Despite their tendency to cast blame and point fingers instead of pushing through meaningful policy, lawmakers will likely steer the country away from a fast-approaching fiscal cliff that could throw the country into a recession next year, said economist and author Mark Skousen.
At the end of this year, a series of tax breaks are scheduled to expire at the same time automatic cuts to government spending kick in, a combination known as a fiscal cliff that could contract the country’s gross domestic product by 0.5 percent next year, according to the nonpartisan Congressional Budget Office.
Expect action, even short-term compromises, as lawmakers will fully realize the gravity of having the power to prevent a recession but failing to do so.
“Congress doesn’t want to create a crisis, they don’t want to look bad to the American people, to the voters, so they will do whatever it takes to make a short-term change,” Skousen told Newsmax TV in an exclusive interview.
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Unemployment rates have remained high, in part, due to the fiscal cliff, as businesses are putting off expanding and hiring until they know how much in taxes they will be paying.
“I think it is affecting the employment numbers and keeping businesses from hiring,” said Skousen, a columnist for Franklin Prosperity Report, which is published by Newsmax. “There’s a lot of uncertainty out there that will be resolved after this election.”
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Even if lawmakers fail to push through longer-term reforms, a short-term solution agreed upon in the lame-duck session after November’s elections would keep the economy in growth mode.
“They will say ‘listen let’s extend the Bush tax cuts one more time, for maybe eight months.’ That will give the new Congress a chance to fashion a bill that will give us some permanency when it comes to tax rates and so forth,” said Skousen, author and editor of “Maxims of Wall Street: A Compendium of Financial Adages, Ancient Proverbs and Worldly Wisdom.”
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“But we still have a serious problem of constantly changing our tax laws and not providing the stability that business needs.”
Meanwhile, stocks will remain buoyed by the Federal Reserve’s recent decision to stimulate the economy with a third round of quantitative easing (QE), in which the Fed plans to buy $40 billion in mortgage-backed securities held by banks every month until the economy and labor market improve.
In the first round of QE, the Fed snapped up $1.7 trillion in mortgage securities, and in the second round, the Fed bought $600 billion in Treasury securities held by banks.
QE aims to stimulate the economy by injecting the financial system full of liquidity via bond purchases that push down interest rates to encourage investing, job demand and stock market gains.
“This is really beneficial for those of us who are in the stock market. We are profiting from the Fed and I do think the economy is gradually recovering despite the negatives out there with Obamacare and Dodd-Frank and these other regulations like Sarbanes-Oxley that are hurting our economy,” said Skousen, who edits the investment newsletter Forecasts & Strategies.
“I think Mitt Romney will be a much better choice as president, but in any case, we are seeing a strong stock-market recovery, not necessarily an economic recovery, and it’s because of that and for political reasons I think the Fed is engaged in this what we are calling QEternity.”
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