Tags: Greenspan | polarizing | Congress | cliff

Greenspan: Polarizing Climate Pushes US toward Fiscal Cliff

Tuesday, 23 Oct 2012 03:42 PM

A fast approaching combination of tax hikes and spending cuts striking the economy at the same time is a great cause of concern due to a lack of political will among the country's policymakers to compromise, said former Federal Reserve Chairman Alan Greenspan.

At the end of this year, the Bush-era tax cuts and other tax breaks expire at the same time automatic cuts to government spending kick in, a combination known as a fiscal cliff that could send the country into recession if left unchecked by Congress, according to the nonpartisan Congressional Budget Office.

Lawmakers have been unwilling to touch tax and spending issues in an election year, though some have suggested they can convene after elections or even after the fiscal cliff passes and deal with it then.

Editor's Note: Startling Proof of the End of America’s Middle Class. Details in the Video

However, partisan bickering and brinkmanship has run rampant in U.S. political circles in the recent past, most notably during the 2011 debt ceiling debacle, when both congressional Democrats and Republicans waited until the last minute to raise the government's borrowing limit, nearly throwing the country into default in the process.

A repeat performance wouldn't bode well for the economy.

"I'm quite concerned. I'm quite concerned because the amount of friction within our political system is not new," Greenspan told CNBC.

"If you look at the caucuses of the Democrats and the Republicans going back, they look very much the way they look today. In other words, the Democrats are caucusing in the liberal areas, the Republicans are essentially in the conservative area, whereas I must say the population is more in the middle," Greenspan said.

While an ideological divide might not be new, the polarizing climate that marks policy today is new and must end.

"What is different is they don't talk to each other. And unless you can talk to each other and reach compromises, which are necessary in a democratic society," Greenspan said.

"The democratic society is one in which one would assume that there are individuals with individual rights and which everyone has decided to live together in comedy because they have certain things in common. It implies that you have to compromise, not your principles, but the way you implement them."

Should Congress fail to steer the country away from recession, expect investors to rush to the dollar and stay there.

"We risk a recession in the first half of next year, and if that happens the risk-off trade will firmly be in play, which should benefit the dollar in the same way it did during the last recession," Greg Anderson, G10 strategist at CitiFX, a division of Citigroup in New York, told Reuters.

A risk-off trading session is one in which investors ditch higher-yielding assets like stocks and opt instead for safe-haven assets like the dollar that are not known for stellar returns but are marked by liquidity and security.

"It will be a net positive for the dollar as money flows into the greenback based on safe-haven flows more than anything else," said George Davis, chief technical analyst at RBC Capital Markets in Toronto, Reuters added.

Editor's Note: Startling Proof of the End of America’s Middle Class. Details in the Video

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A fast approaching combination of tax hikes and spending cuts striking the economy at the same time is a great cause of concern due to a lack of political will among the country's policymakers to compromise, said former Federal Reserve Chairman Alan Greenspan.
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Tuesday, 23 Oct 2012 03:42 PM
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