The fiscal cliff “catch-22”

Concluding thoughts

Today we find ourselves at the edge of the cliff and no viable solution to the problem exists that will allow us to avoid pain. It is a macro problem and the common practice of looking at specific individual metrics of our economic health for positive signs of recovery is not unlike “failing to see the forest for the trees.”

We don’t want to deal with the inconvenient truth that we are in a real mess, so we take comfort in a monthly jump in retail sales or a weekly drop in new jobless claims. We argue that the housing market has bottomed out based on an increase in building permits or home sales.

We disregard the fact that retail sales data and jobs data are subject to revision in successive months and more often than not — in the last three years — that has occurred.  On the housing front, we embrace the positive but fail to consider the massive overhang of “underwater” mortgages that suggest we are a long, long way from completing the deleveraging cycle and really bottoming out in the housing market. 

We simply refuse to recognize that the only reason we are, at the present time, not in recession is because of massive public spending that has been financed with borrowed money. Bernanke argues that the recent run up in stock prices has created a “wealth effect” that should make us feel better and therefore, we should be more inclined to open our pocketbooks and start spending. 

That argument fully ignores the fact that as we have moved to reduce debt and increase savings on a personal level, the federal government effectively has nullified any positive gain we have achieved by mortgaging our future with government debt. The federal government has done the very thing we have collectively refused to do — borrow and spend.

We tend to have a disconnect when it comes to public debt in that we don’t see it as our debt. However, it is our debt in that we as taxpayers are the only ones who provide the funds to pay off that debt. We have reached a tipping point where the loan is about to be called as scheduled tax hikes kick in next year.          

Our debt and deficit problems, our high unemployment problems, our stagnant growth problems and our failed monetary and fiscal policy initiatives collectively represent major headwinds that are not likely to result in a positive outcome in the short term. Our debt and deficits are like a growing cancer that will eventually consume us if we don’t take some harsh measures to put the cancer in remission.

Perhaps we need to back away from the problem and let it continue on its normal course.  The market wants to complete the deleveraging process that was started in 2008 and subsequently interrupted with fiscal and monetary policy. The nature of markets are that we undergo periods of expansion followed by periods of contraction.    

According to the National Bureau of Economic Research, we have had 12 recessions from 1945 to the present with an average duration of 10 months. On average, a recession occurs about every five years.  A recession in 2013 would be consistent with the average and is the likely outcome at this point. 

One could argue that the likelihood of a robust recovery is much greater if our political leaders make a concerted effort to attack the debt and deficit issue with a renewed zeal and abandon the failed policies of recent years. As painful as it may be in the short run, the “Catch-22” dilemma we find ourselves in at the present time suggests that a recession is the likely outcome no matter how we deal with the fiscal cliff.

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About the Author

Joseph Stuber began his career in 1972 as a research analyst. He is an author and lifelong student of risk and risk management.

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