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A favourite pastime of the punditry is bouncing back and forth between warning about the dire impact of the fiscal cliff and scolding Congress for not resolving it.A Bloomberg Op-Ed from David Gordon and Sean West of the Eurasia Group argues that the debate has been entirely miscast.
Unlike an emerging market or Greece, the United States does not face the prospect of market/creditor revolt should it reduce austerity measures.
If treasury yields are any indicator, markets want and expect the exact opposite. For all the talk about our desperate need to enact massive deficit reduction right away, borrowing costs are at historic lows.
From the Op-Ed:
U.S. haven status all but guarantees that the lame-duck Congress and Obama will agree to forgo the austerity that makes up the fiscal cliff, and they won’t suffer for doing so. By contrast, failure to agree on that course would trigger huge economic carnage that citizens would blame on the political class. Thus, the fiscal cliff comes down to a choice between kicking the can into 2013 at no political cost or not doing so at high cost. Don’t be surprised when the president and Congress choose the former.
The sheer size of the cliff and continued market faith in the U.S. economy mean that some resolution is all but certain. It may not be ideal, and we’ll have to endure months of political infighting beforehand, but we’re not going to take a government sponsored 5 per cent hit to GDP.
Read the full piece at Bloomberg
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