Friday, November 9, 2012

Rough ride ahead as America approaches fiscal cliff

As America stumbles and lurches towards the so-called “fiscal cliff”, seemingly oblivious to the world around it, the rest of us are left to watch fearfully, apprehensive that this time America will make a miscalculation and set off the mother of all financial crises.

The economies of Canada and the United States are joined at the hip, though a much mismatched hip as the U.S. economy is about 15 times the size of ours. If America is stubborn—some may say reckless—enough to leap off the fiscal precipice, Canada will be in for a rough ride indeed. We can only hope we still have enough fiscal room to counteract the results of $600-billion of cuts to U.S. government programs and the ending of tax deductions that will have the effect of raising taxes significantly starting in the new year.

Such a gigantic reduction in spending and increase in taxes will suck so much stimulus from its fragile economy, America is likely to sink back into recession and drag Canada along with it. Canada would not be able to avert the downturn, but may be able to cushion it somewhat as we did in the 2008 recession—though Canadian jobs and our slowly recovering prosperity are bound to suffer.

One does wonder, though, whether a U.S. Congress in gridlock, with the majority Republicans’ record of thwarting each fiscal initiative of the President, can pull back from the economic abyss in time to avert a 2008-like crash.

So here we go again, another year of being whiplashed by a Republican-controlled House opposing tax increases and a Democrat-controlled Senate that refuses to make reductions to social programs.

Oh, brother, hang on to your hat!

1 comment:

  1. The problem is this fiscal cliff will happen whether they want it too or not. The daily devaluations of currencies around the world including ours must come to an end. As Ludwig Von Mises stated in his book, Human Action," the boom must be followed by a bust, either by the voluntary abandonment of the credit expansion or the destruction of the currency unit."

    Brad Maynard