day goes by without dozens of articles on the fiscal cliff on almost every financial website. CNBC, amongst several TV sites even has a clock ticking on its morning show showing the time left before the fiscal cliff is here. One of the guests on Bloomberg TV this week even included a comment that the fiscal cliff is more of a fiscal slope rather than a cliff.

I sit here wondering whether the fiscal cliff is all that it is being made out to be. The hype and frenzy around the cliff reminds me of the Y2K scare around computers at the beginning of this century. It was probably the biggest hoax that I have seen in my lifetime. As the world’s clocks ticked past the Dec. 31, 1999, deadline, what happened? NOTHING!

While the fiscal cliff may be important to the U.S. taxpayers and U.S. citizens, it is relatively irrelevant to the remainder of the world. Ask an average citizen in India or China (approximately 35 percent of the total world population) if they care about taxes going up in the United States. I suspect they will not even have heard of the fiscal cliff, let alone be bothered or concerned.

So while we can all debate the effects of the cliff here, the rest of the world is beginning to sprout real growth and start a new cycle of expansion.

China has now had two months of solid growth, with most indicators pointing to an expansion. Yes, it missed the key statistics of exports this month, but that is just a real measure of its years of attempting to stimulate domestic consumption. One of the criticisms against China was that it is heavily dependent on exports. Since 2006 onward, the emphasis has been on growing domestic demand and it seems like the country has turned the corner on having domestic consumption become a much larger portion of the overall growth.

India has once again embarked on a path of economic liberalization. After three to four years of no real policy push, the government seems to have awoken from its slumber and has pushed through some significant reforms in retail foods, aviation, insurance and other major industries. While it is still early days there, the intent seems to be sincere and the government seems to navigate the local politics quite well now.

Malaysia is also showing signs of a real resurgence. Industrial production increased 5.8 percent for September, boosted by both mining and manufacturing. The current indicators seem to show a consistent and positive uptick.

South Africa is also increasing its manufacturing output, although mining is still lagging due to several labor disputes leading to large strikes. If they can be resolved quickly, we will see a resurgence of mining in South Africa as well.

Back in the United States, we are seeing a real increase in the expectations of the people in the economic turnaround. While the signs are alarming when I see data around the personal debt levels and credit card debt increasing again, it is a clear indication that people are spending more and expecting an increase in growth. While I personally think this is misguided and that we may see a continuation of the muddling growth of 1 to 2 percent in gross domestic product in the United States and Western world, we are clearly seeing a momentum shift in the Asian economies without much dependence on the U.S. economy to recover.

China’s export market share is still expanding, albeit at a slower pace than before. There is some evidence that the very low end of manufacturing may be moving to low-cost countries such as Vietnam and Bangladesh. For instance, there has been a rise of Vietnam's imports of fabrics from China, possibly because of low-end textile activities relocating.

China is definitely on the move again and this time without the need for the United States to recover.

I recommend that your investment portfolio also mirror the reality of the economic recovery on a global basis without having to wait for the U.S. recovery.

In such a shifting reality of the world’s growth patterns, does the fiscal cliff really matter to the world?

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