Federal Reserve chairman Ben Bernanke first used the term “Fiscal Cliff” in February 2012 to describe the difficult decision the U.S faces on New Year’s Eve. The US Fiscal Cliff refers to measures required for the U.S. to survive economically in 2013: raising taxes, cutting services, and reducing the deficit. At issue is an annual U.S. budget deficit that now is routinely above $1 trillion and a national debt that has risen to near $16.5 trillion.
President Barack Obama’s solution to stop this proverbial free fall is to tax America’s most wealthy individuals – the top two per cent of earners.
The Fall Heard Round the World
The Cliff poses a serious threat to the American economy and, by extension, the rest of the world. Experts say the effect of these changes will not only push the U.S. back into recession, but will cause an immediate contraction in our own economy. Unlike the European debt crisis, this cannot be given a band-aid solution. For example, Greece fell off its so-called fiscal cliff years ago. However, the world cannot afford to have the world’s biggest economy teetering on the same debt ledge.
Here are a few proposed solutions to minimize the impact of the Fiscal Cliff:
Make a Fast Move
Whether Obama raises taxes, cuts programs or taxes the rich, he needs to move fast and with commitment. The major problem plaguing the E.U. debt crisis has been the ongoing, drawn-out ideas to help save the continent’s most debt-laden nations. Sometimes it feels like the IMF and ECB are throwing everything at these countries to see what works. This method is much too dangerous for the world’s biggest economy, whose survival is imperative for the world’s economic health.
Keep an Eye On the Markets
What happens in the markets is a good indication of what’s to come. If an economy is going through difficult times, the first signs of this can be seen on the stock market. The financial crisis of 2008 is the best example of the markets foreshadowing what the next four years would bring. While government heads in Washington D.C. figure out what they are going to do about the fiscal cliff, individuals should be watching the volatility in the market. If the markets are calm it’s a good indication that investors are confident the U.S. government is making the right decisions.
Let’s Call It a Fiscal “Fast” Instead
Rather than fall off a cliff, the U.S. needs to go on a spending fast. It’s been binge spending for the last decade: on the wars in Afghanistan and Iraq, stimulus programs, and bailing out the banking sector, to name only a few. This trillions in spending is creating a financial bloat that can only be remedied by the U.S. government taking a step back.
The world waits to see what the U.S. will do about its own economic problems in order to plan the future for their own countries. What is for certain is the U.S. will not take steps to ruin its economy – and that is good news for the rest of the world.