While U.S. citizens and taxpayers can breathe a little more easily now that the fiscal cliff deal has been brokered and is merely awaiting the formality of a Congressional vote, the implications were much farther reaching than just the United States. Indeed, had President Obama and the U.S. Congress not reached an accord and allowed the U.S. economy to fall from that precarious precipice it would be more than just $600 billion at stake, immeasurably more.
The U.S. economy, fragile as it is, is the largest economy in the world, and the one which is the center of the universe, so to speak, the one which all the other economies revolve around. While a recession is still not as remote a possibility as analysts and economists would like, it is at least not a looming eventuality. And just because the fiscal cliff has been avoided doesn't mean that there isn't some less well publicized danger ahead.
Analysts point out first that concessions had to have been made, but also that there were some laws that would go into effect on January 1st regardless of the Congress's actions or otherwise. The taxing of the more affluent was, of course, the major sticking point between the parties and in the end the Republicans agreed to a series of tax hikes over the course of several years, which could raise as much as $600 billion for the U.S. government's coffers. Also applicable to wealthier Americans was an increase in the dividend tax and capital gains, as well as estate taxes. Though Republicans remain in principle against tax hikes for the wealthiest Americans, they seemed to understand that in the court of opinions they would be "?blamed" for the chaos which would have ensued had the fiscal cliff issue not been resolved.
What Now?
For some lower wage earners, Bush-era tax cuts will now be made permanent. However, all wage earners across the board will be affected by a 2% increase in Social Security payroll taxes, which will translate into a take home pay reduction for all workers.
On the spending side, unemployment insurance benefits were extended for an additional year, and several tax credits such as those for children, tuition and earned income, will be extended an additional five years. A cut in Medicare payments to doctors has also been avoided.
Markets had been holding their collective and proverbial breaths as they awaited word on the outcome of the fiscal cliff negotiations. Though the deadline was not met, lawmakers can retroactively implement the law so that there is essentially no harm done. The relief was first seen clearly in the world's stock markets, with the vast majority of Asian indices logging in multi-month highs; at present,Europe's key equity markets, i.e., the German DAX, the French CAC, the London FTSE and the Spanish IBEX, are also markedly higher. The EUR/USD pair is also higher, trading at 1.3277 from a session low of 1.3196, and not too far off the session's high of 1.33. Other growth-linked currencies were likewise higher as optimism reigned supreme.
Though the U.S. Congress managed to pull the economy back from the brink of disaster, analysts warn that there is a still a danger ahead. Mohamed El-Erian of Pimco, the largest bond fund in the world, was recently tapped by President Obama to head the Global development Council, has cautioned that the prolonged outlook for the U.S. economy is weak. He believes that an adjustment to a "?new normal" will have to be made, one which included lower growth and fewer jobs. There is still the issue of U.S. deficit and growing levels of debt which have to be addressed, sooner rather than later and El-Erian is still hopeful that the U.S. Congress will propose some "?grand bargain," one that would include medium term fiscal reforms to combat the long term budget challenges and which would put an end to the escalating problems once and for all.
Will the U.S. Congress be up for that challenge? They did, after all, just vote to cancel their own cost of living adjustment, so however improbable, anything is possible.