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Pimco’s Gross: Fiscal Cliff a 'Grand Canyon,' Expect Deal on Revenue

Monday, 12 Nov 2012 08:42 AM

The fast-approaching combination of tax hikes and spending cuts set to kick in at the same time poses a major threat to the U.S. economy, and any deal will likely involve higher revenues though lawmakers will punt on longer-lasting entitlement reforms, said Bill Gross, founder of fund giant Pimco.

At the end of this year, the Bush-era tax cuts and other benefits are scheduled to expire at the same time automatic cuts to government spending kick in, a combination known as a fiscal cliff that could send the country sliding into a recession next year if left unchecked by Congress.

Failure to act could see the economy driving over the edge of an abyss, which is much deeper than people think.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

“US fiscal cliff [is] deeper than advertised. Its a Grand Canyon,” Gross wrote on the Pimco Twitter page.

Democrats including President Barack Obama have said they want the Bush tax cuts to expire for the wealthy, though some Republicans have said doing so would threaten job creation since wealthy small business owners would pay more in taxes and have to less money with which to hire.

Whatever the solution, expect lawmakers to find a way to increase government revenue somehow but punt on addressing massive unfunded liabilities such as those found in Social Security and Medicare.

“Washington will defer entitlement cuts & raise revenues only marginally,” Gross added.

Other high-profile market participants have sounded similar alarm bells over the cliff, and uncertainty alone could roil financial markets.

“The world and the U.S.’s own people need Washington, D.C., to be sensible,” Jim O’Neill, chairman at Goldman Sachs Asset Management, wrote in a note, according to CNBC.

“We had a rehearsal of life without a fiscal package in August 2011, and it wasn’t very pleasant.”

The seeds of the fiscal cliff were laid in part in August 2011, when lawmakers agreed to raise the government’s debt ceiling at the last minute, narrowly avoiding default. However, Standard & Poor’s did strip the United States of its coveted AAA rating.

Terms surrounding that deal required a group of lawmakers to find a way to cut spending in an effort to narrow deficits, which included a measure calling for automatic spending cuts should the group fail to agree on ways to slash spending. That turned out to be the case.

Still, lawmakers remain confident this time around that they will strike a deal.

“I am optimistic,” Sen. Bob Corker, R-Tenn., told Fox News Sunday.

“There is a way of getting there on the revenue side. The real question is can we come to terms on the entitlement side.”

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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