Tags: US | Gridlock | Fiscal | Cliff

US Poised to Shuffle Past DC Gridlock and Off the Fiscal Cliff

By    |   Monday, 14 May 2012 04:39 PM

The slow growth, post financial crisis world has become familiar. But, the environment that has existed since 2009 is on the cusp of a change.

After the 2009 stimulus, there has been precious little action of any kind on the economy from Congress and The White House. There has been absolutely nothing in terms of fundamental economic reforms. As a result, the Fed has had to do the heavy lifting.

Since 2009, the Fed has be the defacto economic authority in Washington, substituting monetary expansion in the place of economic policy. The Fed implemented two rounds of quantitative easing, operation twist and has sworn to keep interest rates near zero into 2014. The pumping of liquidity into the economy has managed to keep the post financial crisis economy on life support, with average GDP growth of 2 percent to 2.5 percent.

The abundance of liquidity and near zero interest rates has propped up the stock market. But, the Fed is running out of bullets. It appears that the Fed's driving of the economy has about come to an end. Interest rates can't go any lower and more liquidity will do little for the economy at this point except increase the risk of inflation.

The Fed has actually said as much.

Fed Chairman Ben Bernanke recently suggested that the Fed was finished riding to the rescue and said "don’t look to the Fed to offset political gridlock.”

With the Fed essentially finished, the time for political inaction is over. And action is especially important now considering the "fiscal cliff" looming at the end of the year. The fiscal cliff is the expiration of all the Bush tax cuts on 12/31 and mandatory spending cuts that will take place at the same time. Some analysts estimate that the negative affect of the scheduled tax hikes and spending cuts will take as much as 5 percent from GDP, plunging the U.S. into recession.

But, as action becomes more and more crucial, Congress seems farther apart than ever. The parties have moved to the extremes and a virtual state of warfare exists between the two parties. But as this year's crucial presidential election draws closer, most expect the partisanship to become even more heated, if that is even possible.

It is highly unlikely that Congress will act on preventing the fiscal cliff before the election. It has been anticipated that Congress will likely act on these matters in the lame duck session of Congress after the election. But, while many expect the election to fix the stand-off, it might not fix anything. Obama or Romney could win the election without a strong mandate and with solid political opposition in Congress.

There's no guarantee that Congress will act after the election. Also, political gridlock could spook the market even before the election.

Worries about a possible crisis caused by the debt crisis in Europe or a military confrontation with Iran have existed all year and will continue to be risks for the rest of the year. As well, a recession in Europe and a slower Chinese economy threaten to drag down the recovery and the market. But there is a new risk in town that will take center stage for most of the rest of this year – the fiscal cliff and political gridlock.

Politics and business news will merge closer together and drive the market. Get ready for a new mini era where politics more than anything else will move the markets.

About the Author: Tom Hutchinson Tom Hutchinson is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of The High Income Factor. Discover more by Clicking Here Now.

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Monday, 14 May 2012 04:39 PM
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