Chances of a recession US rise as US budget talks stall
A decision by House Republicans to cancel a vote on House Speaker John Boehner’s budget proposal last Thursday increases the chances the US economy will go into a recession next year, said Mohamed El-Erian, CEO of PIMCO.
The reluctance among Republicans stalls a deal with the White House to craft a fiscal framework for Y 2013 and avoid what many folks as a “preventable recession.”
Broad tax hikes are set to take effect at the end of the year, and at the same time deep cuts to government spending kick in, a combination has been dubbed the Fiscal Cliff, events that could tip the country into recession in early Y 2013, according to government and private-sector estimates.
The White House and Congressional Republicans are focusing the debate on income taxes, with the Obama administration calling for tax hikes on incomes over $400-K a year, and Mr. Boehner countering with a proposed hike on incomes of over $1-M a year, aka, Plan B that is opposed by most Republicans in Congress.
El-Erian wrote in a CNBC Guest Blog, “Get a deal soon and end the political grandstanding, even with political parties or the chance of recession becomes increasingly likely.
“In order to avoid a recession that would aggravate the country’s unemployment problem and re-ignite concerns about housing and household finances, Democrats and Republicans need quickly to find a way to work together. While possible, it is hard to see how this happens endogenously. There are lots of divisions, and at many levels,” Mr. El-Erian wrote.
“Thursday’s collapse of Speaker Boehner’s Plan B unfortunately makes it more likely that the Fiscal Cliff may materialize, constituting a blow to a recovering US economy.”
Stock Markets could soon get volatile and force action, something lawmakers do not want to face.
“The 2008 experience with TARP, where the market and economic dislocations that followed the initial congressional vote rejection quickly forced politicians to cooperate suggests that there is nothing like visible turmoil to get our bickering political parties to come together properly in the national interest,” Mr. El-Erian wrote.
“Let us hope that the political system responds in a similar fashion in the coming weeks, if not earlier. There is a lot at stake.”
Savvy market watchers are anxious in here, is there a deal, is there no deal that is the Wild Card Q?
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Paul A. Ebeling, Jnr.
Paul A. Ebeling, Jnr. writes and publishes The Red Roadmaster’s Technical Report on the US Major Market Indices, a weekly, highly-regarded financial market letter, read by opinion makers, business leaders and organizations around the world.
Paul A. Ebeling, Jnr has studied the global financial and stock markets since 1984, following a successful business career that included investment banking, and market and business analysis. He is a specialist in equities/commodities, and an accomplished chart reader who advises technicians with regard to Major Indices Resistance/Support Levels.
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